ETF | Margin Rich

Trading Brazil

Posted on December 12, 2021 by Margin Rich

Putting the trade on in September, when I wrote about it, just didn’t feel right but I’ve continued to observe the price action. I think we have a tradeable set-up now in Brazil. Since topping out in late June, it’s down 33%. The commodity euphoria has finally waned a bit, or rather other asset classes have moved to the forefront of investor minds (mainly tech again for now). Couple this with a potential strengthening of the Real against the USD and we have a chance for the stock prices of Brazil’s largest companies to be re-rated in the short-term.

Observe the correlation for EWZ (green) price spikes vs the USD (light blue) weakening against the Real.

This chart alone looks like a good enough set-up to allocate capital, but the Timing by TradeSmith forecast (purple line) just below shows there’s potential room for a bit more consolidation before an up-move. But there is a definitive, tight correlation to the forecast line and actual ETF performance. This might be the most successful forecast by TradeSmith’s software that I’ve analyzed.

What that means for our trade is that we need to purchase a strike far enough out (theta) to give the hypothesis time to play out. Volatility in this ETF is sharp. Observe the wavy action, surfable swells if you will, of rallies and drawdowns in the chart. It’s readily obvious.

Roughly half of the ETF is positioned in just 5 stocks, which are Vale (iron/coal/base metals), Petrobras (oil), Itau Unibanco (banking), Bank Bradesco (banking/insurance), and Ambev (beer). I don’t need to know their prospects to determine if the set-up is worth a trade as potential movement in the Real can improve investor perceptions of them as EM investments.

In September, I thought that $34 might be a potential bottom but it was too early. Still though, $34 represents an important price point. Only now it is resistance instead of support. $31.50 should be the first line of resistance, but once broken, it looks as if it could easily run up to $34.

The indicator that I probably put the most stock in is also at a favorable place for an EWZ rally as it just crossed over its oscillator. I’ve highlighted in cyan each crossover occurrence over the last few years. Positive price action tends to confirm.

As I’ve mentioned countless times, I prefer weekly charts to guide my trading theses. But for you daily enthusiasts, EWZ is displaying a nice clean breakout to recover it’s 50-day SMA. Based on my analysis, the 200-day should be next. Observe:

In any event, I suspect there are multiple opportunities amongst “emerging” markets such as Brazil as a result of potential weakness on the horizon for the USD. S. Korea is showing similar action as observed in the EWY.

So watch the US dollar and place your bets accordingly on some international holiday speculations!

If Everybody’s Thinking Alike, then…

Posted on September 13, 2021 by Margin Rich

While September’s seasonality, OpEx, and 7th straight month without a 5% dip has speculators on edge, if all the big banks along with many other outlets and mediums are calling for a correction, then can the markets have one?

Of course. Just enough time has to elapse since the calls of the last week for one to begin. When speculators have forgotten about the chance for correction is when a 5% – 9% dip can do its thing.

In the meantime, here’s a couple of opportunities worth considering regardless of where larger markets go this month.

Cannabis could be establishing a base from which to provide a nice little reversal trade. Let’s look at a weekly of MJ, the largest cannabis-themed ETF by AUM.

MJ seems to be finding nice support here at $15. If it can bounce here, then $21 looks like a solid resistance point. Between those 2 price points in the shaded area above is a confluence of various charting overlays & indicators. Should that bounce occur, there’s any number of ways to structure a trade within that range to take advantage.

The CAGR vector for revenues, margins, FCF, etc. across the MSOs is looking quite enticing. If the trading gods can deliver some political magic with a positive announcement of some sort around legalization, then you never know how spicy a trade might get.

And from the intra-week YTD high established in the 2nd week of February, MJ is down over 50%. Regardless of any wider market breadth issues, it seems like enough capital has fled the category and is ripe for capital to bounce back in. Overhead supply looks heavy between $22 – $24 so I wouldn’t get too clever pushing a move at the top of that shaded area.

The other potential trade setting up is in once white-hot Brazil. Heavy amounts of capital shifted into Brazil on the back of the commodity thesis earlier in 2021. It’s been shaken out a bit as EWZ has corrected 20% (intra-week) since late June.

