Flash Update – January 31, 2020

Published on: January 31st, 2020

Julian has been an underwhelmed, FOMO bull but now has the catalyst to turn bearish as the technicals roll over. He initiates short positions in NDX and Apple, and addresses tactics on USDMXN.

Comments

  • MG
    Miguel G.
    2 February 2020 @ 17:45
    Julian, with China announcing stimulus measures what kind of implications would this have on the US dollar? Shouldn't this keep the dollar big and possibly open the door to that napalm move in the dollar we've been waiting so long for?
    • HM
      Harry M. | Real Vision
      11 February 2020 @ 13:33
      Miguel, you are right. We have been caught out by what now looks like a bear capitulation in equities. We tried to pick the stock market top given what looked like favorable risk-reward and technicals and got stopped out in the indices. The institutional consensus view was that US equities are expensive, and so is the US dollar. That view is getting hammered right now. No idea when this capitulation move ends. One explanation might be that the market is starting to discount a Trump win in the elections. Or at least an election between Trump and Bloomberg, which might be viewed as a "win-win". Whatever the reason, the dollar is very strong
    • MG
      Miguel G.
      12 February 2020 @ 17:23
      And Harry with the dollar now breaking out to 2 year highs isnt this a problem for further easing out of China? Until the fed capitulates in the US and tops the dollar doesnt this tie Chinas hands behind their back to continue to try and stimulate their economy without risk of losing their currency?
    • MG
      Miguel G.
      12 February 2020 @ 17:28
      Im just trying to talk this process through step by step and its becoming more clear to me that in order for the reflation bulls to get what they want they need to have the fed admit that their still to tight. The only logical way I see that happening is with equity pressure. Just all seems to point to some kind of selling coming in to this market in the near future. Am I thinking about this correctly?
  • DF
    Diamantino F.
    31 January 2020 @ 22:20
    Thanks Julian, although shorting Apple feels like getting drunk on beer without alcohol :)
    • HM
      Harry M. | Real Vision
      11 February 2020 @ 13:40
      Lol. I know exactly what you mean. Stops are our friends.
  • DB
    Daniel B.
    4 February 2020 @ 02:49
    Julian, concise and detailed update as always. AAPL was mentioned as a beneficiary of the repo injections in your last Insider Talks with Raoul, what about TSLA right now? Low short interest and potential to slow the balance sheet expansion by the Fed could see this drop faster than AAPL? Understand if AAPL is just the safer bet. Cheers
    • HM
      Harry M. | Real Vision
      11 February 2020 @ 13:39
      "Safer bet". Absolutely right Daniel. Tesla is a very scary short. I personally had a short in it and covered with quite a black eye. Some very smart short sellers hate the stock. Its extensive short base and committed following has made it a gamblers play. Very tempting to take a swing at it for all sorts of reasons, but its just so volatile that its very hard to recommend shorting it as a thematic trade. Still, I cant help but think of it as a "Northern Oil and Gas". But that's a personal observation - not a recommendation!
  • JA
    Joseph A.
    1 February 2020 @ 05:42
    Some technical and risk observations. Assuming entries are possible Sunday futures/Monday at the levels stated. Risk Reward Ratio (RRR) for SPX 0.67:1, NDX 2:1, Apple 2.28:1 with NDX and Apple correlated somewhat so double the risk if two full positions entered. Otherwise half each to manage correlated risk? (Somewhat rhetorical question to highlight what having both positions on could entail risk-wise). IWV/IVE ratio entry was at 1.48 now 1.56 against (hit 1.58 at one point). Suggesting to double down on the losing position? Although I do accept the thinking behind the IWV/IVE thesis and that it should play out eventually possibly quite soon with the latest moves. NDX stop is interesting compared to SPX stop. 9450 on the NDX a fair bit higher stop above the high than the SPX stop above the high both in % terms and comparative volatility measurement terms (using daily ATR (14) for example). Can you explain a bit more behind why you chose those stops relatively speaking? SPX target doesn't seem to be a good RRR with a target of 3150 that appears a bit arbitrary compared to the NDX target of 8250 which is both more aggressive and more of a likely support area. I am guessing that is possibly due to your bias with reference to rotation out of growth/tech into value reflected partly in a more aggressive stance on the NDX vs SPX? Silver and gold looking bullish after their pullbacks post Iran. I note you haven't mentioned silver or adding to silver here. Any particular reason or that you feel it is still chart challenged after the Iran strikes pull back (likewise for gold)? Fundamentally it appears supported by a weaker dollar but challenged by a currently dead reflation thesis for now? Although I note the USD/MXN risk/reflation issue in this piece which I would like some embellishment on why it is no longer a suitable trade because like Raoul I never had an opinion on this trade idea having never followed USD/MXN myself before you mentioned it so I don't have as good a grasp on what is driving it's recent rise back towards the entry price. I appreciate that you might be addressing some/all of the above in the upcoming presumably 1st February trade recommendations publication hopefully also before the weekend is out. By the way the email notification of this flash update only came through for me half an hour before the close of US markets. Thanks.
    • HM
      Harry M. | Real Vision
      1 February 2020 @ 14:47
