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September 30, 2017 | Trading Desk Notes – Sept 30th

Senior Vice President and Derivatives Portfolio Manager. Victor began trading financial markets over 45 years ago and has held a number of senior executive positions during his career as a commodity and stockbroker. Over the years he has provided considerable market analysis via radio and television and at financial conferences. His primary brokerage business is providing corporate accounts with risk management services using exchange traded derivatives. He actively trades currencies, interest rates, precious metals, stock indices and commodities for his own accounts.

Trading Techniques:

Several interest rate, currency and commodity markets REVERSED direction the first full week of September. For instance, On September 8 markets were pricing a 25% chance that the Fed would increase s/t interest rates by 25 basis points come December…markets are now pricing in a 75% chance.

I’ve noticed, after trading for more than 40 years, that price trends often go WAY further than seems to make any sense, and then “REVERSE – turn on a dime” and go the other way.

When a market is trending higher I prefer to be a buyer, rather than a seller, but I’m always wondering if the trend has gone too far and will reverse right after I buy!

Successful trading depends, in part, on distinguishing between a “reversal” and what is just a little correction. Clearly, it depends upon your time horizon, but even then you have to allow for the market to move against you to some degree.

My son Drew likes to define the difference between a “reversal” and a “correction” as either a “fundamental shift” or just a “data point.” For instance, around mid-June two senior Bank of Canada officers signaled a “fundamental shift” in the central bank’s position on interest rates and the Canadian Dollar rallied ~10% over the next three months.

By early September I thought the Canadian Dollar (and a lot of other currencies) had rallied “too far – too fast” when it got to 83 cents. It seemed that “everybody and his dog” was long CAD and/or short the USD…but I was loathed to sell CAD short because I understood that the rally could go WAY higher before it reversed. So I waited for a “sign” that it was going to roll over. The “sign” could be “technical” (a chart pattern, for instance, in CAD and/or related markets) or “fundamental” ( a change in tone from the Bank of Canada, for instance.)

CAD hit a 2 ½ year high on September 8 and traded lower the following week…a number of other currencies, commodities and interest rates had a similar kind of reversal pattern and I saw this overall “technical sign” as “reason” to short CAD. Later in the month there were indications of a possible “fundamental shift” from the Bank of Canada (they wanted to see how the Canadian economy responded to the interest rate increases and the subsequent rise in CAD) and this made me more comfortable to remain short CAD.

This past week:

The yield on 2 year US Treasuries hit a 9 year high as Yellen maintained a “hawkish” tone. The US Dollar Index hit a one-month high while gold hit a one-month low.

The USA slapped import duties of 220% on Bombardier…as NAFTA negotiations continue.

BofC governor Poloz “backed up” statements made last week by deputy governor Tim Lane to the effect that they want to “see” how the Canadian economy reacts to the recent increases in interest rates and the rise in CAD. The market took this to mean that they are “backing away” from raising interest rates again anytime soon.

Trump proposed tax cuts. This could be a bullish “fundamental shift” for the US Dollar…if the market believes that the tax cuts will actually happen.

It’s bitterly ironic to many Canadians that the Americans are looking to cut tax while our government is raising taxes.

There is a proposed vote in the Catalonia region of Spain this Sunday to separate from Spain. The central government is opposed to even letting the vote happen. This could become a bearish “fundamental shift” for the Euro currency on a denial of “democracy”…and/or an “opening” for other regions in the Eurozone to have their own “Brexit” movement.

Brent crude oil hit a 2 year high in September (WTI hit a 4 month high) on indications (real or otherwise!) of rising global demand and falling global production.

My short term trading:

My best trade this month has been short CAD. I remain short. There is still a huge spec long position in CAD that will be pressured to liquidate if CAD keeps falling…adding to downside pressure. I also think CAD could fall further IF crude oil prices start to weaken.

I sold WTI short this week. I’ve been waiting for the recent rally to “run out of steam” and I think I saw technical signs of that this week. IF WTI prices keep falling I hope to find a spot to add to my short positions. Like CAD, there has been a lot of speculative buying in the commodity and stock markets of “crude oil plays” and these buyers may become sellers if crude price reverse from here.

I established small short positions in the S+P last week…I thought I saw technical signs of weakness but I covered that position for a small loss and actually went long earlier this week when the stock market refused to go down. I closed my long position later in the week for a small profit (offsetting my small loss) and I’m now flat.

PI Financial Corp. is licensed as a broker-dealer in all provinces and territories of Canada and is a member of the IIROC and the Canadian Investor Protection Fund. The contents of our Website are not intended, and should not be construed, as a solicitation of customers or business in any jurisdiction in which we are not registered as a dealer in securities.

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September 30th, 2017

Posted In: Victor Adair Blog

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