It’s easy to see that the yellow horizontal line represents an important price point for speculators. And there’s a confluence of charty stuff, yada, yada, including a couple of intra-week bounces with longish wicks established in the past 4 weeks. The chart tells me that a bet on a 10% to potential 15%ish bounce might be in play. That’s just based on price action, but geopolitics and FX may hold more sway. Further assessment of risk is warranted, but a surf-able swell may be setting up.

Based on all the Wall St. banks jawboning about market weakness in the past 10 days, it appears the Fed is attempting to lubricate the transition into a tapering environment and get a little correction started. Just have to control volatility as an asset class and steam can be released with relatively little pain. But markets don’t work like that, right? Trade accordingly.

Have You Lost Your Mojo

Posted on May 31, 2020 by Margin Rich

Which side of the speculating-fence are you on? Are you euphoric with gains from this rally off the low? Thank you “dumb” money.

Or are you annoyed sitting in cash, position-less, and asking the market why is it not listening to you about this being a bear-market rally? I see you “smart” money.

I was fortunate to have lost very little thanks to my hedges coming into 2020. Partnered with basic risk management, returns on the year are flat. Not great, but I’ll take the profits off the well timed trades to mitigate losses in the long-term buckets. Bottom line, I missed this rally.

But the major indexes are up 40% off of their seppuku-inducing lows. Are we in for more? Is everything fixed? Will we see new highs and then push on for an additional 30% to 40% more in gains? I want every reader to remember just how great and unusual 2019 was for returns.

You could’ve made 30% in 2019 in your sleep with zero skill and no risk management. We’re going to get back to back years of that? Highly unlikely.

Is this rally legit? Well if you sell and realize gains, then hell yeah! But are we truly in the clear from a bear-market rally and more damage? Who’s to say? Just history.

Have a look at this chart that Macro-Ops put together.

Here’s another chart from BofA. It’s already made the rounds and is dated at just over six weeks old, but have a look at the 3 columns specifically on the right. Have a look at the dates and percentage losses that were still pending to the date of the actual, final low.

The coast may be clear but 2020 has seen the most unusual market action in history. I have no way of knowing if this is a bear market rally or a legit restoration of the bull that I’ve missed so far. But my portfolio’s cash levels clearly mark where I stand. And if the statistics above are not enough history imploring caution, then have a look at this chart near the end of the GFC in 2008/2009.

How many bottom-callers gave away healthy chunks of their stacks during that 6-month rundown?

The most successful, sharpest speculators on the planet are currently telling you outright where they stand on this market and it’s poor risk/reward set-up. That has to make you pause even though the price action is the final arbiter.

People are trained to not fight the Fed, now. Even dumb money is trained. Everyone now “knows” that the tsunami of liquidity washing over the financial and corporate world will support equity prices.

It worked for the last 10 years. It has to work now. Right?

The stock markets are a discounting mechanism. They see the future and the future is bright according to speculators, currently.

But let’s revisit the realities of the pandemic’s effects on spending and thus business earnings as well as viability to continue as ongoing concerns.

Tens of millions of people have lost their jobs regardless of whether it’s a furlough or a permanent termination. How many people who retained their jobs have taken salary cuts of 20% to 30%, possibly permanent? And somehow this is not going to have a long-lasting impact on business conditions?

The current, typical mindset seems to be something like this, “Just write off 2020. It’s a sunk cost. We’ll have vaccines soon. People are social distancing. And the government is propping up everyone. 2021 is definitely going to be a great year, economically, so let’s price stocks accordingly now.”

However, widespread impairments to income will lead to widespread impairments to business operations.

Have a look at the credit downgrades from Q1.

Bankruptcies are going to happen. Capital will be lost. Is that being appropriately discounted right now?

Right in line with the credit downgrades, let’s take a look at the HY option-adjusted spread.

We’re in a recession. The BEA will report this. And yet spreads are diving. Well the Fed is buying HYG and JNK. Don’t fight the Fed.

