October 26, 2019 | Trading Desk Notes October 26, 2019

The S+P 500 index hit a new ATH today…up ~ 6% from Oct 3 lows…up ~11% from mid-summer lows…up ~29% from last December lows. We’re in the heart of quarterly earnings season…companies that beat are aggressively bid…companies that miss are clobbered. Markets are embracing risk…implied vol is back to mid-summer lows…even as global economic growth slows and political uncertainty ramps up. Hedge funds continue to under perform index tacking passive funds. Sentiment indices show rising but not extreme enthusiasm. Total share buybacks of $5 Trillion since the GFC seem to have had a significant effect on share/index prices. Warren and Sanders both promise to stop share buybacks if they become President.

Two weeks ago I wrote that a breakout to new ATH would amaze a lot of people and might “force” cautious money managers to become more aggressive or risk losing AUM. D-Mark and other OB/OS indicators show many shares/indices at high risk of (at least) a correction.

Interest rates: The market is pricing >90% chance of the Fed cutting rates 25bps next week…the 3rd cut this year…with ~20% chance of another cut in December. A year ago the market was looking for the Fed to raise rates 3 times in 2019…now the market is looking for the Fed to cut rates with the major stock indices at/near ATH…unemployment around 50 year lows…and inflation near the Fed’s target. Will it be seen as a “hawkish” mid-cycle cut?

Was Sept 3/19 a MAJOR Key Turn Date? (Several important markets changing direction on/around the same date.) On Sept 3/19 the US long bond printed its lowest ever yield. The total of negative yield bonds hit ATH. Yield curves were max inverted. The narrative was that a serious recession was coming. Since then:

US long bond price down ~4% and yield curve un-inverts

Copper up ~8% from 2 ½ year lows

WTI up ~5%

S+P up ~3%

AAPL up ~ 20%

BoA up ~20%

RBC up ~ 10%

Global bank shares up >10%. European bank share ETF up ~19% from multi year lows.

Gold down ~3.5%

Silver down ~ 8.5%

USDX down ~2% from 28 month highs

CAD up ~ 2.5%

September 3 may have been be the date when “the world” stopped expecting interest rates to keep falling (going deeper negative.) If that’s true then…maybe…some of the MASSIVE capital flows that have gone into bonds and bond funds and money market funds the past few years will start to leave and look for another home. Stocks? Commodities?  That date will also be important if bond yields start falling again and drop through the September 3/19 record lows.

The US Dollar Index (USDX) hit a 28 month high October 1 and dropped ~2.5% to last week’s lows. Those lows were also approximately the 200 DMA and multi-month trend line lows. USDX has rebounded this week as European currencies weakened.

The Canadian Dollar had zero reaction to the Federal election but CAD has rallied ~1.5 cents the past 3 weeks. The BoC meets next week and may sit tight on rates. CAD has been in a YTD 3 cent range against USD but has rallied against many other currencies. The chart below shows EUR at a 2 ½ year low against CAD…this may be a “spillover” effect of money coming to USA/North America for safety and opportunity…note MEX has been in a narrow YTD range Vs. USD but has rallied against many other currencies. Is North America perceived as an “Island” of relative prosperity / economic strength?

WTI is up ~5.5% from its lows of 4 weeks ago while the S+P 500 Index is up ~6% in the same time period. Several times over the past few years I’ve pointed to WTI and the spooz turning together at significant tops and bottoms. Here we go again?

My best trades of the week: I took profits on the long EUR I’ve had for 3 weeks…missed the highs of the week by half a Euro but it was still a worthwhile trade. I did a 180 in the gold market…covered the puts I bought last week when I thought gold was about to break down and bought futures as gold looked like it was going to breakout to the upside. I sold the futures early Friday when the rally hit a wall at $1520. The money I made on the futures offset the loss I took on the puts. I’m going into the weekend short TNotes…looking for bond yields to rise.

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Victor Adair October 26th, 2019

Posted In: Victor Adair Blog

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