Stocks fall – US dollar and interest rates rise
Leading American Stock indices fell to their lowest level in over a year this week during hit a 20-year high. The Fed will propose tighter monetary policy at next week’s meeting.
stocks
From all-time highs in January 2022, the is down ~14%, the Vanguard Total Stock Market Index Fund ETF Shares (NYSE:) is down ~15%, while the is down ~11%.
The Index and Index peaked in November 2021 and are down ~24% to 17-month lows. The NYSE advance/decline ratio ended April at its lowest level in over a year.
Market sentiment is extremely negative, with some analysts saying lack of growth is a bigger problem than inflation. Implied volatility had the highest weekly close since October 2020.
Emini S&P Implied Volatility Puts, Weekly Chart
S&P 500 Total Returns Index
AAII Bearish readings
Most stock buybacks have been shelved during earnings season but will resume in a big way in May. The total for 2022 is estimated at 1.2 trillion ATH.
Share buybacks 2022 estimates
currencies
USDX was super strong in April, posting its biggest monthly gain (5%) in over a decade. It was up ~17% from its tipping point on January 6, 2021, when the mob stormed the Capitol Building in Washington, DC.
Dollar Index quarterly chart
The US dollar is like despite massive trade deficits Capital continues to flow to America to find security and opportunity.
USD-JPY 10 year yield spread chart
USD Yuan 10 Year Yield Spread Chart
has “performed” against the USD this year and has risen significantly against other currencies. The CAD is up against and at a 7-year high.
Interest charges
Late last year, when the Fed was still talking about “temporary,” the market started raising interest rates. The revaluation was gentle at first, but the delta (rate of change) increased dramatically from January.
Fixed income markets have been hit hard this year, as have 60/40 stock/bond portfolios.
Weekly chart for 30-year US Treasuries
iShares National Muni Bond ETF (NYSE:)
Daily sentiment chart for US 10-year bonds
Barclays Aggregate Bond Index 4 month rolling total return
World Govt Bond GDP Weighted Return Index
raw materials
They’ve tripled since 20-year lows hit during the COVID panic in March 2020 — but are still historically “cheap” compared to stocks.
US commodities vs. S&P 500 performance
hit a 22-year high following the Russian invasion of Ukraine (and Western sanctions against Russia), while (Diesel) surged to new all-time highs.
WTI crude oil weekly chart
briefly rose to new ATH on the invasion but failed to hold those levels as the USD and interest rates surged higher. Gold fell below pre-invasion levels (circled on this chart) this week, losing about $200 from the March 8 highs.
ETF investment demand
Grains, oilseeds and others have rebounded from major lows in March 2020.
My short-term trading
The trading environment: Short-term market price movements are very choppy and volatile. Liquidity is low. Open interest in several major futures markets has fallen to multi-year lows.
People are limiting participation as there is much to fear: Ukraine, European energy, Russian aggression, the Fed, rising interest and mortgage rates, China lockdowns, global supply chains, global food shortages and the existential risk that something BIG is afoot , For example, stock and real estate prices have risen parabolically in recent years – perhaps the peak has been reached!
I’ve called the stock market rally from mid to late March a bear market rally. This call looks more predictive, but I don’t base my trading on big picture calls—I make money from risk management, not a great crystal ball!
I bought the yen and TNotes on Sunday night and sold them on Monday for a decent profit. I bought back the yen on Monday and covered it for a slight loss.
I bought the S+P on Monday and sold it early Tuesday at a small profit.
On Thursday I bought the S+P and CAD and closed both positions for profit early Friday. By the end of the week I was floored; my P+L increased by 1.8%.
on my radar
I can imagine that the stock market has made a significant high and the market is now in a bear market phase. The stock market (and housing market) has had a remarkable run since the GFC, with much support from accommodative monetary and fiscal policies.
Now the Fed appears to be on the verge of a sea change, and while it has been slow to act, it may follow its resolve to “take the punch bowl” like the Fed of yore.
But the current sentiment is extremely bearish, so pushing to the short side here is not without risk.
I’ve previously written about passive investing, where people put money into a broad stock market index each month, regardless of price, on the assumption that the stock market will continue to rise over the longer term despite temporary corrections. Don’t try to time the market, and don’t try to pick stocks or sectors.
The flow of money from private and institutional investors into passive investment strategies has increased dramatically over the past decade and is overshadowing active management strategies. I wonder if/when a sustained bear market will cause passive investors to “think” and pull money out of passive systems.
I think it will take a ‘crash’ without much recovery and then there will be relentless selling in this sector.
Currencies: I’ve traded currencies since the mid 1970’s and one of my mantras is that trends in the forex markets go WAY further than makes sense and then they reverse on a dime and go the other way. (See Leads and Lags.)
Thoughts on Trade
One of the best things about writing this blog is that I get to exchange emails with people I would never have met otherwise. This week a subscriber and I exchanged emails about “missing trades.” Here is my latest email to the subscriber:
I have mixed thoughts on “missed trades”.
Usually the missed trade is something that has been making a big move over an extended period of time – weeks at least, if not months, and I’m like, “How could I have missed that?” (Like the Japanese yen!)
But I don’t usually initiate trades with a long-term time horizon because I would have to risk “too much” from my entry point. I would also have to “believe” the story justifying the trade – and I don’t believe in much except mean reversal! (h/t to JMP!)
So (so as not to miss a big trade) the implication would be that I enter a trade using my standard time horizon and then realize the idea is a lot bigger than I first thought; I change plans (add scale and risk) and ride out the big winner.
To be honest, that doesn’t seem likely. (I have no illusions about being the Tiger Woods of trading, although I always try to improve.)
So I make my peace with missing trades; you can’t catch them all, trading isn’t a game of perfection, and some people can live with huge drawdowns – that’s not me.
I don’t envy any dealer. Some guys swing big and hit Homer; others, like Bill Hwang, swing big and suffer huge losses.
Quotations from the notebook
“Successful traders are obsessed with analytics because it gives them confidence in their trade. There is no certainty. Be strict with your rules – be flexible with your expectations.”
– Mark Douglas, Trade in the Zone, 2001
My comment: Trading in the Zone is a great book filled with gems like this one. Over the years I’ve seen so many people search for “someone who knows” and so many people cling to a narrative as if it were “the truth”. Mark Douglas is the king of Anything Can Happen.
“Each waking moment of each day we predict the impact of what lies ahead. The interpretation is in the form of an expected feeling/emotion. If you engage with it, you will make better decisions.”
— Denise Shull, The ReThink Group, on Twitter, April 2022.
My comment: It seems that predictions are part of our DNA. We can’t stop doing this, and we can’t stop reading other people’s predictions. So live with it; Just don’t let it rule your life or trade.
I have three separate computers on my trading desk including my laptop. They are all loaded with the same software etc. If one of them fails I have redundancy, but usually one computer is dedicated solely to charting, price boards and a trading platform, while the other is dedicated to email, web browsing, etc.
The trading computer is where I make or lose money; in the other I read and write. I’ve noticed that I’m spending more time on the read/write computer (but keep looking at each other!) I made a conscious decision to spend more time on the trading computer.
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