But let’s look at HY’s default rate versus debt to GDP. You see that wide mouth? It’s going to chomp and the likely path of convergence lies with the default rate moving upwards.

And what about leveraged loans and CLOs? Approximately half of the the leveraged loan market, $600 billion, is securitized via collateralized loan obligations. Between downgrades and further business earnings impairment, wait till CLOs begin acting like 2008 CDOs. Will it be a positive or negative for equity prices?

Let’s keep it simple and return to equities with a final look at the pure concentration of capital in this Q2 rally. Here’s the BofA chart that’s played out by now. It doesn’t seem to matter that capital is concentrated because this time is definitely different.

These stocks support the work-from-home new economy so it’s all good, but let’s take a look at a SentimenTrader chart. After all these years, SentimenTrader continues to generate so much value at such a small cost. Literally, every player subscribes to it; even those that already have Bloomberg terminals and the best info-flow money can buy. Chart is dated 5/13/2020.

Not a pretty picture but we’re almost 2 weeks removed from that signal and the market is up almost another 10%. Not trying to mine the data but I just can’t shake the nagging feeling that a selloff is imminent. And by imminent I mean within weeks if not days, just not tomorrow.

Based on the concentration levels then it would stand to reason that the NASDAQ will truly indicate when a correction is to begin. With the 5 stocks (FAMGA) up above representing 45% of the NASDAQ vs 20% of the S&P 500, look for weakness in the NASDAQ to indicate a trend change.

Once a correction starts, I could see 8200 as a solid support area. This would put the NASDAQ about 13% below from current prices. For those of you that missed this rally, some Puts on the QQQ followed by some jumping into quality long positions once that 8200 level is reached will be a good way to make up lost ground in your P&L for 2020. This would be just above a huge price area of recent purchases, noted below in the chart.

Hard to fight this rally. I know. But if you want to get that mojo back along with some of that lost capital, it might pay to be bold.

Volatility and Price Action

Posted on April 24, 2016 by Margin Rich

On March 13th, I made a call that I thought it was time for the markets to begin consolidating. Now some may label that call incorrect as the markets have moved a couple of percent higher, even surpassing 2,100 at one point, but I stand by the call. I think late-comers to the rally pushed the S&P 500 that 2% higher.

Specifically, I guessed we’d “see about 7 weeks of sideways consolidation.” Well in order to get a sideways move, the market will need to see a little correction soon. I suspect we’ll get one starting this week. It wouldn’t surprise me to see a move downward of about 5% in the S&P 500 to the 2,000 – 1,975 area over the course of this week and possibly the next. That stem created last week on a weekly chart is the tell.

But here’s the thing. I think market participants will completely overreact to the 5% or any move downward. I think the bears will start beating on their keyboards and cranking out articles and blog posts saying things like, “See! I told you! Here comes the real start of a 50% correction!” Pay these cranks no mind.

Instead, utilize the negative sentiment to leverage a potential move in volatility. I could see the VIX spiking to 20 in an over-reaction by hedgers. Those same late-comers to the rally in February will overdue it with VIX options potentially causing a spike.

So how do you leverage the potential? As usual, if you’re a futures player then just structure your option strategy to take advantage of the fear. For the ETF traders and retail guy trying to swing trade some profits off his work salary, there’s the ProShares Ultra VIX ETF, UVXY. Now this ETF is a trading tool only and it’s not for the faint of heart. If you’re going to trade it then you have to be nimble and ready to take profits. The moves are sudden and quick, but profits can be spectacular if you accurately time an upward thrust.

You can see in the last two moves of late summer last year and the start of this year, that perfectly timed trades have huge potential. In a 3 week run last August, UVXY moved up almost 300%. From late December to February, it moved up 150% in just 6 weeks. Again, not for the undisciplined. If this puppy isn’t played right, it’s easy to get shell-shocked and lose any profit potential.

