Recent Animal Spirits and Some FX Dynamics

First, let me start by stating how poor my read was on HY in my last article.  I grossly underestimated the level of fear in debt markets and grossly overestimated the potential for large capital to reach for yield.

The USD’s ascent should have told me everything I needed to know, that the extremes in credit volatility were just getting started.

Mid-Summer has arrived and with it a slackening in fear.  We can review some market extremes near the end of the article, but it’s important to first address forex dynamics and their current impact across markets.

The USD is the sun in our forex solar system, and really the financial system.  It’s movement affects all other currencies, commodity pricings, and is an effective gauge of animal spirits.

A few weeks back, the USD looked toppy.  I contended that the USD would correct which would kick up animal spirits for risk.  All we needed to validate that hypothesis was not so bad earnings, an anticipated CPI, and GDP to be shrugged off.  Lo and behold, all three happened while commodities were in the midst of a breather, thus reducing expectations for next month’s CPI.

The dollar is key right now as it is getting a temporary reprieve as a must-have haven.

USD Supports (Aug. 2022)

Maybe I’m not reading the room correctly.  It happens.  Bloomberg journalists seem to think so.

Article from last Wednesday (7/27/2022):

4. Bloomberg USD Article 4 (July 27, 2022)

What’s funny is that the dollar had already turned over and yet this still went to print.  Bloomberg articles about the dollar have a pretty solid track record the past year as a contrary indicator.

Here’s a few more articles and a chart of the USD notating time of publication and the exact opposite move occurring:

1. May 21, 2021Bloomberg USD Article 1 (May 27, 2021)

2. August 31, 2021Bloomberg USD Article 2 (August 31, 2021)

3. December 28, 2021 Bloomberg USD Article 3 (December 28, 2021)

Bloomberg Article Indicator - USD (Aug. 2022)

Which all begs the question, where to park if not in dollars?

The Yen is the obvious carry and capital is flowing.  The European economy appears worse than the US.  At least the US has energy.  So flows into the Euro will probably be muted.  The pound is seeing play because it reached an extreme.  That leaves the commodity currencies, CAD & AUD, but that’s not going to cut it.  Which leaves the Swiss Franc.  The Franc is still a trusted haven-currency and I believe it’s volatile past several weeks portended the move in the USD.

Franc Versus (Aug. 2022)

While the other reserves were diving, the Franc was chopping upward.  The Franc’s action looks like confused capital; almost like a begrudging acceptance as a dollar alternative in the current environment.  I happen to think this also portends a move in gold as the Franc and gold share a long-term love affair defined by a consistent correlation.

Gold and Franc (Aug. 2022)

It appears gold is ready for some action and it could be sustained action.  I suspect gold’s move will be predicated upon it’s perception as a reserve asset.  Despite punching above it’s weight economically and financially, Switzerland cannot sustain inflows and the SNB will just defend its currency anyway.  This leaves gold as a non-USD alternative haven that can handle the capital inflow to an extent.

$1775 (green) was the first line of resistance and it was met quickly.  $1915 (yellow) should be next.  If gold gets there then the USD should have already breached $103 support with $99 as a potential stopping point.  After $1915, all time highs past $2080/oz are blue sky.  These numbers are “ish” numbers, not exact calculations as foretold to me by an astrologist.

Blue sky is great.  But with a controlled asset like gold, excitement needs to be tempered.  Yes, gold is a powerful currency, however it’s held in check.  That’s fact.  New all time highs will ensure it won’t be long before we hear the foolish siren calls of $5k/oz or even $10k/oz. any second now.

So don’t get too excited but now might be a time to start dabbling in the shiny metal.

Back to the stock markets.

When I was contemplating the dollar’s down-move and how to play the uptick in animal spirits, I projected the S&P 500 to maybe crap out at about 4175, a hi-lo move of 15%.  But now I’m not so sure.  We hit that number quickly so a short breather might be in order.  Markets have to give bears a chance to say, “See, I told you so.”  Before a potential final move higher.

Large capital will be waiting to sell at 4200, but the dollar’s descent has more room to run.  Additionally, there’s massive amounts of skeptical capital that missed this last move.  Between chasing and squeezing I wouldn’t be surprised if the S&P 500 hits 4315-ish.  But that should fill the belly and satiate the bulls in this bear market rally for a rough hi-lo move of 18% – 20%.

S&P 500 (8-2-2022)

Now if you’re a skeptic of the recent rally, you’re far from unique.  How can you not be considering the economic and geopolitical situation in which the world resides?

