Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

Trading Desk Notes: It's The 'When' And Not The 'Why' To Enter The Market

By Victor Adair Market OverviewNov 20, 2021 11:51PM ET
www.investing.com/analysis/trading-desk-notes-its-the--when-and-not-the-why-to-enter-the-market-200609008
Trading Desk Notes: It's The 'When' And Not The 'Why' To Enter The Market
By Victor Adair   |  Nov 20, 2021 11:51PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
EUR/USD
-0.04%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
USD/JPY
+0.07%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
USD/CAD
-0.23%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
EUR/CHF
-0.14%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
XAU/USD
+0.19%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
DJI
-1.71%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

A handful of BIG cap tech stocks make all the difference

The DJIA and the small cap indices closed lower for two consecutive weeks (the DJIA fell as much as 1,000 points from last week’s high to this week’s low)—but the NASDAQ and the S&P 500 indices hit new All-Time Highs this week.

DJIA Weekly Chart
DJIA Weekly Chart
Nasdaq 100 Weekly Chart
Nasdaq 100 Weekly Chart

The American stock market has massively outperformed the Rest Of the World, largely thanks to the same handful of BIG cap tech stocks.

American Stock Market Vs Rest Of The World
American Stock Market Vs Rest Of The World
American Stock Market Vs Rest Of The World
American Stock Market Vs Rest Of The World

The S&P and NASDAQ keep tracking the seasonal trends—momentum trumps valuations.

S&P 500 Seasonality
S&P 500 Seasonality

American real interest rates hit the deepest negative level of our lifetime

The recent inflation surge means the difference between nominal rates and after-inflation rates has dropped more deeply negative. A critical aspect of deeply negative real interest rates is that they add to the “pressure” of capital flowing into risk assets. Deeply negative real rates mean that people who should be “savers” become “traders”—reaching for yield in risky markets.

US Real Interest Rates History
US Real Interest Rates History

The purchasing power of the US Dollar is falling – except when it comes to buying other currencies

The USD hit (what I called) a cathartic inflection point on Wednesday, Jan. 6, 2021, when the mob stormed the Capitol Building in Washington, DC. It was a 34-month low for the US Dollar Index, and since then, it has rallied ~ 8%.

Dollar Index Weekly Chart
Dollar Index Weekly Chart

The Japanese yen has tumbled ~10% since January, hitting a 56-month low last week.

JPY Weekly Chart
JPY Weekly Chart

The euro currency has fallen ~8% against the USD since early June. Against the Swiss Franc, the euro is down 6% (near All-Time record lows) during that same period. I look at the euro falling against the franc as a sign that European citizens are moving money to “safety” because they are unhappy with or fearful of the political/economic climate in Europe.

EUR Weekly Chart
EUR Weekly Chart
EUR/CHF Weekly Chart
EUR/CHF Weekly Chart

The Canadian dollar hit a 4-year low at ~68 cents during the COVID Crisis of March 2020, but rallied to 83 cents (22%) at this year’s high as 1) the USD trended lower and 2) commodity and stock markets trended higher.

CAD Weekly Chart
CAD Weekly Chart

The CAD peaked at ~83 cents in June as the USD started to trend strongly higher and rolled over from a lower peak in October as the commodity indices (and crude oil especially) dropped away from 7-year highs.

With the USD making solid gains against virtually all currencies this month, it is hard to tell if the CAD is suffering from the effects of the extensive flooding on the West Coast, which has crippled vital transportation links.

Gold surged over $100 the past two weeks – but fell back last week

Gold rallied the last two weeks even as the USD rallied—and that’s unusual outside of “haven buying” on a geopolitical event. The rally broke through several key technical levels and was accompanied by a 20% surge in open interest. Net speculator long positioning in the futures market soared.

