commodities | Margin Rich

Pride Goeth Before the Fall? – A Performance Review of 2021

Posted on March 1, 2022 by Margin Rich

It’s been awhile since completing a review of market calls made here at Marginrich.com. As my general knowledge of market inter-workings and crowd psychology has refined over the past several years increasing in nuance and depth, now’s as good a time as ever.

Let’s start with accuracy percentage and a list of the articles with basic details. Then I’ll provide a quick, detailed breakdown of each call afterwards down below. We’ll work backwards from the most current post, skipping 2 posts where I don’t make any directional calls or predictions.

Nine of the 11 asset forecasts between December 2020 and December 2021 were correct, for an accuracy rate of 82%. Stellar by any definition, especially for a free blog written in spare time. Each forecast was actionable via options, futures, the underlying asset, or simply raising cash.

Forecasts:

1. Trading Brazil – 12/12/2021: The Brazilian Real would strengthen against the US Dollar and Brazilian stocks were about to be re-rated higher. (CORRECT)

2. Options Markets Muting Signals – 11/20/2021: Trapdoor underneath stock markets and potential for a large selloff in the near future. (CORRECT)

3. Insiders, Metaverse, and Options – 11/16/2021: Options usage too extreme; quick & shallow selloff felt very close. (CORRECT)

4. I Can’t Fight This Feeling – 10/24/2021: Commodities sentiment extreme and due for a selloff led by oil with a rise in the US Dollar. (CORRECT)

5. If Everybody’s Thinking Alike, then… – 9/13/2021: Technically, I stated the cannabis sector looked as if it might be basing for a potential up-move. I didn’t actually make a directional call, but I’ll still own it. Same goes for EWZ, for which I actually did make a directional call 3 months later. (WRONG)

6. Volatility Interpretation – 9/1/2021: Volatility was about to show its face in stock markets. (CORRECT)

7. I Don’t Know Why I Talk About Crypto in a Public Setting – 8/30/2021: Ethereum on the verge of another run upwards. (CORRECT)

8. The Best Part of Waking Up – 7/22/2021: A correction in coffee was imminent. (CORRECT)

9. Bitcoin – A Quick Technical Read – 7/16/2021: I thought BTC had one more puke-dip into the $20k range, anywhere between $21k and $29k. Major whiff. My article actually bottom-ticked that particular correction before BTC went on to return over 100% within 4 months. (WRONG)

10. Oil Taking Its Breather…Finally – 7/7/2021: Oil correction had begun (not obvious yet) and XLE would sell off accordingly. (CORRECT)

11. Beware the Secular Trend’s Short-term Counter Move – 12/28/2020: The Euro/USD pair had reached an extreme point and a USD rally looked primed, which would coincide with potential fear-events in the equity markets. (CORRECT)

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So that’s the quick and dirty. Keep reading below for a bit more detail and to view the charts better illustrating each forecast. Each chart will have a yellow circle denoting the date the article was published.

Trading Brazil:

Calls on EWZ were the chosen expression for this trade. Pre-tax return was 100% in less than 2 months. While everyone has been focused on energy, I focused on an EM component that looked ripe to provide a kickstart to 2022 trading.

Real strengthening vs the USD. Any reader could’ve bet futures here on the currency pair for a tidy profit.

Options Markets Muting Signals:

This particular article actually top-ticked the NASDAQ Composite, but I didn’t go short here. Hindsight being what it is, I should have, but instead I simply raised cash levels for the opportunities that are currently availing themselves.

My focus was on the NASDAQ in this article however one has to include the S&P 500 if one is going to comment on general equity markets. No top-tick as there was a bit more demand for the S&P 500, but within a matter of weeks, the trapdoor opened for this index, too.

Insiders, Metaverse, and Options

You could almost smell the move coming, like a turkey basting for hours. Then, Black Friday delivered a little fear for the unprepared. No trade here as raising cash was the strategy, and the ensuing rallies assisted with that process. Going short up until the past few months was a dangerous endeavor and understanding option flows was and is critical.

I Can’t Fight This Feeling

That little 11% jaunt downward in the underlying ETF over the next month resulted in a 135% pre-tax return on simple Put purchases. Of course, energy as a sector is a different beast entirely now, and along with inflation, the Russia/Ukraine conflict has put commodities front and center of the financial space again.

