At LaDucTrading, I analyze price patterns and intermarket relationships across stocks, commodities, currencies and interest rates. I develop macro investment themes to identify tactical trading opportunities and employ strategic technical analysis to deliver high conviction stock, sector and market calls. My annotated Charts are meant to do most of the talking and illustrate my Thesis, Trigger, Time Frames, Trade Set-ups and Option Tactics. When applicable, I note Unusual Option Activity (UOA) and Deal Flow. I also keep a Tally and follow a Trade Plan, both of which are made available to members. No proprietary indicators are used, just solid chart pattern recognition, volatility insight and some big-picture perspective thrown in. Don’t hesitate to contact me with questions or comments: [email protected].

The LaDucTrading Gone Fishing Newsletter is divided into basically three parts:

  1. Reflections and Inflections
  2. Events This Week and How I’m Trading It
  3. Macro Considerations

Reflections and Inflections

Oh My God the Bank of Japan Did It Again

Back in Feb of 2016, BOJ shocked markets when it cut its benchmark rate below zero which sent global government bond yields on a slide, many into negative territory by June — $12T worth. Yen appreciated in value which undid a lot of the $NIKK advance from prior year. But that all changed in September when BOJ came out again to counter their ‘mistake’ by pegging the 10 year yield to zero, basically putting a floor under global yields by offering, in essence, Unlimited QE. THIS was the impetus for the market’s wild advance, and the run-away reflation trade, that was credited to Trump. Media dubbed it the Trump Rally but it was really a perfect storm of hope-fueled market buying on his (empty) promises, the earnings recession trough ending and Japan’s offer to buy unlimited amounts of JGBs. I wrote about it here: Anatomy of a Trade: Yen Short.

Since rates globally have risen, BOJ has been swimming against the current in its effort to buy up JGBs to push yields down toward zero.  Until last Friday the 7th of July when they announced and recommitted sending equities in a tear higher, especially the precariously-perched Tech stocks which looked like they were just about ready to roll over and roll over hard. Timing! As has been the case, BOJ is openly buying bonds AND equities, at every dip. So it is not only “Don’t Fight The Fed”; it is also “Don’t Fight Japan”!

As a result of the BOJ announcement, not only did SPY and QQQ, and especially the FAANNMG (FB, AMZN, AAPL, NFLX, NVDA, MSFT, GOOGL) gap and go, but the USDJPY crashed, putting pressure on the USD and US rates, sending metals (both precious and industrials) to rally hard. This does not mean Inflation is Here — see article: How To Time a Market Top — but I’m determined to find and trade it either way.

Copper, Gold Miners and Rates

We already suspected the Reflation Trade (inflation proxies) was heating up again in June based on this inverse H&S formation on the COPX:GDX chart, which has foretold higher rates at every turn this year! Higher Copper, Steel, Rates didn’t disappoint past 30 days although Gold/Miners did. Now with the BOJ move, and Yellen testimony of future US rate hikes and deleveraging, it looks like it may be time for the US 10 yr to pull back and with it GLD/SLV/GDX/GDXJ to move higher.

Tech Stocks Correlation with Interest Rates

This tweet caught my attention this week:

It’s a little cheeky but not really. So growth stocks like technology can do just fine in a low-rate, slower-growth economy. In fact, they do better. And money rotates into Value Stocks when we have a stronger economy with rising bond yields. Keep this in mind once we have Real Rates Moving Up Fast. For now, note that downturn in yields during 2008 and again in 2014 helped tech performance (black arrows), which continued into the second half of 2016, H/T John Murphy

Let’s Talk About Gold

Big Picture, I have concerns and my colleagues have graphically represented what I fear:


Now for the Micro Bullish Perspective:

  1. Large specs in silver futures have moved to their smallest net long position since late 2015, when silver was putting in a bottom and on the verge of rallying ~50%. it is unusual and noteworthy when swap dealers move to a net long position in precious metals.
  2. CFTC Gold Net Long Positioned Contracts vs Gold Price July: 25k v $1200 June: 175k v $1300 Dec 2016: 30k v $1125
  3. CFTC Bulls Turned Bears in Net U.S. Dollar Futures Positions 2017: -100k 2016: +330k 2015: +420k
  4. The shorts in the JPY (Yen) have increased to their highest level since June 2015. This marked a Major Bottom.
  5. Cryptos Crashing: Not going to get into this theory here but with the Cryptocoin markets imploding this weekend, what money is left over will likely find its way back in to Gold and Silver.