But of course, there were only dozens of data points indicating the extremes in the stock markets, flashing bright neon yellow signs to buy.  Here’s a smattering of charts in case you missed them weeks ago.

Are Spec Net Shorts in Equities Showing Capitulation (July 2022)

Forward Returns After 20%  Two-Quarter Drops for the S&P 500 (June 2022)

Squeeze Potential Based on Equity Futures Positioning (July 2022)

UMich CSI Extreme vs S&P 500 (July 2022)a

H2 Performance After 3 Other Most Dreadful H1s - Goldman (July 2022)

Had enough?

After a 15% run higher off the lows, the S&P 500 does not have much more room to run so some profit taking this week could set the stage for the final leg of the bear market rally.

As this goes to print, equities are in day 2 of some corrective action and the USD is seeing inflows.  Nothing moves in a straight line.  Watch the currencies closely to help guide your macro-decision-making.

“It’s not what you don’t know that kills you, it’s what you know for sure that ain’t true.”

I return to this statement over and over as I play the markets.  Mark Twain had unending wisdom.  The speculating public, usually not so much.  November’s stock market returns were a delightful 10% for the S&P 500 and an eye-watering 18% for the Russell 2000; thank you very much hard and fast sector rotation.

Major Indexes November Returns (12-2-2020)

Despite this, ambiguity still reigns supreme currently.  Context is critical.  So does the ambiguity matter to long-term investors?  No.  But if you’re swing trading any asset classes in these markets then the ambiguity matters a whole lot.

Let’s use some simple, classic technical analysis to better illustrate how muddy the waters have become.  We’ll start with the S&P 500.  Depending on your trend-line bias, there’s a few different ways to perceive current action.

SPX Weekly (12-2-2020)

It looks like a very legitimate breakout.  It’s been a hard chop since late July, but I thought we might see yet one more leg down to the high 3100s or low 3200s.  The reason for this was the curious inter-market activity among various asset classes.  Typical correlations weren’t holding up in November and the breakout just felt fake.  But therein lies the problem of using “feel.”  Obviously, I don’t just go with the gut when allocating capital but it has often paid to at least listen to it.

We know that one major, semi-new factor driving markets is option activity.  Never before has one had to care so much about option Greeks to simply trade the underlying.  Observe the enormous rise in single-equity options premiums as a result of the tidal wave of buying, most of that in Calls by retail and institutional.

Buy to Open Calls Spot Premium (10-18-2020)

Options activity has seen market makers make unparalleled purchases in the underlying stocks in order to hedge their Call sales books.  As a result, volatility has chopped right along with the markets as moves have been fast and furious.  So where is volatility possibly headed next?  Again, the trend lines paint a couple of different pictures.

VIX Weekly (12-2-2020)

We have the current liquidity flood and more coming in 2021 to support fund flows into risk assets.  There’s also the beginning of a sector rotational move into value.  I don’t think that’s a done deal yet.  I think growth i.e. tech still has legs left.  I hypothesize that the bounce in energy and small caps is only the first strike of sector rotation, but the growth of SaaS and big tech will soon parry in 2021 which should stunt recent returns in energy and small caps…at least temporarily.

The one asset class that continues to dominate my thoughts is the US dollar.  I’m reading tons of obituaries.  They feel premature.  A swift move up to the 95 area would not surprise me here; swift relative to its usual multi-month cadence.  A “swift-ish” move in the USD would drop a hammer on commodities, which wouldn’t bode well for the recent rotation into energy.

USD Weekly (12-2-2020)

The grains and sugar have been on an unfailing tear upwards.  Typical COT activity would have already seen correlated reversals in these crops.  I’ve seen insinuations that perhaps we’re in a regime change for those specific assets, but like the death of the dollar, that innuendo feels a bit premature.

For my own long-term portfolio of equities, I continue to evaluate the plays that many deem to have great forward looking prospects as not only technology evolves but society as well.  They may seem obvious, but it’s hard to shake what a well chosen play can mean for the potential of a portfolio.  This means gene-editing, cutting edge biotech, AI, data dissemination, and two of the oldest vices on the planet with tremendously long runways as a result of only barely being legitimized.

In the short-term, I think the commodity shorts present a most compelling current opportunity but so much rides on the USD’s anti-correlation.

If you really want to generate some returns with equities, consider after hours trading.  This has been widely reported on for a few years now, but just look at a recent chart put out by Bespoke to truly illustrate the marked difference in strategies.

