Trading | Margin Rich

I Can’t Fight This Feeling

Posted on October 24, 2021 by Margin Rich

Commodities have gotten white hot in a very short window. The sheer amount of headlines around inflation and raw material pricing is insane. I don’t have a nifty little Google Trends chart to show you but I’m pretty sure I already know how it looks.

Every other financial article or analysis is about inflation or commodity pricing.

Commodities are on top of everyone’s mind right now, which of course means a reversal is imminent. Which in turn should drive the buck upwards as commodities are priced in dollars and heavy amounts of short-term capital will have to hide there while steam is let out of this commodities rally.

Have a look at DBC. You can see when recent capital started jumping in enmasse as a result of commodity price action and the narrative heating up around inflation.

It’s all a bit too much, too fast. A correction may have already began last week and I wouldn’t be surprised at all to see DBC come off 15%. However, there are a ton of Calls outstanding on this ETF compared to the Put total with tons of theta purchased out to January of next year.

Gamma sways everything.

Still though, my gut tells me the narrative around oil and copper is simply too hot. I’m probably a bit early here, so if one were intending to go short on select commodities, be sure to purchase enough theta on one’s own Puts.

Just look at the raw YTD performance of the energy complex! And copper is easily outperforming the S&P 500 and NASDAQ.

A couple months back, I thought a harder selloff in the commodity complex might trigger selling action in the equity markets. Instead, equities took their own little breather in September as volatility rose.

But I don’t think we’re quite out of the woods with equity volatility. This “buying of the dip” has a delicate feel to it, as if fear was not properly washed out last month. I continue to stand by my hypothesis that commodity weakness will lead to general equity weakness.

Of course, the commodity weakness will be transitory along with any equity weakness. I expect to have a solid end of year rally in stocks.

Assuming my hypothesis is correct, oil and copper should be the triggers. Copper’s decline has probably already begun with last week’s 5% selloff (and more to come).

Oil would be the real trigger for overall weakness across markets. Observe this bit of backtesting on oil, courtesy of SentimenTrader. If the trend over the last 30 years holds true, then we should expect a rocky month in oil regardless of narratives and “shortages.”

Couple this with some end of month historical tendencies towards equity weakness, and we have the makings to pull the rug out from recent dip buyers.

From Tom Bowley of Earningsbeat.com via his weekly segment at Stockcharts.com,

One historical fact is that, at the close today, we will be entering the worst historical week of the year. The October 21st close through the October 27th close has a tendency to show weakness. Before I show you the numbers, keep in mind that the 19th through 25th of EVERY calendar month has produced annualized returns of -8% on the S&P 500 since 1950. So this October weakness is really nothing new. It just happens to be the worst of the bunch. Below are the annualized returns by calendar day (since 1950) on the S&P 500, followed by the NASDAQ:

But then these annualized returns are immediately followed up by historical strength in the S&P 500, so any weakness should be relatively short and shallow, but very scary. It is Halloween, folks. Observe the next 9 days of annualized results (since 1950) for the S&P 500:

Summing up: The inflation narrative and commodity pricing are too hot. Expect weakness there. This would then catalyze weakness in equity markets with overall weakness driving capital into the USD.

All sound far fetched? Have a look at the USD and performance when CoT shows Large Traders at a wide disparity to Commercial Hedgers.

Some hefty rallies noted. I don’t expect a monster run; just enough for a short-lived rally while capital hides. It’s only a hypothesis, but one has to trade their beliefs and manage risk accordingly. Can’t reiterate that enough.

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.

Volatility Interpretation

Posted on September 1, 2021 by Margin Rich

Volatility is a tricky asset class. At least for me. I’m sure quantitative methodologies utilizing various derivatives make it easier for the more mathematically inclined, but I do with what I got. Chart interpretation is definitely more art than science, and I wanted to share what could be a set-up for a short-term burst in risk-off sentiment.

We’re only two weeks removed from that spike in fear that got everyone’s under-garments in a bunch. Since April, the last 4 times the VIX spiked up resulted in intra-week advances but never closing a week above that top channel line.

Price action across all markets says to me that there is a lot of FOMO and confusion, as evidenced by declining or negative breadth and sentiment readings with new highs across various asset classes.

In order for a proper selloff across multiple asset classes, I’d like to see the VIX close out the week above 20. Not a bear here. Just positioned accordingly for some short-term profit should things soon get a little sparky for a minute.

The Best Part of Waking Up

Posted on July 22, 2021 by Margin Rich

Wow, what an ignition for coffee. This all-important soft has shot up a rough 20% in three days as of today. That’s smoking momentum.

