Margin Rich

It’s Like the Old Days in Commodities

Posted on July 23, 2016 by Margin Rich

For the traders out there, action in commodities has been highly volatile presenting opportunities as if it was the 80’s. Basic technical analysis has been rather effective, especially within the softs and agriculturals. Now the precious metals swell appears to be breaking, if only to regroup for the next move

It’s important to remember that large-scale traders and high-frequency traders are the beginning, middle, and end when it comes to trading. Not only do they control breakouts and breakdowns, but they often make the market, too. It’s important to exercise patience before positioning into a play. Before a larger breakout or breakdown is firmly established, there can be see-sawing volatility that can jar traders out of position. Patience allows you to skip a few waves before finding that swell you decide to ride.

What’s been hotter than the precious metals or related investments in 2016? Not a whole heckuva lot, and silver has been on mad recent run but price action says it’s time for a pause. The price of silver has already started turning over the last two weeks. Because of the intrinsic volatility in the metal, it could be a quick ride down to the breakout point around $17.75. I think this breakout in the precious metals is the real deal and I suspect we could see a sort of V-bounce right back up to the two-year highs once the breakout point is retested.

One of the calls I made in my last post was that sugar was looking blow-offy. I wasn’t precise on the timing but clearly the action is looking corrective. More importantly, the price action has been controlled to squeeze final long-profits and allow positions to be lightened.

I think sugar’s action could go one of two ways. One, it could be like in the chart above where we see a downmove and then a bounce where final profits are taken and it gets sold off pretty hard down to a natural support point. Or the market-controlling speculators could just sell the sweet stuff down in a hard, volatile move. My gut tells me the first option is the probable play. If you haven’t positioned for a sugar short, there’s still time.

Trading intense moves in an asset class is a lot like trying to catch a metro train. You may have missed it going away on a long, but you can always catch it when it comes back on a short.

I don’t know nor can I explain why basic resistance/support chart analysis has been working so effectively since late 2015. Maybe it’s the patience. Maybe I’ve learned to read the action with HFT-tinted glasses before executing. I don’t know. All I know is that I don’t feel like I’m doing a whole lot different from most other years, but 2016 has been one for my own trading record book. Who knows? Maybe that whole 10,000 hours thing actually means something.

Let’s take a final look at bonds. They’ve been driven up right along stocks. In a bizarro turn, American equities are being viewed with virtually the same risk premium as corporate bonds and even treasuries, primarily because of solid credit ratings coinciding with high relative yields and developed-world central bank backing.

However, the boat is awfully crowded on the one side of interest rate direction. The world has negative rates everywhere. The crowd thinks there’s no way rates can move upwards just because the central banks are not in a position to act. That is fallacious logic. Observe:

Remember, the Fed’s final QE announcement in 2012. You see that upmove in 10-year rates? That was a market-driven move, not Fed-driven. And yet money is allocated today as if there ain’t no way the market can drive rates up again in any sort of treasury selloff. There is a widely held belief that American debt is one of the only pure safe havens, and it is to an extent. That doesn’t mean that market controllers won’t inflict maximum pain for bettors letting their guard down.

We’ve already seen a sharp move up in rates recently. Is there more to come? I’d bet that the odds favor a continued, but possibly choppy ascent in interest rates. This provides logical plays shorting TLT.

It’s not just developed sovereign debt that has seen a run. Corporate debt has been plowed into as well. Trading the exuberance on US corporate debt is as easy as some puts on LQD. Have a look at the upward spike since Brexit:

LQD is already beginning to turn. It may not fall down to support but hedging within a structured option play is well documented and easy to execute.

For my few followers out there, don’t give up on me. I’ve been extremely busy with very little personal time. I hope to post more regularly in H2 of 2016. Have fun out there with your money. Just don’t blow it.

When Last We Was Trading…

Posted on June 4, 2016 by Margin Rich

…I’d shared some thoughts on trading volatility and the action of the S&P 500. I was right about the down-move in the S&P 500. I thought a small move was possible of no more than 5% and a 3% percent move down is what we got, then a continuance of the sideways consolidation. However, I was very wrong about volatility. I suspect the reason is because the trade was simply too crowded. Volatility became a trade du jour as the intense bounce that had started in February had obviously grown long in the tooth.