      All good questions. Its true that the trade involves doubling from a losing position. Some people explicitly reject doing this in their trading style. Others only double losers, because entry position is more important than reinforcing performing trades and cutting losers. In the case of the growth value, JB argues that the trade has suffered from what has been a momentum driven market. Value is very cheap, growth arguably reflecting a bubble. The breaking of this sentiment is critical to the performance of the trade, so the weakness in Nasdaq despite the strong results announced by Apple, Tesla, Amazon etc is very telling. Using a Bayesian inference type approach, the additional information is much more supportive of the trade now, so because conviction is higher the risk taken by the trade is higher. Adding to that is the series of strong technical indicators of Momentum exhaustion. The number of TD13 counts. The very clear ABC pattern in the equity indices (Nasdaq and S&P). Re:targets and risk rewards, the S&P stop selected was the old high. A tighter stop could have been used such as interim highs. Because the old high was used the risk reward on the trade is very close to 50:50. The target is arrived at by technical analysis. However even analysts suffer from "slippage". This note was written a day earlier but because of delays in updating charts etc was released as the market broke (unfortunate). We would recommend traders apply judgement either to the stop (tighter) or the target, which may easily turn out to be overly conservative. We remain bullish silver and gold. On MXN, a risk-off trade in US equity indices (global leaders in risk) is no time for long EM fx risk. The situation in BRL and MXN looks concerning in the circumstances. Long MXN is definitely a crowded trade, and crowded EM trades are unsafe places to hang around in during a global risk off. I apologize for the delay in this reaching you. It was my fault. My email suggested it came out at 1.30pm EST, but that is still too late.
    • JA
      Joseph A.
      1 February 2020 @ 18:02
      Thank you Harry. “No further questions your honour” :)
    • JL
      J L.
      1 February 2020 @ 20:03
      I never got the email for some reason
    • HM
      Harry M. | Real Vision
      2 February 2020 @ 01:42
      JL, Thats very worrisome. Can we look into why not? Its possibly your email address is incorrectly listed in the system.
    • JL
      J L.
      2 February 2020 @ 12:49
      my email is correct but no alerts to be found in spam or anywhere, i opted out of all your publicity at some point maybe that made some difference
    • M.
      Milton .. | Founder
      3 February 2020 @ 07:40
      JL, just sent you a message.
  • MK
    MILTOS K.
    1 February 2020 @ 08:42
    Hello Julian. I would appreciate just a small piece or comment on how Eurodollar futures are working. I've noticed during the Virus situation , eurodollar futures of Dec 2020 have doubled and more while FED rates stayed the same and even got +0.20 since FED announced stable rate last week. I struggle to find a way how those contract work. thank you
    • HM
      Harry M. | Real Vision
      1 February 2020 @ 14:30
      Forgive me for answer on JB's behalf. So if we assume a stable spread between Libor and Fed Funds, EDZ0 contracts will reflect the markets best guess as to where Fed Funds will be in Dec 2020. The contract is actually 100- contract price, which itself is the 3m Libor rate at the expiration of the contract. The reason why you can see such sharp moves is that the market can swing from expecting rate hikes, to expecting rate cuts. Since the Fed announced last week we have had the evidence that the Corona Virus is more contagious and more dangerous than we had understood. This is a threat to global growth, so the ED market is anticipating that interest rates will be cut to reflect now weaker growth prospects. It is a forward looking contract, rather than a reflect of current Fed policy. Hope that helps.
    • MK
      MILTOS K.
      1 February 2020 @ 19:07
      Thank you Harry. Appreciated
  • JK
    James K.
    1 February 2020 @ 01:56
    The “Black Swan” has come to a market priced for perfection, .....
  • OT
    Omar T.
    31 January 2020 @ 21:13
    Thanks Julian, also, do you see this as the start of a 5-10% correction? or are you in the camp of Raoul that the virus could tip the global economy in the a recession this year?
    • JB
      Julian B. | Contributor
      1 February 2020 @ 00:12
      My base case is a 10% . But I wouldn't be surprised to see 20% i.e. a 2018 type move because stocks are very stretched and people as SO complacent . I was amazed to hear on CNBC commentators talk about a policy response as soon as next week, which certainly in the US is WAY too soon. We are only a few % of the highs. The only place I'd watch is China and at this stage I'd even fade that! As for Raoul's call I don't have a recession in my models. Yes its possible and I would construct a scenario but that's not how I work. So that's not my call yet.
  • HM
    Harry M. | Real Vision
    31 January 2020 @ 21:30
    Since publication the equity market has sold off very sharply. The levels Julian set for trade entry in the S&P and Nasdaq were reached within an hour and half of publication. He noted that one of the most telling indicators was that the weakness occurred despite some very strong results from some of the market leaders. This is a clear indication of exhaustion, and suggests that even though the market is now below our suggested entry points, strength should be sold.
    • HH
      Hugh H.
      31 January 2020 @ 22:22
      thanks for the quick update!
  • OT
    Omar T.
    31 January 2020 @ 20:37
    Julian, what are your thoughts on EEM? As isn't that majority China? and the SPY could jump back easily with more fed action?
    • JB
      Julian B. | Contributor
      31 January 2020 @ 20:59
      Hi Omar, yes the epicentre is China, which means EEM is vulnerable . However, when you look at equities holistically, the excesses are here in the US. Indeed, I believe the Fed has exacerbated inherent weakness in the US market. Stocks like AMD, Apple etc have gone parabolic since Not QE was launched at the start of Q4. Those moves look incredibly powerful but in fact they are incredibly fragile, because they are unstainable and once the momentum fades you need to run. Don't forget what we saw in Amazon, Netflix and Nvidia at the end of Q3 2018. PS. In Q4 2018, EEM actually outperformed the Nasdaq.
    • DR
      David R.
      31 January 2020 @ 21:23
      Re EEM, bear in mind that China has been closed 7 days for lunar new year. So when China re-opens next week, it will have a huge spike down to catch up and then EEM will gap down big.
  • RK
    Robert K.
    31 January 2020 @ 21:03
    Nice ideas. Thanks!
  • JI
    Janne I.
    31 January 2020 @ 18:36
    Thank you for the update!