Bespoke After Hrs. Trading Since Inception (Nov. 2020)

Of course, 2020 has flipped that on it’s head.  See below, but after-hours is starting to reassert it’s dominance.

Bespoke After Hrs. Trading Since Start of 2020 (Nov. 2020)

Stay sharp.  Recent choppy action may not be over just yet.  And with everyone predicting an amazing 2021, including myself, it might just take a little time to get the real momentum going next year.

Hey Gold, Don’t Get Cocky!

Gold Fever - Article Header

Seen this movie?  If not, it appears to be starting another theatrical run.

With the recent action in gold, the precious metals bugs are all stirred up.  Price action has been constructive.  Big time asset management names are mentioning it and the metal is definitely conveying a message.  New songbirds are putting their price calls out there for short-term and long-term destinations.  The old songbirds are putting their same old calls out there as they suffer permanently from the fever.

There’s no fever like gold fever, and I’m an expert in the symptoms.

We’re already seeing the $10,000 and up per oz. calls for gold.  What’s funny is you see the same old reasons for why precious metals are going to boom.  Everybody was selling the same handful of points in the last gold bull run and those same points are being tossed out there again as if they have meaning or truth.

– Negative real interest rates

– Excessive debt loads

– Accommodating monetary policy by central banks

– US Dollar losing value via debasement

– Inflation expectations

– Supply shortcomings

This is folly.  These are not reasons for anything; merely convenient sales pitches that still work on the zealous subset of speculators that are looking for either a reason to stay devoted to the precious metals or believe an amazing amount of money will be made by a small speculation.

From a technical analysis standpoint, it’s time for a rally and the price action hasn’t disappointed thus far.  However, technical analysis has virtually no merit any more due to the advent of the internet.  This has been statistically proven.  Tape-reading still has merit in conjunction with technical analysis and fundamental analysis, but it takes real talent and luck to fight the machines.  Here’s a Captain Obvious chart of gold proving higher prices in the making.

Snarky Gold Chart (7-13-2019)

But there’s only one thing that could potentially drive the price of gold and the precious metals to those high price levels so blithely forecasted.  Here it is in plain, bold English:


That’s it.  I believe that to be the only driver that will get gold up over $5,000/oz. or higher.  Something in the order of the USD losing perhaps 35% or more of it’s reserve status which will coincide with decreased use of dollar-settlement in international trade.  Or said another way, chaos.  Because if the rest of the world decides to shift part of the USD’s reserve status to another currency whether it’s gold, Bitcoin, SDR, yuan, etc.; you can bet those in power in the US will be wreaking havoc as a result.  This will be adjoined to the financial/economic chaos that will already be in place.

There still exists old-world faith in the precious metals, and blockchain currencies do not have enough cumulative faith by investors to reel in allocation decisions.  This is the path for significantly higher prices in gold, silver, and the PGM complex; potentially even for the commodity complex.

Regime changes in currency reserves are not fast.  They don’t just happen like a stock market correction.  Many powerful and wealthy nations have a vested interest in the USD maintaining it’s ultimate reserve status.  Just bear that in mind as we watch the dynamics between all asset classes, markets, economies, and countries play out in real time going forward.

It’s tough to visualize if you can’t foresee a world where the USD loses place and face.  But hell, don’t take my word for it.  Google and consider the opinions about the subject of some of the most powerful financial insiders in the world:  Larry Fink – Head of Blackrock, Ray Dalio – Largest principal in the largest hedge fund in the world, and Mark Carney – Head of the Bank of England.

Ain’t no fever like gold fever.  Keep your wits goldbugs.

The Game of the Workplace

Whether you’ve been in the game for a while or are just entering the game, there’s some core concepts to truly understand in order to build a career to a place of satisfaction.  Having now been around the block a couple of times i.e. I’m old, I’d like to share a few more workplace truths to tack onto my 2012 piece about Perception Management.

Concept #1:  Your career advancement is not based solely on merit

In other words, just because you may be a high-performer, doesn’t mean you’re going to earn that snazzy title and a solo-office…or a corner office.  WHAT?!  Say it ain’t so!

Maybe you’re the fastest programmer with least bugs and consistent best end-user experience, maybe the top sales person, perhaps the highest performing middle manager, etc., whatever.  And yet, you’re still not getting promoted.  Why is that?  Have you considered your ability to manage-up?

Managing-up is simply managing the relationship with your superiors, in all facets.  This means you have to manage how you are perceived in addition to “Exceeding Expectations” in your performance.

