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November 28, 2020 | Trading Desk Notes For November 28, 2020

Victor Adair, author of The Trading Desk Notes, began trading penny mining shares while attending the University of Victoria in 1970. He worked in the mining business in Canada and the Western United States for the next several years and also founded a precious metals trading company in 1974. He became a commodity broker in 1977 and a stock broker in 1978. Between 1977 and his retirement from the brokerage business in 2020 Victor held a number of trading, analytical and senior management roles in Canada and the USA. Victor started writing market analysis in the late 1970’s and became a widely followed currency analyst in 1983. He started doing frequent media interviews in the early 1980’s and started speaking at financial conferences in the 1990’s. He actively trades his own accounts from The Trading Desk on Vancouver Island. His personal website is www.VictorAdair.ca.

Market positioning, sentiment and psychology are strongly reinforcing consensus expectations. Caution is advised.

Markets this week:

MAJOR NORTH AMERICAN STOCK INDICES ARE AT ALL TIME HIGHS. COMMODITY INDICES ARE AT 2 ½ YEAR HIGHS. THE US DOLLAR INDEX IS AT A 2 ½ YEAR LOW. GOLD IS DOWN ALMOST $300 (14%) FROM ITS AUGUST HIGH WHILE US 10-YEAR TREASURY YIELDS ARE STEADY TO LOWER AT 0.84%.

 

 

 

Consensus expectations:

Covid will continue spreading in N. America with Thanksgiving holiday travel accelerating the trend. Covid cases are already reversing lower in Europe. Near term economic slowdowns due to virus containment measures will be more than offset by stimulus programs and vaccines beginning Q1/21.

 

Biden will be the new President. He and his team will champion fiscal stimulus, green programs and rebuilding relationships with America’s allies. Trump will be increasingly irrelevant.

Central banks will maintain accommodative policies and actions. Interest rates will stay low. The USD will continue to weaken.

Market positioning/sentiment:

Positioning across assets other than bonds is very pro-risk. Capital flows into equities since the election are at record levels. The Fear/Greed index is at Extreme Greed. Retail is very long speculative stocks. There has been a dramatic rotation from large cap market leaders to small cap market laggards. The Put/Call ratio is at extreme levels. Volatility metrics across assets have crashed from pre-election highs to the lowest levels since February indicating little fear of trend reversals.

Market psychology:

FOMO. Chase hot stocks, buy dips, use leverage. Safe havens and hedges are a waste of money. The Retail Army has had great success YTD, why stop now?

What are the trading opportunities/risks?

I THINK POSITIONING, SENTIMENT AND MARKET PSYCHOLOGY ARE STRONGLY REINFORCING CONSENSUS MARKET EXPECTATIONS. THAT SETS UP PRO-RISK TRADES FOR A SHARP CORRECTION ON ANY VARIANCE FROM CONSENSUS EXPECTATIONS. CAUTION IS ADVISED.

Another Key Turn Date signal

When several markets all reverse direction at the same time that’s a signal that something BIG has happened and I refer to it as a Key Turn Date.

 

It looks like we had another KTD around the beginning of November (circled on the charts.) Perhaps markets were de-risking ahead of the election and then re-risking after the election and then added even “more risk” as the election results cleared and as vaccines were announced.

Stock indices too far too fast?

The major stock indices are currently in the “as good as it gets” category but they may keep going higher. Extreme pro-risk sentiment leaves the indices vulnerable to a correction trigger. I’m short the S+P (small size/tight stop.)

 

Bond rally sends a different message

I’ve been trading bonds from the long side following the sharp dive they took on the Pfizer vaccine news. Bonds seem to have a less rosy view of the future than stock indices. My long bond position is another way of shorting extreme pro-risk sentiment.

Gold is over-sold

I missed getting short gold when it broke on the Pfizer news and again when it broke the September and November lows around $1855 (basis Feb.) My “thesis” has been that the $600 gold rally from March to August was accelerated by (if not almost entirely due to) gold ETF buying. I thought ETF buyers would turn sellers if bearish news (vaccines) hit the market and/or if gold had a technical breakdown.

The strong selling pressure this month and this week was probably driven by gold ETF long liquidation given that gold fell even as the USD and real interest rates fell – normally 2 bullish factors for gold.

 

Short term gold sentiment is extreme negative. The thinking seems to be, “Who needs gold (or any other hedges or safe havens) in this pro-risk environment?

I bought out-of-the-money gold calls Friday with gold and gold Vol both around 5-month lows. Some of the major gold mining shares found support this week.

The US Dollar continues to weaken

The US Dollar Index (USDX) is at a 2 ½ year low. Investor sentiment and positioning is bearish. Consensus forecasts are bearish. Biden in the White House with Yellen at Treasury and Powell at the Fed seems to add weight to the bearish USD views.

I’ve traded currencies more than anything else over the past 50 years and if I could only say one thing about currencies it would be that trends in the FX market often go WAY further than seems to make any sense and then they turn on a dime and go the other way.

 

The USD bearish trend could gain momentum into year-end like it did last year. The USD could also turn on a dime and rally if pro-risk sentiment reverses. Staying with the trend I bought CAD against USD this week. CAD closed this week at a 2-year high. I will keep stops tight on this trade because USD seems very oversold.

Crude oil is aggressively bid

WTI crude oil prices made a dramatic reversal November 2nd and have rallied ~$12 BBL (35%) since then. The market was in steep contango for months and is now mostly flat with some backwardation.

 

For months I described WTI as a lack-of-demand market. The vaccine news certainly sparked “hope” that demand would come roaring back next year but there seems to be “more” to this rally than just the vaccine news. I wonder if there is some “Mid-East risk premium” in the price now – we haven’t seen that in a long time.

OPEC+ meets next week and will likely try to keep a lid on production but given cash flow needs a lot of producers will have to keep pumping.

Thoughts on Trading: Managing risk is more important than guessing where markets might go

My trading time frame is usually a few days to a few weeks. I trade markets in terms of what I think they might do rather than what I think they should do.

 

For instance, I won’t buy a market just because it’s cheap and I think it should bounce, but I might buy that same market if it’s cheap, appears to have made a bottom and I know people have been selling it aggressively.

 

I say I “might” buy that market but it would depend upon whether or not I can find a price, a place and a method to buy it where I’m comfortable with the risk  on the trade.

 

No matter how “convinced” I am that a market is going up I will not buy it (even with reduced size) if the risk is wrong. That means I often miss getting into a trade that I’ve been waiting to make.

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November 28th, 2020

Posted In: Victor Adair Blog

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