Events This Week and How I’m Trading It

Economic Reports

There are no important US data releases next week as eyes will be on Q2 earnings. Some will be closely watched which should provide some good reads on healthcare, industrials, and tech sector. Chinese GDP and Retail Sales Sunday may give rise to some China plays. Eurozone inflation early in week followed by Japanese and Eurozone rate decisions later in week means currency volatility. Draghi remarks Wednesday which will affect EUR and USD accordingly.

Sunday:  China Industrial Production, Retail Sales, GDP
Monday:  Eurozone CPI, US Empire Manufacturing
Tuesday:  UK CPI, Output PPI, House Price Index, Germany ZEW Economic Sentiment, US Import/Export Prices, API Crude Inventories
Wednesday:  US Housing Starts, Permits, DOE Crude Inventories, Japan Trade Balance, Australia Employment Picture
Thursday:  Germany PPI, UK Retail Sales,  US Jobless Claims, Philly Fed, Leading Indicators, Eurozone Flash Consumer Confidence
Friday:  Spain Trade Balance

Earnings This Week

Earnings season is upon up and here are the Majors reporting this week:

Key Biotech and Healthcare Companies Reporting

And here are a list of the Best Optionable names for liquidity and reasonable bid/ask spreads:

Member Trading Video

Member Trading Video will be sent out tomorrow. Here are my Notes to accompany it:

BOJ — they did it again!

Indexes – I was wrong last week and I was freaked out about it! SPY QQQ IWM

 

Reflation Trade: Where’s the Inflation? –

CPI Big Miss (5 mos of slowing growth, slowest in 60yrs) but I keep looking.

Copper, Miners, Rates…and Steel, but that may be fleeting (lobbyists trying to reverse Trump/his rhetoric around Steel tariffs).

Let’s see how X does next week post EPS. Last time it dropped like a rock 28% and may be sued for misleading investors because of it.

X NUE AKS STLD CLF JJC SLX are still in play.

SECTORS

Energy –

Try, Die, BUY! Third Wkly Low is a charm?

Made some money lost more not allowing enough time with my options or waiting until bottom confirmation.

Buying USO XLE APC XOM when oil at $45 this week; will add some downside put spreads when/if XLE gets near $68.

Tech rotation into XLE USO is a good thesis I think.

Caveat: look at chart on XLE august 2015 where the bottom dropped out only for it to recover in time and then go lower.

I absolutely see gyrations of large magnitude in the space given divergence with HYG, prior 2015 chart pattern, fundamental case of oversupply against backdrop of political posturing between Trump and Iran.

Should sanctions be employed, we lose 1 million barrels per day of oil from this middle eastern state and that will shock the price of oil higher, at least short-term.

High-Yield Corp bonds could also start to rumble/tumble, leading oil lower.

Be. On. Guard. For. Anything.

Tech –

XLK – The string of buying on low-volume last week in NFLX FB AAPL QQQ SPY NVDA was nothing less than impressive. Thanks BOJ!!!!!

But now I await the next TSLA-like blow up to give pause to that bullish Tech thesis as CB buying pauses and rates fall globally and with it a pullback in the reflation trade before ‘last low’.

Until Then Money Rotates. I see slightly higher next week plus for FB, AAPL, AMZN, TSLA, NFLX then all fall back into August, bounce, and then fall sharply into mid September. Buying put ratio spreads for August which I plan to roll into September.

Semis –

SMH continue to look strong with unrelenting UOA in NVDA MU WDC to name a few. I will chase intraweek both directions but the air pocket that was taken out on June 9th from SMH which has been retraced means sector is too strong to short just yet although I have put spreads in NVDA just in case.