If you’ve worked in any organization long enough, you’ll inevitably encounter upper management or executives and wonder how the heck they got there.  Managing-up is how.  Control the narrative around your career and you at least have a chance at controlling your advancement or stasis.

Combining the ability to positively manage others’ perception of you with your own ability to outperform to expectations is a great way to garner success.  Not the best way, but a great way.


Concept #2:  You catch more flies with honey, and…

It is easier to win by cooperating and complementing your teammates’ skill-sets.  Even if that teammate is a competitor, by working together, you can both achieve more.

Cliche?  I know.  But why do you think this concept is constantly reiterated in sports and in the workplace?  Better to play nice and lift each other up than to look down  your nose, judge, plot, and scheme.  Leave the plotting and scheming to the talentless hacks who solely manage perceptions to cover for their absence of talent.

Concept #3:  Discipline!  Discipline is the key!

I said out-performance and perception management are great but not the best.  Combine those two notions with discipline and there’s the true formula for success.  Proven over and over; not statistically but visually, anecdotally, and through the countless commentaries of the successful.

How many stories have you yourself read about some successful person you admire where they comment on discipline?  It’s also known as the ability to outwork, to consistently apply the process, stay focused, etc.  Whatever you want to call it, discipline is about mental-toughness.  And combining discipline with concepts 1 and 2, my friends, is how you win in business.

Sure, this is a broad generalization.  There is nuance to all concepts, but the core concepts are the truth to success in the workplace.

image.pngNow all that being said, am I some successful, retired-early, self-made millionaire?  No.  I work for a living with the hopes of getting there one day soon.

But I’m just north of 40 years of age and I ignored those three concepts for the bulk of my multiple careers.  It cost me.  I have had a modicum of success and am just young enough to still apply these concepts and hopefully reach my business goals that much faster.

If you’re in your 20’s or 30’s or any age and have somehow come across this post, I implore you to please not ignore these simple lessons shared.  They seem like common sense but we all know how uncommon good sense can be.

If you consistently apply these three concepts in the workplace, then like the great coach Herman Boone says, “…like Novocain.  Just give it time, it always works.”

Speed, Glorious Speed!

If there is one thing that has been so dramatically impacted in the markets since 2008, it’s the speed of moves.  The causes are widely known.  Number one, high frequency trading (“HFT”).  Number two, massive amounts of money and capital backing HFT ops in conjunction with low-cost capital freely available to the “players” for any and all speculations.

A player is defined as bank trading desks, asset managers, hedge funds, pensions, university endowments, insurance companies, sovereign wealth funds, and any other sufficiently large entity managing money or assets.  And let’s not forget corporations and their buybacks.

The sheer velocity with which trend changes initialize now is amazing.  Trend followers will continue to have their impact because of their late nature to a move and their “pour-on” effect once the action is deemed legitimate.

Which leads us to the current sentiment in the buck, treasuries, bank stocks, copper, and steel.

Trump wins.  Buck goes up.  Bank stocks go up because rates go up.  Copper and steel go up because Trump is going to build four regional towers with elevators that reach the moon.  He’ll also build hyperloops all around the US.  Additionally, he’s going to revamp every bridge, tunnel, and plain old road with $4 trillion worth of modernization.

That’s how those five assets are currently trading.

Says to me, a short looks pretty good here.  I may be a little early.  But I think profits will be taken as fast as they’ve been made if sentiment reverses and the fervor dies down around the president-elect.

Convoluted Copper Chart - Weekly (11-28-2016)

Take copper.  The chart’s a little convoluted, but everything on it are charting 101 tools.  So chartists will instantly see what’s appears to be logical retracement points on a potential reversal of this fast trend.

That green-red, support-resistance line terminates right at the 20-week EMA.  If we were to see a profit-taking event, $2.30/lb. is as good a spot as any to maybe lock in short-profits as the mega-breakout at $2.20 just may be legitimate.

The same analysis can be applied to the other four assets, especially steel.  Using US Steel as a proxy, a 20% correction wouldn’t be surprising in the least.  There’s also a monster gap up at $20.

Two things most traders love, gaps and stems.  Technically, the stems are called “wicks” or “tails.”  I call’em stems because once they begin to grow on the underside of a candle, long profits seem to blossom.

It sure looks like little piles of money are building over in the corner.  Even if you don’t have the guts to go short, keep your eyes on the US dollar, Treasury yields and T-bonds, bank stocks, copper, and steel.