You better watch out cus I’m telling you why, Santa Claus ain’t comin to town…
LAST WEEK’S ACTION
Some profit-taking moves into month-end particularly with EMFX ZAR and MXN being the strongest performers while it was predominantly a risk off week, otherwise the thematic USD JPY CHF EUR group and ZB futures all saw some bid while risk assets sold off. Notable is Crude being 25% off 3 week highs and almost 20% off 2 week highs (both markers off the chart) — it is very oversold, had indecisive price action, atop a strong technical area, and a lot of retracement room to the upside.
EQUITIES
US indices led losses last week while Japan is mirroring similar 1W and 1M performances with Nasdaq.
We looked at the monthly weekly charts last week so seems fit to look into daily charts this week, especially as we’ve had quite a bit of action. Developed and and Emerging Market funds held the extremely strong support last week and could change the tide in momentum…
Nasdaq still looking very bearish compared to peers and does not provide much sign of letting up…
Momentum studies in SPX however, like in Developed/Emerging market charts above, is showing tentative signs that a bounce could be sustained and based on this alone, I like tactical long trades to start the week while looking for risk in Asia and Europe to trade resiliently. That said, I prefer selling high ones in risk later on especially via Nasdaq (which I’m still currently short 16400+) and don’t believe in a Santa rally this year:
1 real rates and equity performance - we’ve seen real rates (inverted in purple) moved higher and something to watch as Nasdaq (7-day rolling percentage change) in particular is sensitive to…
and inflation expectations continuing to moderate and the gradually rising short-end yields with the Fed looking increasingly proactive on inflation,real rates (blue) will probably stay off the lows.
2seasonality - seen a lot of posts in support of a Santa rally and going back 50 years it is undeniable but I felt some were dressed in ways that I wanted to apply conditions that mimics our current seasonal pattern — 1) a thematically weak September month followed by, 2) a strong October rally.
Dec does finish positive on average but it is hardly impressive when the above conditions are filtered from 50 year stats.
3 technicals (the bearish higher tf charts) and hawkish Fed pivot, US equities is some +20% ytd and it seems wild to me that we can finish higher while Fed is moving to tighten policy faster. It’s probably all fairly priced in but implications on various markets will manifest itself further the closer we get to hikes and there is likely to be a lot of volatility ahead.
Lastly, US equity vol premiums are elevated and looks like SDEX will follow TDEX higher; Move index pullback some 10pts but still elevated.
RATES
I’ve covered nominal/real yields and inflation expectations above. A look at the Eurodollar spreads for next year:
Market continues to price in 75bps of hikes next year and with faster tapering being on the agenda and Dec FOMC round the corner, I would expect we continue to chop around these levels.
USD rate differentials have narrowed recently and will be key to how USD moves from here and given US policy tightening, I don’t think it will narrow much further and would be a good opportunity to build a long USD position. For the imediate term however, narrowing spreads are pointing towards near-term USD weakness.
COMMODITIES
Commodity futures being very high beta tend to give early signs of broader drawdowns like it has done recently.
Big picture wise, commodities have lost upside for the time being…
Looking at short term technicals however, indecisive price action after getting oversold from a 5-week downtrend should favour a relief rally especially if the sell-off in risk proves to be over and Crude long (and related assets) should be one trade in the mix when goldilocks sentiment kicks back in.
TRADING VIEWS/IDEAS
I’ve shorted Nasdaq early last week and have long been buliding up an Oil long position. My star trade AUDCAD is down over 4% from the July highs where my first positions were taken in the pair, and I’ve layered a good chunk over it. There was some frustrating times when I’ve got trailed out of some positions unneccesarilly but in any case, this is proof that positioning trading with small position sizes can still produce very good profits when you catch a good trend. If it’s anything like my cash game holdem poker mantra — “few good hands an hour” that has proven timeless in my good runs, a “few good trades a day/week/month” (depending on trading style but conservatively speaking) is probably enough including the hands/trades that don’t quite work out. A few percent a week/month isn’t a big ask if you’ve been trading a while, and the math should take care of itself.
In addition to some views expressed above — long risk to start the week especially favouring Crude/Energy/Petro-currencies, short Nasdaq on rallies, I resonate with the RIA chart for the short term on US indices which have led the selling in risk last week, and Mr Bonde’s newsletter ‘Don’t Fight the Fed’ on market patterns when fed starts tightening.
With Dec FOMC round the corner, I doubt these levels are still atrractive enough to entice big money to put risk on, FOMO will be weaker, and therefore seeing upside capped in risk.
Have a great week trading!
