Thankfully the hurricane assumptions were off and they did a bit less damage than what was anticipated. Although let’s not make light of the recent weather events, for mother nature always proves her strength. The financial markets were anticipating a bit more in damage and thus bonds were bid late into the week and pushed toward new highs in early am trading Friday. Yields hit year lows as the 10yr settled at 2.06%! However sellers rejected those high prices and the bonds ended down slightly for the day on Friday. The equity markets were mainly sideways all week and ended down marginally, but still well within reach or all time highs! The dollar index sunk to new year lows at 91.33 as the Euro and Yen put in fresh year highs at 120.33 and 92.79 in the futures respectfully.
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So another week passes and another ECB meeting moves to the weigh side. Not much to report out of ECB land, other than Draghi and his cohorts are hell bent on generating some inflation. Which is really strange considering they are buying $72Bln worth of assets a month and yet inflation is nowhere to be seen, what do they have in mind? Of course the strong Euro is at the forefront even if they don't want it to be as is the fact that they are running out of available bonds to buy. So, what does this all mean? Well we wait till the October meeting of course!
As privy bond market players we should have saw the writing on the wall when the 10yr Repo market traded thru the fail rate this week. Basically what fail to deliver and paying the penalty means, is that an entity would rather pay the highest charge to short the 10yr than try to find the security to deliver it. We could be wrong but from our lens, this meant someone was desperately accumulating a short position, i.e. looking for interest rates to rise and the fee to short them was inconsequential…considering what has happened so far this week , well someone was very happy! We will show you the charts later on.
Also out this week was the quiet passing of a bill to temporarily suspending the debt limit and fund the government through Dec. 8th. (which promptly led to the debt exploding to $20.3Trn) It also provided a little over $15Bln in disaster funding for the recent hurricane victims. Buying time that's all, but we read an interesting post this week where some were suggesting we just eliminate the debt ceiling all together and rather, just call it a "debt target." It has become a rather sad joke and thus targeting may be a bit more accurate.
We were also interested to read that none other than leverage king himself Jaime Dimon was out saying Bitcoin was a fraud, "worse than tulips!" Hah, this is rather funny, coming from a guy who runs an institution whose sole survival is predicated upon fractional reserve lending. He is entitled to his opinion, but considering he is even commenting upon it, means he is very worried about the potential of the technology. Then again, he is part of the fiat system and we know that any new technology that may threaten that system, will not be welcomed with open arms, so his comments are very appropriate given his background.
Ok so let's get right to the technical's and the stuff we think gives traders and investors that little bit of an edge they need to profit. We all know someone was shorting 10s and considering the yields were near 2%, we could hardly blame them. We figured the level was strong enough to stop even the biggest bulls from pushing it though first time down and thus we feel a bottom in rates has been reached, at least for now. 2.21% is our upside resistance and an obvious trip below 2% is in order to drive the next leg down:
The 2s30 has flattened out on this recent bull move up in bond prices, but we suspect any reversal in yields will come at the expense of the long end and lead to a bit steeper of a move in the 2s30:
We have heard a few compare copper prices to Ten Yr prices and thus, this chart is very telling as copper saw a large rejection move from recent highs:
Over in currency land we see the Euro Futures still hovering above that all important 119-45 level, even putting up a nice run to 120-40, we still think the up move has potential, however below 119-45 may see some weak hands start to exit:
The Yen Future continues its ascent as well and looks increasingly likely to close that gap up at 95-00, above 90-75 remains bullish as the futures had their biggest weekly gain up 202 ticks:
Crude Oil Futures continue to be plagued by this downward channel. The $49 level seems to be capping it and a rotation lower will be seen if the $45 level is reached. We continue to favor the downward theme until this trend channel is broken:
Moving to hard money both the Gold and Silver Futures are putting in decent bust out moves. Now are these shorts tossing in the towel or new capital joining into the fray. We think Gold above $1350 remains bullish but a dip back into this trend channel will resume sideways to higher trend:
As far as Silver it too remains bullish and will do so as long as it holds 16.71 area:
Moving over to equities we continue to feel bullish amongst all the negative fundamentals and especially the quite negative tone from many large managers. Yes we all know the fundamentals of old don’t make sense, but our readers know the truth and the truth is PE compression due to buybacks on the heels of large central bank QE is all that matters. So we don't care about other fundamentals, well until we do, but that time is not upon us. So far now and as we have talked in the past, every new up move comes when the SP500 reaches its next even handle barrier, i.e. 2300/2400 and now 2500. We feel a trade here opens the flood gates for the next leg up to 2640. Yes we don't agree with it, yes we know buying it is all wrong, but somehow doing something wrong feels ohh so right! It thrills us, it excites us and hell we aren't fools! So first up the SP500 Future, where we know 2480 is at the top of our range, but the real juice comes at 2498 so will see what happens there when the time comes, but here's the chart:
The Nasdaq future has lagged the SP500 which is indicative of some risk parity funds most likely swapping out of tech and into underperforming sectors. Hell you can't just keep buying the high flyers can you? Well maybe you can, but when you're moving billions, best to rotate every so often! Anyway the Nas is well below its top and Friday didn't help, but with Apple unveiling the new X or 8 or whatever the heck they call it, will see if that all changes:
As for the FAANGS rest assure, collectively as a chart, they do not want to trade below our 2347 horizontal line of death. We think that would confirm a head and shoulders top and would not bode well for the overall markets, especially the tech sector!
Ok finally and a late edition as of yesterday was that chart we promised of the bond move. We have had this trend channel intact for some time and the bonds hit the top in early Europe session Friday morning, then the floor came out. This channel has been intact since late July and is well under threat here:
Thanks for reading fans and we hope you got something useful out of today's read. The banter out of China and JPM about Bitcoin has led to a selloff in the complex as mainstream monetary conduits are getting very nervous of its adoption or as BofA says "it’s the most crowded trade right now!" China wants to crack down on the exchanges, although not truly confirmed and JPM is calling it out as fraud. This theater will continue to entertain us and we are excited to see how the future unfolds. As is the case with all new technology, the dinosaurs that don't adopt will be tossed aside. We expect a few large over burdened arrogant players to get wiped out by blockchain much as the digital print revolution did to Kodak and the VCR did to RCA. We believe the future is unpredictable and that many will be shocked by the outcome, but we can always keep ourselves in the know and that is why we are here! We also wanted to touch base on the gigantic Equifax breach. From what we read, Equifax has truly no idea on how many were actually effected and so it's best to take the utmost caution. We tend to think if they say 143 million that means everyone! Do your research and find out what is best for you. There are many resources online on the best action to take, so we won't suggest. All we know is this type of thing is becoming all too common and it is why data encryption and protection is at the forefront of a well functioning digital environment. Like money, if there is no trust in the system, there is no system…Cheers!
Finally, we will decidedly end our notes with our reaffirmation of the growing need for alternative strategies. We would like to think that our alternative view on markets is consistent with our preference for alternative risk and alpha driven strategies. Alternatives offer the investor a unique opportunity at non correlated returns and overall risk diversification. We believe combining traditional strategies with an alternative solution gives an investor a well-rounded approach to managing their long term portfolio. With the growing concentration of risk involved in passive index funds, with newly created artificial intelligence led investing and overall market illiquidity in times of market stress, alternatives can offset some of these risks.
It is our goal to keep you abreast of all the growing market risks as well as keep you aligned with potential alternative strategies to combat such risks. We hope you stay the course with us, ask more questions and become accustomed to looking at the markets from the same scope we do. Feel free to point out any inconsistencies, any questions that relate to the topics we talk about or even suggest certain markets that you may want more color upon.
See the full PDF below.