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

Markets have entered potentially the most volatile period not only of the year (August/September/October) but of the past 8 years if last week was any indication.The VIX spiked 45.5% last week, the 8th largest 1-day % increase in history. In a rare 3 standard deviation move for SPX last week, and for the first time since March, the main indices (not Dow) have broken moving average support. Despite this decent bout of market weakness and out-sized volatility strength, incentives remain for yield chasing (see TSLA’s recent bond issue!) and central banks are still printing (ECB, BOJ) while suppressing interest rates. I mean, let’s face it, a 2% pullback on ubiquitous coverage of Trump’s threats against North Korea’s threats of nuclear war are not what I would call panic conditions. Bears got fed a little – and they are hungry still; VIX sellers got unwound a little – and they are no doubt going to eat again. Point is, this past week looked much more like Structural Selling than a significant Sell-Off. And given volume on Aug 10 for VXX was the third highest of the year, and VIX is in an unsustainable 52-week 87th percentile, it would not surprise me if VIX sellers come a callin’ and SPX gets a bid. But don’t mistake my bounce thesis for “All Clear”; it is not.

From the Q2 Earnings season report card, a theme I proposed before earnings season (buy the rumor, sell the news?) and reviewed in last week’s newsletter, the market clearly punished those who missed their estimates but clearly did not reward beats: 

Sky-high valuations part of the reason? Citibank warned investors this week against being greedy: “The cyclically-adjusted P/E ratio on the SPY has been higher only twice: at the height of the dot-com bubble in 2000, and in 1929.” Fear of missing out, lowest volatility since the 1950s, migration of money into passive indexing…are all contributing to investors giving up on valuation as a metric. But they warn, this “will inevitably render the market vulnerable.”

Adding to the growing fear, uncertainty and doubt, Financials reversed from their false breakout levels the prior week (on lower rates which I warned about) and both Tech and Semi sectors sold off the most when compared to others, but it was the SPY and IWM index moves lower in the US–and DAX, FTSE, INDY and NIKK abroad–that most surprised. In fact, prior to Wednesday, the prior 15 trading days had officially marked the calmest stretch in the history of the S&P 500 Index. That’s called a squeeze. And wouldn’t you know it; it was the 10-year anniversary of the global financial crisis of 2007-08 when the TED spread (EuroDollar spread) moved significantly from .44% week of August 6, 2007 to 1.02%. The SPY was 6% off its highs, then reached them Oct 9, 2007 before proceeding to drop 56% from the top (datapoint courtesy LPL Financial Research). Our TED today is but .29% and hit a low of .16% July 24th so…eyes on the prize…history may not repeat but it can rhyme!

If we didn’t have enough to worry about abroad (North Korea, Russia, Venezuela…) and at home (weekend domestic terrorism in Charlotte and national outrage against Trump) , Politico reports Trade Crackdown Coming Monday when Trump will call for an investigation into China over allegations they violated U.S. intellectual property rights and forced technology transfers. Tension is more likely to spark a US trade war with Beijing than a shootout with Pyongyang and with that China’s debt bubble could burst, with major consequences says The Guardian: Trump v Kim can wreck the world economy without a shot being fired. Another set of reasons why it is anything but “All Clear”!

 

Events This Week and How I’m Trading It

Economic Reports

Beyond a lot of geopolitical news against Russiagate background and civil unrest in the foreground, we will get some economic data that may provide reads on the global consumer: China, Japan, UK, US and EU will report industrial production and retail sales figures. Earnings will slow considerably with China names (JD, BABA) and Big Box Stores (WMT, TGT, HD) reporting. CSCO Wednesday and AMAT Thursday for Semis; DE reports Friday for look at Industrials.  The big news may be the FOMC Minutes Wednesday if it provides their view on balance sheet reduction/tightening. This may trigger the long USD/short EUR trade.

Sunday:  Japan Prelim GDP SAAR, China Industrial Production, Fixed Asset Investment, Retail Sales
Monday:  Eurozone Industrial Production, S. Korea Trade Balance, China Foreign Direct Investment
Tuesday:  Japan Industrial Production, Germany Prelim GDP, UK CPI, House Price Index, US Import, Export Prices, Retail Sales, Empire Manufacturing, Business Inventories, NAHB Housing Market Index, TIC Flows, API Crude Inventories
Wednesday:  Netherlands, Italy Prelim GDP, Eurozone GDP 2nd estimate, US Housing Starts, Permits, New Zealand PPI, Japan Trade Balance, Australia Employment Picture, USD FOMC Minutes, WTI EIA Oil Stock, JPY Imports/Exports/Trade Balance
Thursday:  Austria CPI, UK Retail Sales, Eurozone CPI, Trade Balance, US Initial Jobless Claims, Philadelphia Fed Index, Industrial Production, Capacity Utilization, Leading Indicators
Friday:  Germany PPI, Michigan Consumer Sentiment Prelim, Canadian CPI Inflation, Baker Hughes Rig Count

Earnings Releases

Expected Moves

The market makers have an expected move of $42 this week for SPX–up or down. That’s the most since the French ‘pre-election’. I wanted to see what similarities it may have with this period and found my write-up on that very move back in April. Back then it was easier to identify why it was moving and in which direction. In the current market environment, I would say we have much more at risk with geopolitical events and FED rebalancing/tightening just remember volatility is a trading instrument not an investing one.

 

Update on my 3-month Futures Volatility chart. At some point volatility may be an important ‘weapon of mass market destruction’ but first it likely retests that apex.

 

Member Trading Video

Member Trading Video will be sent separately with trading notes to accompany it.

And Thursday’s Special Video Release that reviews the Anatomy of a Macro-to-Micro Basket Trade of shorts, longs and hedges still applies!

Big Question: When will growth plays migrate back into value? Specifically, will the FAANMG holders sell and go buy commodities? The FAANMG is certainly not strong but neither is energy, materials and industrial metals. And now that CPI has disappointed Friday, even GS is cutting their rate hike odds in December. The combination of lower sentiment and lower inflation is likely to weaken yields and commodities, not strengthen them.

Macro Considerations

Recession Indicator No More?

From Cam Hui @humblestudent came an interesting concept: Based on Yellen testimony that the Fed is “watching” this indicator closely, what if the yield curve stops working as a recession indicator? The Fed may not allow the yield curve to invert…by steepening the yield curve in how it sets the federal funds rate. Apparently GS thought of this too.

Is Sentiment A Reliable Indicator?

I scan a good supply of market commentary and overwhelmingly the sentiment has been not just bad but dire. A Portfolio Manager interviewed on CNBC had the best line: The Stock Market Is Like Yellowstone: It’s Beautiful, But It Has A Volcano Underneath It.

DoubleLine’s Jeffrey Gundlach encapsulated this risk“If you’re waiting for the catalyst to show itself, you’re going to be selling at a lower price.”

Lena Komileva wrote for the Financial Times this week“In a nutshell, central banks are not necessarily turning more hawkish, in defiance of their inflation stability mandates. Rather they are clearly signalling that investors are becoming far too complacent about the policy outlook — and that risks financial stability…This decoupling between economic and financial cycles is where crises are born.”

Bespoke Investment Group’s co-founder, Paul Hickey, said: “true bubbles aren’t accompanied by an almost consensus opinion that we’re in a bubble.”

Wait, that last one wasn’t bearish!?

Regardless, the market will panic when it has a reason to.

 



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].

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