But crowded trades are a trading fool’s errand and my thesis was wrong. And so ended one of the greatest 6-month runs I’ve ever had in reading the tape, but now I’ll just have to start fresh on a new run of prognostications. The crowded trade of long volatility and short the S&P 500 was skewered by the “market making” bot shops. Even Mr. Bonds himself, Gundlach, came out and stated during a Reuters interview that from the 20th of May and on the action in the stock markets felt like a short squeeze. JPM backed that assessment as one of the largest broker dealers out there. Observe a chart they released verifying the quick spike at the end of May in short covering.

As this short-covering burst has squeezed a chunk of the volatility hedging, too, we still very well may get a correction of 5%ish down to just below 2,000 on the S&P 500. Volatility is still worth watching for a quick scalp if enough weak hands have been washed out and the robots let some negative momentum push the S&P 500 down and volatility up.

Let’s return to the soft commodities market as sugar has just been on a silly tear. Observe:

Just look at the last week, specifically. Talk about momentum ignition. The Commercial Hedgers have gone supremely short but this softy keeps ripping higher, moving 16% in the last week. Crazy. But the last two trading days look suspiciously like blow-offs. Have a look at what’s happened during the last two blow-offs in sugar over the past 9 months.

You can see that prior to each of the blow-offs there were frenzied gains in very short time periods, but then astute traders could have made a nice rip quickly shorting sugar for 2 to 4 weeks. Has another opportunity presented itself for one of those rips? It sure looks like it. Go elsewhere for your farm reports, international weather patterns, crop output, regional flood potential, yada, yada, yada. This is straight up tape reading.

Using the futures proxy ETF of SGG, it is clear to see that $36 is an important number for sugar. Magnetic almost.

Using Fibonacci from the August 2015 low to the current June high, $36 also happens to be the 38.2% retracement point on the weekly chart. Tread lightly, if you’re inclined, as the action in sugar has been fast and furious. Just look at that whipsawing action since the start of 2015. Hedge. Trade with discipline. Manage the position.

One final note from a macroeconomic standpoint, have a look at this chart of negative yield curves in Germany and Japan.

If this doesn’t scream insanity to you then nothing can phase you. Maybe all the developed world’s central bankers have been secretly, partially lobotomized. A little frontal lobe here, a little hippocampus there, and you have a compliant banker with the inability to remember what negative rates actually mean and the lack of cognition to act effectively. Germany and Japan combined equal approximately two-thirds of the US economy. Which means their economies matter. A lot. Germany has negative yields out to a decade and Japan out to 14 years, just screaming recession is near if not already present in those two countries. You think the US is in better shape economically because we don’t have negative yields? These are different and unique times, folks. The kind of times that are remembered with head shaking and derisive snorts by future students of the economic past. Trade smart. Build cash. Stay disciplined. New highs are coming, but new lows are closer than you think.

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.

A Game Plan to Beat The City’s Warriors

Posted on April 17, 2016 by Margin Rich

Sorry that the last 2 posts have been about professional sports, but it was a good weekend of boxing and basketball and I saw some things where I felt I could provide some value-added commentary for sports fans. The commentary is still potentially actionable in the markets…the sports wagering markets.

The broad assumption here is that the Cavaliers take the Eastern Conference. Based on game 1 against the Pistons, the Cavs should be able to beat any team in the conference in a 7-game series. The Pistons are young, fiery, and came out extremely hot but the Cavs kept their cool and simply stuck to a game plan of Lebron getting everyone involved. The other 2 of the Big 3 stepped up huge, and despite the closeness of the score, it was a pretty easy win for Cleveland. Their game play against Detroit provided a clear look at the formula it’s going to take to have a chance at Golden State.

I’d like to make one quick note on the Detroit Pistons. Reggie Jackson pretty much lost them the game. No joke. He got fouled on a jump shot with 3 minutes and change to go. No call by the refs. Jackson then loses his cool and storms over to the referee’s face and incurs a technical for his immaturity. In his un-subdued fury, Jackson continued to over-dribble and take horrible shots for the rest of the game like a petulant little child. Yes, his teammates missed a couple shots when Jackson did try to make a play, but Jackson’s over-dribbling gave the Cavs easy defensive possessions and caused the Piston’s to take bad shots. If Jackson doesn’t get his head right, it’s gonna be a long series for Detroit. Reggie is Stan V’s guy. I’m sure Stan will have the heart to heart that Reggie needs and basketball fans hopefully will see a more composed playmaker for the Pistons. Maybe even Stan’s brother, Jeff, can shoot Reggie a text telling him to grow up, man up, and bring it.