The US Dollar followed it’s typical anti-correlation to commodities by rising. Since that initial run upwards, it has chopped in this uncertain environment. I suspect the ultimate, long-term path is downwards for the USD, but that’s a philosophical discussion for another time.

If Everybody’s Thinking Alike, Then…

Ugh, what else needs to be said? This one is ugly. To reiterate, I did not actually make a directional call or bet here. I simply thought that the bear market in cannabis may be reaching a nadir. But investors and speculators had other ideas as the market pounded this ETF for an additional 50% loss subsequent to publishing the article.

Volatility Interpretation

The article literally bottom-ticked the VIX. Unfortunately, I didn’t directly trade Vol here. I used the ensuing volatility to pyramid some positions in the long portfolios.

I Don’t Know Why I Talk About Crypto in a Public Setting

Those percentages in the chart above were from the publishing date of the article (yellow circle). The actual moves were, 20% as annotated for the first ascent, then a quick 50% downdraft followed by a 75% spike. If you ignored ETH in 2021, or crypto period, then you missed some of the best trading opportunities of the year.

The Best Part of Waking Up

Coffee was the gift that kept on giving for about 4 weeks in late July through late August, before squeezing out of an old school pennant to what seems like non-stop upside. The initial trade was simple Puts on the JO ETF for a 40% pre-tax return in a week. Then I was able to scalp 20% in a week out of JO with some Calls before finally squeezing the last bit of Put juice for 10% in a week before THE breakout in coffee.

Subsequent to those trades, I did overestimate the extreme in buying-sentiment and underestimate the impact of the freeze in Brazilian crops. Consequently, I gave back a bit of the profit with additional Puts and failed to capitalize on the ensuing multi-month rally as a result of my bias. All additional lessons at a fair tuition price.

Bitcoin – A Quick Technical Read

I darn near bottom-ticked BTC with this particular forecast. So wrong! As BTC goes, so goes the crypto markets so it wasn’t long before I was pursuing the other opportunity as noted above. As has been said countless times by countless players, trading is all about managing risk (control losses & maximize gains).

Oil Taking Its Breather…Finally

Oil (West Texas Intermediate) was overdone. I top-ticked the high in July on the day of publishing and was fortunate to estimate an unsurprising 20% sell off in the commodity.

I favored Puts on the XLE as the expression for this trade and the market rewarded me with a 100% pre-tax return in under 8 weeks.

Beware the Secular Trend’s Potential Short-term Counter Move

I published this article in the midst of what felt like virtually everyone expecting the “obvious” demise of the USD. The dollar’s imminent demise down into the $80’s has since proven to be fallacious logic. Its haven status as the world’s reserve currency has kept it afloat and demand will probably keep it there for some time until internal and external geopolitical/economic events shift perceptions and capital flows.

Once again, the anti-correlated pairing could’ve provided currency traders with an exceptional opportunity. Admittedly, I failed to take advantage of this potential trade with a currency pair expression.

What I did do was expect more intense volatility. As such, I purchased hedges which ended up costing me insurance premiums as the S&P 500 simply chopped for a month before continuing onward and upward. Sure, I was correct about some volatility but wrong about the amplitude. Still though, I contend that the price paid for peace of mind was worth it.

It’s my sincerest hope that if you’ve read this full performance-review that my skills and experience are apparent. I’m not some wannabe, greenhorn daytrader posing as a professional. Although I mostly showcase my technical analysis skills here at the site, I’ve honed my fundamental analysis skills for all asset classes and sectors. Over the last 20 years, I’ve poured my heart and soul into building an amalgamated skill set around a professional-level understanding of investing, finance, banking, currencies, economics, accounting, business operations, sales, geopolitics, crowd psychology of markets, leading/managing/coaching, and asset management.

Now I’d like to test those skills in the appropriate arena. If you’re here just to have a read, I hope you’ve enjoyed. I’ll continue to intermittently share actionable thoughts. But if any readers from the professional, financial space are interested in how I can benefit their organization, please don’t hesitate to reach out. Email address is listed at the menu button in the upper-right of the screen. My LinkedIn profile can be accessed at the About page by clicking the hamburger in the upper-left of the screen.

Here’s to a fruitful 2022 for any and all readers of Marginrich.com.

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!

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.

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.

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.