Gold Weekly Chart
Gold Weekly Chart
Gold Prices vs Real Interest Rates
Gold Prices vs Real Interest Rates

Crude oil and commodity indices fell away from multi-year highs in September

WTI rallied from ~$62 to ~$85 (37%) from August to October as “re-opening” demand surged and OPEC+ made only modest production increases. The need for crude “right now” caused a very sharp increase in the price of nearby futures over deferred futures during October, but a lot of that has faded away as front-month prices have dropped from ~$85 to ~$75.

Crude Oil Weekly Chart

This chart shows that the Dec 2021 contract was a $1 premium over the March 2022 contract in early September. Soaring “demand” for WTI crude drove the premium to nearly $5.50 by Nov. 1st. It has now dropped back to ~$2 as crude prices have fallen.

Crude Oil Daily Chart
Crude Oil Daily Chart

Speculators may also have “backed away” from bullish positioning on concerns of a coordinated global release of government crude oil reserves and worries about rising COVID cases.

Oil vs Equities Jaw Gap
Oil vs Equities Jaw Gap

My short term trading

I started this past week with no positions, but after doing my homework last weekend, I developed a “bias” that the “runaway inflation narrative” had gone too far too fast. I decided to look for opportunities (price action setups) to fade that narrative.

I shorted gold, crude, the S&P and the CAD on Monday. I was quickly stopped for a slight loss on the S&P. I was stopped on gold Tuesday, also for a small loss, but I re-shorted the market as it fell back below Monday’s lows (gold had a daily key reversal down on Tuesday.)

I was also stopped on my short WTI position Tuesday, and I regret not finding a spot to re-short that market as it dropped $5 by Friday’s lows.

I took profits on the short CAD ahead of the weekend. I was puzzled that the CAD wasn’t weaker, given the USD’s strength and the economic disaster unfolding on Canada’s West Coast.

CAD Daily Chart
CAD Daily Chart

Going into the weekend (ahead of the US Thanksgiving week), the only position I hold is short gold. My realized P+L for the week is flat; I have decent unrealized gains on the gold position, which ended the week right on its lows.

Gold Daily Chart
Gold Daily Chart

On my radar

I continue to think that the stock market is at the “Euphoria” stage of the “full market cycle,” so I will keep looking for price action setups to probe with short positions.

Greed/Buy & Fear/Sell Index
Greed/Buy & Fear/Sell Index

I think the “central banks are WAY behind and will have to tighten” narrative is overdone (or at least, fully priced in), as is the “runaway inflation” narrative, so I will look for price action setups to fade those sentiments.

Consumer Sentiment
Consumer Sentiment

President Biden has said he will announce his decision about the Fed Chair before Thanksgiving. Betting sites see Powell being re-appointed—if Biden wants to replace him the markets won’t like that.

Thoughts on trading

I recorded a 30-minute interview on November 19 with Howestreet radio. I talk about what I’m seeing in several different markets, and some of the trades I’m making. Access is free.

Last week I invited readers to tell me what they would like to see in the TD Notes. Several people asked for more detail on how I trade. Here is an edited version of my reply to one of those readers:

First, I form an “opinion” about a market. For instance, the stock market has HUGE upside momentum for several reasons, but my s/t opinion is that retail FOMO has “taken it too far, too quickly.” I think it could experience a quick, nasty correction—which could morph into a more significant downside move (for instance, if it takes out the Sept lows.)

My “opinion” gets me looking for an opportunity—a setup—to get short. This trade would be an initial position. If the market fell, I would look for a setup to increase my short position.

My “opinion” is not a timing tool—price action is the timing tool. I can’t sell a market without regard to price action simply because I think there is a “good chance” that it will be lower in the future.

The S&P made a new ATH within the first hour of the “day session” on Friday, Nov. 5, but then started to fall back. I got short an hour later with a stop just below the ATH. The market took a swift 35 point drop from the ATH and closed the day below the mid-point of the day’s range. I felt OK staying short over the weekend. If the trade had been in the red by Friday’s close, I would have exited the trade (and cancelled the stop—the stop was intended to protect me if the market had a swift rally while I wasn’t looking.) I would not want to carry a money-losing short position into the weekend with the market in a powerful uptrend. (The Friday closing price is often the most valuable price of the week.)