Retail –

AMZN is a category killer. But have you seen a Mo chart? Waiting on EPS to short it.

XRT bottom fishing bounce plays are in play like M GPS GES. Need some time but way overdone. Carefully positioning with AMZN short preEPS but now long M KORS and soon COST for ‘pair’ trade.

KORS has UOA; COST is one of the ten most crowded hedge fund shorts; M is value play.

BioTech/Healtcare —

IBB XBI XLV has been an exercise in patience. Next week has mega earnings reports. Now or never. It looks poised but market and sector have been weak, so be selective. AND just for trades

Fave plays are THC (despite AHCA risk, or because of taking other side of AHCA risk) and

JNJ ABT PFE PG all look higher technically.

Financials –

XLF My Thesis is of rates dropping potentially, in time, to 1.9% area will cause financials to pullback, especially in light of weak earnings last week and continued gridlock in Washington.

Bonds –

Short term, rates fall and bonds rally. Then that all changes at some point. Big Picture: rates are probably done going down at 1.9% and reverse  in 2018 for generational low. TLT and IEF will be Big Shorts, then.

TNX looks like H&S top on D so TLT should run again ($26/28/30PT) and with it XLF SPY XLK pull back.

XLU XLP – wrote last week this is proving to be a pullback on support buy area. WORKing.

TIP – looks higher after bear trap and this could be Inflation Tell even though TLT looks higher in the short-term well. Right now, both TLT and TIP look higher which is weird BUT it is bullish Gold for a trade.

Currencies —

USD ~$92.50 area is my PT short w mini bounces along the way. Not safe to short (for more than a trade) Euro/FXE until then.

Equal-weighted dollar has actually been flat this year but UUP is made up of Euro 56%, so FXE has been on a tear north and can continue as it approaches resistance.

FXC is way overbought as USDCAD is way oversold (from interest rate hike) but no time done.

USDJPY is diverging from SPY. Maybe because now everyone is looking at this so now I’ve stopped obsessing over it. No edge as the crowds arrive.

Here’s my Macro View: BOJ wants YEN lower which is BAD for Gold and the Reflation Trade. If however, the ‘market’ fights them, well then, that would be different! Is this time different?!

DXJ – looks higher w EWJ lower cuz they are inverse 🙂

FXY and GLD look higher BUT just for a trade. Then I will revisit.

China –

FXI has broken out so BABA AABA JD look strongest, maybe BIDU finally. Even YELP and VIPS have UOA picking up,

Buying BABA Aug 25 W 135 puts sold to finance the 155/165 call spread.

Auto –

In room called out HTZ CAR last week and went long GM, again, but now I like GM F FCAU post doom and gloom reports of loan default rates and such. Sell rumor, buy news?

Transportation–

IYT looks to be breaking. Still I have UPS; a little in July and September.

Emerging Markets –

GREK is the poster child for rate manipulation. The Greek has bond yields nearing pre-crisis levels. And yet, their price of this ETF is going up. ECB bond buying has caused the GREK ETF to explode higher this year. Here’s The Irony: GDP in 2017 was 179% versus 109% into 2008. Clearly debt has exploded but growth has not. There is no relationship to reality here, just the manipulation of the Greek yields as a way to bail out the country in hopes they can stand on their own. That’s our new normal.

EEM has continued strength but EWG is a bullish chart with a negative divergence. See comments on GREK.

My eyes are on $NIKK as a Tell on Yen rate manipulation push back that results in a pullback.

Solar –

FSLR SPWR TAN CSIQ  is undergoing, finally, a big picture trend reversal. Not done.

Homebuilders –

XHB looks good but uneven for the next year as lumber peaks and housing prices continue.

Gold —

GLD GDX looks  higher for a trade w bullish WK engulfing candles and spec shorts and low sentiment yada yada but I still see Big Issues w gold once rates take off in earnest. Until then, long precious metals: GLD to 125, SLV to 17, GDX to $23 GDXJ to 36.

SLV wkly capitulation low candle foretells a stronger rally potentially than gold.