Are these calls bold? Maybe, in that I don’t have any quantitative analysis to back my assessment. It’s just the gut feel I’m getting from price action and general sentiment. It can be dangerous to trust someone else’s instincts, let alone your own. A trade like this requires precision and a hawk-like watch over the action. Trading volatility can very often turn into a sucker’s bet. Let price action as opposed to greed guide your moves.

Evaluating Markets Not Called Stocks

Posted on April 17, 2016 by Margin Rich

In my last financial post, I stated that I thought the market would move sideways for approximately 7 weeks before a catalyst would present itself to drive the market higher going into the beginning of the summer. So far, so good. Yes, the market is up about 1.5% but it appears to be the start of a sideways consolidation as the market exhales some energy.

I suspect we see a little downside move over the next week or two, as part of the sideways action, followed by a move back up to current levels about 3 maybe 4 weeks from now. By then, that catalyst should present itself for the resumption of the trend back up to new highs. Will my hot streak continue? If past is prologue…

Right now, I want to talk about the US dollar and its potential effects on various commodities. Specifically, we want to watch oil, precious metals, and the grains.

It’s easy to observe the stiff support at $94 and I think this time is no different. I suspect we get a slight bounce of about $4 up to about $98. This is in line with previous bounces off of $94 during this 15-month consolidation. There are plenty of analysts out there who think the USD bull will renew to move a lot higher. The thesis of the trade being a fear-based allocation in light of a pessimistic international outlook to various economies and the worthless, respective monetary policies currently employed by central banks.

I disagree. When the big one hits, the real correction across all markets, the USD will at first be a bastion of relative strength but that sentiment will be temporary. The problem with the thesis that we are in the early phases of a USD bull is that it runs counter to the other widely held thesis that the next financial crisis will be co-focused around an international collapse in confidence in the USD. That’s a discussion for a future post.

I believe the momentum has shifted for commodities. I suspect the worm has turned in the precious metals complex. Corn, wheat, and soybeans are potentially at the beginning of a spike. Oil has been unstoppable, but that DOHA meeting of the controlling powers will have a heavy influence on trading behaviors. It’s not inconceivable that the USD and commodities could run in the same direction but that belies decade’s worth of a consistently negatively correlated relationship.

Specifically, I’m referring to short-term action. Months not years. But let’s look at multi-year charts for gold and the grains, of which I’ll use my typical go-to trading medium of JJG.

Gold:

What goes up generally comes down. Gold has held strong with a sideways move off the hard spike higher to start the year, but with the pending move in the USD, I think we’ll finally see the correction that many have been calling for. You can see that around $1,140 represents a stiff area of support. I suspect that could be gold’s next destination over the next several weeks or months, however that still represents a higher-low leaving a new uptrend intact. If one were inclined to trade, that’s $100 of movement to design a short-term, multi-month play as it moves lower and then begins a recovery. One pattern to watch, if you believe in such hokum, is the little head & shoulders that has formed since February. Will the break of the right shoulder-base be a catalyst?

Grains:

I have had a lot of luck trading this grains ETF. Some of my biggest returns in the shortest amount of time have come from scalping the market for a nice rip on these multi-month grain rallies. Sentiment, professional hedging, and seasonality point towards the potential of another run. More importantly though, price action agrees. It looks like a based-low was established to start the year and last week represented a possible higher low. The price action was especially promising to end the week. Position accordingly.

But if the USD is about to bounce, won’t that hurt commodities? Even agriculturals? Not necessarily. Oil will very likely be affected but again the speculator positioning by huge players could potentially cause another squeeze as much as the DOHA meeting could negatively affect prices. Gold sentiment was stretched anyways. But the grains don’t always run counter to the dollar. In fact correlations between the USD and grains do not share an easily deciphered message. Grains can and do run in lockstep with the dollar at times. Have a look below.

In two of the last 3 rallies, the grains (blue-dotted) ran concurrent with the USD. Even though the USD is potentially beginning a bounce, so could be the grains.

As stocks continue their consolidation, the USD should be the dominant theme in the markets as it moves upward over the next several weeks. Watch associated commodities. If you’re feeling really brave, try trading the other currencies with a rising USD as your foundation for analyses. Good luck out there.