The market rallied during the Sunday “overnight” session and the opening range of the Monday “day session”—and nearly hit my stop—but it then drifted lower for the next couple of days. By the Wednesday lows, I was ~75 points ahead on the trade. That was “decision time.”

Wednesday’s lows (4625) had been a resistance level in early November. If the market could break below 4625, I could see it falling another 75 points. I decided to stay with the trade, to give it the chance to become a BIG winner. But for risk management purposes, to protect my P+L, I lowered my stop to lock in at least a small gain.

The market turned higher from Wednesday’s lows, and I was stopped for a small profit (~20 points) on Friday, one week after entering the trade.

To wrap up: My process is to form an opinion about a market (I follow dozens of markets, and most of the time, I have no motivating view on many of them.) When I have a “strong” opinion, I look for confirmation from the price action. I look for a price action setup. For example, I might get short if I’m bearish and the market has just made a lower high. Maybe the market will fall, but, at least on some time horizon, I’m not trying to top-pick a rising market. I also need to have a potentially good risk/reward ratio for the trade given where I would place my stop—a point where I know I’m wrong to be short.

Two weeks ago, I included a link to a video done by Goehring & Rozencwajg. As I watched their video, I was thinking, “If their ideas are correct, then a TON of capital is mal-invested in the energy markets—where’s the trade?”

Here’s a link to another (5-minute) video that also makes the case that a TON of capital is mal-invested in the energy markets—and if that’s true, it will create many great trading opportunities.

Another reader sent a link to a beautiful little piece (a 4-minute read) that makes the point that amateurs will win more by avoiding stupid mistakes, rather than trying to be brilliant. This message applies to trading/investing BIG TIME.

Raoul Pal and Keith McCullough

I watched a fabulous 1-hour video interview between Raoul Pal (founder of RealVisionTV) and Keith McCullough (founder of Hedgeye.) The video is about Crypto—Macro—Regime Change—and how Millennials are HUGELY different than Boomers (and how that changes everything in markets now that the Mills out-number the Boomers.) Both men are deep thinkers and very successful traders.

This video is one of the best explanations of crypto and what it is likely to become that I have ever seen. I loved Raoul’s perception (near the end of the video) of the Regime Change underway as Millennials view RISK much differently than Boomers!

Quotes from the notebook

"Trying to predict a trend is hard. Trying to predict the end of a trend is even harder. (Therefore) picking stocks to buy is a better use of your time than trying to pick stocks to short." Jared Dillian 2021

My comment: I agree with Jared, but it’s in my nature to look for opportunities to fade irrational exuberance or to call “Bullshit!

My fundamental premise in trading is that “When” is much more important than “Why.” Raoul Pal in the video noted above. 2021

My comment: I agree. I remember taking a phone call from a client many years ago when I was a commodity broker. He wanted to discuss some ideas he had about a market. After our chat, he asked me to buy some contracts for him—at the market. I wondered, “why now? Just because we’re on the phone doesn’t mean that this is the best time to enter the market.”

You can have your ideas about “why” a market should be doing something (I call it having an “opinion,” but instead of trying to be brilliant, reduce the chances of doing something stupid by concentrating on “When” you enter the market.

Trading Desk Notes: It's The 'When' And Not The 'Why' To Enter The Market
 

Related Articles

Craig Erlam
A Busy End To A Busy Week By Craig Erlam - Sep 30, 2022 3

Stock markets are bouncing back on Friday, although I don’t think anyone is getting excited by the moves which pale in comparison to the losses that preceded them. This looks like...

Trading Desk Notes: It's The 'When' And Not The 'Why' To Enter The Market

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email