FXY- maybe it follows Gold this time? That would be a BIG TELL.

Volatility –

 

RANDOM SWING TRADE UPDATES

TWTR buying more for ‘long-term’ swing; chasing TSLA to ~350 then shorting to 280. My version of a Tech Pair Trade ;-).

P – again, bottom fishing pattern looks good.

AUPH – highly speculative biotech name that ran from two dollars to $10 and looks like it’s setting up for another eight dollar run (10 then 14).

GSAT – very large $33M CEO insider buying, potential M&A, telecom space, left for dead.

S – potential Buffett investment, Softbank investor, pull back to support trade. Also, the sector might move up with T and VZ each yielding over 5.35% now, the latter trading near a 5 year low.

SQ – fave since $18, approaching $27 wow. Still think it can get bought out by PayPal.

RH – $72 price target hedge but after $700 million share repurchase program (via loans!) has ended, to hurt shorts, selling should commence.

W – Citron short went opposite direction so now overbought, large large insider selling now, price seems unsustainable.

Macro Thought:

And with that what could cause inflation to rip higher? Oil of course comes to mind. Off-Sides Idea: potential oil spike from Iran/Venezuela sanctions.  Long Oil.

Food input prices are on the move finally. WEAT CORN SOYB have all put in recent bottom fishing reversal signals. JO and SGG seem to want to follow. Long JO and SGG.

If industrial metals and basic material prices increase, whether through tarrifs or higher cost of production, then these input prices would be passed along in the housing market. Lumber has shown to lead a housing peak by about one year and lumber looks to have just peaked. Long XME.

CBs from Europe and Japan may share a change in stance around their view toward deleveraging, raising rates, ending QE, or not? If they do, my thesis is it will spike inflation. Until then we have CHOP.

Big Picture Most Likely: FED/CB is deleveraging itself. Shorter term duration yields fall and longer term rises. And if that spikes Gold, well then we likely have our Market Top.

 

Macro Considerations

Is Deleveraging Good or Bad?

Well Central Bank deleveraging is good for BLK and PHK but not good for banks so there’s a trade idea.

Rule of Thumb: Long rates rise in a contraction as it signifies too many individuals and corporations and governments took on more debt than they can service and FED wants to cool that down. It’s a balancing act as FED doesn’t want to stifle growth. But that’s where we are at: our growth is anemic and debt is rising so when does the mania end? A Tell could be when short-dated treasury rates decline indicating that careful money fears lack of liquidity.

Is BOJ Hurting or Helping?

There is a chorus of concern over BOJs actions to deflate their way into prosperity. I wrote about this last week for See It Market: Timing The Market Top. Jared Dillian penned a piece for Forbes with the same theme:

Last year the BOJ implemented a policy of yield curve targeting (ostensibly to help the banks), keeping the overnight rate negative but targeting a 10 year rate at zero percent. The BOJ has been buying longer-dated bonds for years, but this was the first time it ever explicitly capped a rate at longer maturities. Some people wondered how committed the BOJ would be to maintain that cap in the event that JGBs were caught up in a global duration selloff, which we experienced in the last two weeks.

As 10-year JGB yields rose above 0.10% last week, the BOJ announced that it was prepared to buy an unlimited amount of bonds to keep yields close to zero percent. As you can imagine, buying an unlimited amount of 10-year JGBs involves printing a theoretically unlimited amount of yen, so the yen weakened significantly on the news.  It still remains about ten percent stronger than it was in 2015.

We are getting closer to the endgame for Japan. What happens if yields rise further? What happens if the yen depreciates significantly? How much could it depreciate? Could Japan have a currency crisis? What happens if the BOJ ends up owning the entire bond market? These are the questions that investors are asking, and nobody really knows the answers. We are in uncharted territory.

With that, watch the Yen!

Risk Happens Fast

Ben Hunt sums it up best:

When the air pocket of risk is triggered — across currency, bond or equities — there will be a huge amount of selling pressure.  Liquidity will dry up as sellers want out quickly. Traders and fund managers will be insensitive to execution price. Real money buyers will step away.

So don’t forget to hedge!