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Trading Desk Notes 11-06-20

By Guest Author | November 7, 2020

Stock indices tumble and bounce back on the US election.

The DJIA dropped ~2,500 points (9%) from mid-October to last Friday’s low but recovered those losses in 4 days this week. Volatility jumped sharply when the indices fell but collapsed this week when stocks bounced back.

Trading Desk Notes 11-06-20, Trading Desk Notes 11-06-20

I was short stock index futures as they tumbled the last 2-weeks of October and took profits Thursday of last week. I wanted to be out of the market ahead of the election, fearing very choppy short-term price action.

The US Dollar index has been the mirror image of the stock market.

The US Dollar rallied in late October as a “haven,” while stock indices tumbled. This week the USD wasn’t needed as a haven and fell hard as stock indices rallied and volatility collapsed. The US Dollar Index closed this week near a 2 ½ year low.

Trading Desk Notes 11-06-20, Trading Desk Notes 11-06-20

Investor sentiment on the US Dollar is very bearish, and futures market speculators have been heavily long the Euro against the USD since June.

Trading Desk Notes 11-06-20, Trading Desk Notes 11-06-20

I was shorting Euro and CAD against the US Dollar the last 2 weeks of October. I was stopped out of those trades early this week.

Asian currencies have been strong.

Asian currencies have been rising against the US Dollar for the past several months. The Chinese Offshore Renminbi (CNH) hit a 12 year low near the end of May but has rallied >8% since then and is now the best it’s been in 28 months. (Falling prices in this chart mean that it takes less CNH to buy one USD.)

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This week the Japanese Yen had its highest weekly close against the USD in 4 years.

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The Euro/Yen cross rate is another major market that reversed the early September Key Turn Date trend.

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Canadian Dollar has followed the stock market’s lead.

The ups-and-downs of the Canadian Dollar have been highly correlated with the US stock indices’ ups-and-downs this year. Also, the CAD had its highest weekly close of the year this week and is very close to the best levels seen in the past 2 years.

Trading Desk Notes 11-06-20, Trading Desk Notes 11-06-20

Gold fell in late October but rallied hard this week.

Gold drifted lower in late October as stock indices tumbled, and the US Dollar rallied. This week gold jumped >$100 from last week’s lows as stock indices came roaring back, and the USD tumbled.

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With retail demand for gold down sharply this year in both India and China, the ETF market has been an important demand source. Global gold ETF buying year-to-date is ~1,020 tonnes with ~750 tonnes bought between March and August when gold jumped ~$600. Total gold ETF holdings are now ~3,900 tonnes. (Source: World Gold Council.)

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Gold and Interest Rates

The huge gold rally since 2018 has been highly correlated with the sharp decline in real interest rates. That relationship has suffered a “disconnect” lately, with gold and real rates both rising.

In previous posts, I’ve shown charts of several different markets that reversed the Key Turn Date (KTD) trend at the beginning of September. The TIPS chart (my rough measure for real rates), I’ve circled the All-Time High that happened on the KTD. (Rising bond prices = falling interest rates.)

Trading Desk Notes 11-06-20, Trading Desk Notes 11-06-20

Trading: This was a good week to be patient

I had a good run with my trading in October and wanted to be mostly out of the market going into the election. Also, I was worried price action would be very volatile, and I would give back the profits I’d made in October. (The old saying is that it’s easy to make money trading, just tough to hang onto it!)

I stayed short CAD and Euro into November (Euro ended October right on its lows) but moved my stops down tight and was stopped out very early this week. Just as well. Both CAD and Euro rallied hard most of the week.

Trading Desk Notes 11-06-20, Trading Desk Notes 11-06-20

I sat on my hands Monday to Thursday, as I didn’t see anything to do that didn’t have “too much” risk. I re-shorted CAD late Thursday, thinking that the 4-day rally was overdone but got stopped Friday when CAD rallied above Thursday’s highs. (Importantly, I wouldn’t say I like holding a losing position over the weekend, hoping that it will turn around next week.)

Conclusion

It may be that stock indices sold off ahead of the election on “de-risking” and then bounced back after the election results were “OK.

I don’t want to speculate about the “reasons” for all the wild price action. My view is that the indices are back to where they were 2 weeks ago, volatility is way down, and I’m flat at the end of the week. I’ll look at the charts over the weekend to see what I might do next week.


Victor Adair is a veteran trader with 50-years of experience trading all types of markets. After retiring from “the business,” he set up a personal website to share his notes, ideas, and “the trading life.”  You can subscribe to his website to receive his weekly newsletter. You can get his past notes on his website, “The Trading Desk.”


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2020/11/07
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