Now let’s breakdown that game plan. First, regarding Curry, forget him. He’s going to make his shots and get his points. You simply can’t stop players that good. You can only make it hard for them. But players that skilled and that mentally tough are going to shine. Always. Just make him work. That’s why you have Dellavedova. Rotate him for Kyrie but sometimes run him with Kyrie, especially if Klay is on the bench but Steph is on the floor. Just let Dellavedova annoy, harangue, harass, and piss off Curry. That’s his value against the Warriors.

The key to winning is to neutralize the other starters. Step 1, the Cavs have to switch to the small line-up for the rest of the playoffs. Bring Mozgov off the bench. Start Kevin Love at center against Bogut. This will draw Andrew out of the paint. It will also allow for faster starts to the offense via Love’s outlet passing. That’s the only way they’re going to maintain the Warriors’ pace. The key is Love has to consistently hit the 3. Poor shooting completely negates the effect of starting Love at the 5. If the Cavaliers try to go to a half-court, slow-down offense this will stymie the small-ball strategy of starting Love and will just be chewed up by the shooting accuracy and passing efficiency of Golden State.

Step 2, bench J.R. Smith for Iman Shumpert for defensive purposes. I see more value in J.R. Smith providing an offensive spark off the bench than I do in playing him 30 minutes as the starter. Think Vinnie “The Microwave” Johnson of the Bad Boys Detroit Pistons. Give Shumpert the same mission as Dellavedova, except it’s against Klay Thompson. Shumpert will need to be a body glove, shadowing Klay’s every move. Iman will need to body him up, foul him hard even flagrantly a couple times, and just straight up get in his head. Shumpert is built like a strong safety. He’s fast enough and certainly strong enough to affect Klay Thompson. Should coach Lue agree, Shumpert has to be mature enough to understand the mission and engage with maximum effort defensively and not worry about scoring points.

Step 3, Lebron has to match up against Draymond Green to essentially destroy Green’s box score. This is the toughest step for the Cavs to execute but Lebron is strong enough and fast enough to do it. It’s not about shutting down Green’s scoring. That’s not the issue. It’s about taking away his rebounding opportunities by effectively boxing him out. It’s about keeping the ball out of his hands so that he can’t be that playmaker for the Warriors. It’s about keeping him honest defensively so that he can’t provide that weak-side help that he’s so great at giving. This is where Lebron will have to supplant his ego a bit and allow Irving and Love to lead the Warriors in scoring. If Lebron dedicates himself to the task of significantly reducing Green’s total affect for the Warriors, then I think Kerr will have a tough time adjusting the game plan accordingly. However, Lebron is one of the greatest players of all time and I just don’t see him accepting the fact that he needs to focus on diminishing Green’s presence while making plays to get the rest of the Cavaliers involved. I believe this is the most critical step for the Cavaliers to win it all.

That leaves Tristan Thompson and Harrison Barnes. That’s a tough cover for both. Thompson is too strong for Barnes and will effectively grab rebounds against the smaller player, especially offensive boards. Barnes is too fast for Thompson’s feet and will be able to get to the basket or free himself up for jumpers. The Cavs will just have to live with that match-up. If Barnes burns Thompson for some points but Klay Thompson is taken out of the game and Draymond’s total playmaking is scaled down then you live with the tradeoff.

After considering the starting five of each team, the benches need to step up accordingly. This is where the coaches really earn their keep by effectively subbing based on the ebb and flow of the game. Making the right reads and adjustments based on shifting chemistry is the bread and butter of the best coaches. Kerr has a decided advantage over Lue in this department plus Luke Walton’s insight provides another edge. It’s like playing tennis 2 on 1.

Look, I’m not saying that the Warriors aren’t going to win the championship. They did just win 73 regular season games. The odds are clearly in their favor as not a single team has been able to figure out their revolutionary brand of basketball. It’s just that I think the Cavaliers provided a blueprint specific to their team to potentially beat Golden State in a 7-game series. Consider the evidence. We’ll see what happens in June.