Props to those who are grabbing or grabbed a piece of that squeeze.

However, capital is nervous these days. One can feel it across multiple asset classes and sectors. That general nervousness could cause capital to quickly shift out of coffee and into some other asset bearing a superior portfolio correlation. The move this week feels like a firework as opposed to a rocket headed to the moon.

FinViz Daily Chart

And fireworks fizzle out. Now maybe this is a legitimate breakout. Destination? Moon. I don’t identify as a commodity market expert in any futures category so there are definitely legitimate fundamentals factors that I’ve spent zero time assessing.

In fact, I don’t identify as an expert in anything. I just like to surf the swells of extreme price action across various sectors and assets classes. Simple as that. Sometimes I win big. Most times I lose small. Just trying to net higher and higher.

Let’s zoom out to a monthly chart of coffee (FinViz Monthly with COT). The blue circles below show every time the big-money, savvy traders get a bit out over their skis against the smart-money commercials.

Over the last 16 years, it would’ve paid to heed this signal more often that not. In 2010, it was a total bust during that commodity super bull coming out of the GFC. But other than that, futures and options would’ve paid out nicely betting on a sharp change in trend.

I’m a simple man. Simple mind. Simple life. Simple trading tactics, and Puts on the JO ETF could provide a solid reward to risk if a reversal is essentially imminent.

The spreads suck, but there’s enough liquidity. If coffee is to see holders start grabbing profits just as fast as they’ve made them, then the zone highlighted in yellow below looks like a logical place to explore opportunities.

Ideally, we’d like to see profit taking tomorrow (Friday 7/23/2021), in order to add a wick to the top of the current weekly candle.

Again, beware of that price action in 2010. And the Great Mother asks you to kindly stop brewing your morning drug with single-use plastic pods.

Oil Taking Its Breather…Finally

Posted on July 7, 2021 by Margin Rich

For traders who’ve been waiting oh so patiently, it genuinely appears an oil sell-off has begun. Discretionary trading requires sound, subjective judgement which comes through diligent research and a practiced hand. Do I have any of that? It’s certainly questionable, but you’re here reading so let’s get to the squiggly lines.

There’s a massive confluence of moving averages, Bollinger Bands, and indicators on a weekly chart signaling a sell-off could have some legs, at least temporarily. Have a look at the monthly chart of West Texas Intermediate (LC). That horizontal yellow line represents a very good stopping point should momentum build to the downside as H1 P&L’s get protected.

A 20% correction in oil would not surprise me. This coincides with action and positioning in the US dollar. For event-traders, OPEC+ activity has definitely raised hackles so I suspect stops have been pulled up pretty tightly which can exacerbate a move to the downside.

On the monthly chart above, since the bottom of that negative-price move in April 2020, hi-to-lo oil is up 1000% in 15 months. It’s up 350% using closing prices, and hell, it’s up 135% since November.

We did get a 15% correction starting in March that began a little consolidation period from which oil has recently broken out.

I suspect that June breakout drew in a bit of newer capital that failed to position earlier and could be chasing in addition to pyramiding by existing position holders. Feels like a false breakout from that wedge. Commodities across the complex have all been taking breaks, but not the King of Commodities. Consolidation yes, but no true breaks.

I’m of the persuasion that a commodity super bull has legitimately begun. But that thesis ran so white hot with nary a breather, that now it’s time for the granddaddy of the commodity complex to kick up its legs for a minute. Any multitude of ways to go short.

One of the methods I like is Puts on the XLE. Vast liquidity with excess positioning will allow for a potent ROI on a well-timed swing.

That horizontal yellow line on the weekly XLE chart also represents another good confluence of moving averages, bands, volume@price, etc. Use any spread methodology desired within the options complex, but $45 looks like as good a point as any for a possible bottom and a consolidation to begin.

As usual, I’m handicapping here. This is a personal bet just for me and no others using my own proprietary methodologies that have consistently given me an edge. Risk management is always the key to a successful trade. I use a mix of technicals, fundamentals, and anecdotals that all get swirled around the noggin until the organic computer kicks out a trade suggestion just for me. Then I write about it on a site nobody reads anyways to help me flesh out and think about the theses a bit more.

If you’re somehow reading this content, it’s not a trade or investment recommendation. I’m just thinking out loud.

Commodities and stocks have just been on a tear in 2021. Performance as such for both the S&P 500 and BCOM has occurred a handful of other times in financial history. It tended not to bode too well for commodities over the next couple of months. Observe the following chart from SentimenTrader.

Sample size not withstanding, with oil and natty combined being the largest component of the BCOM, a short thesis just might profit.