Trading desk notes: Market instability turns into weekly bearish reversal

A vicious cycle of aggressive selling, thin liquidity, volatility and fear

Given the drama since Thanksgiving Friday, it's hard to believe that major North American stock indexes hit all-time highs on Monday of last week. It's also hard to believe that with the indices,,, and down only ~ 6% on average, the implied index doubled and the fear / greed index plunged to levels not seen since March 2020.

This year, a tidal wave of retail money hit the stock market. The market risk has increased because of all this extra "new" money. More than half of that money has been invested in index-linked passive investments - increasing the value of these indices - and in particular the value of the handful of large-cap stocks that dominate these indices.

Passive investors expect "small corrections", but they plan to "stay the course" as, inevitably, stocks only keep going up. I don't expect any significant selling in this sector, unless the indices stay in a downtrend for six months or more. If these people ever start selling, we'll see what a real bear market looks like! (Who will take the other side of this trade?)

Other retail funds have been invested in "active" investments, ranging from niche hedge funds (especially anything with ESG in the name) to YOLO kids buying deep OTM options. Some of that money has bought the plunge since last Friday (ouch), but I bet you some hedge funds / CTAs have sensed issues going forward and are trying to get a good performance record for 2021.

Regardless of who did what, the short-term price action has been very choppy (up or down the equivalent of 500 Dow in less than an hour on a few occasions this week), and the trend has been on the decline. Volume has been relatively high, sentiment across asset classes has taken no prisoners.

Last week, the S&P and NAZ charts recorded a weekly key reversal from historic highs.

Bonds soared as stocks and commodities tumbled

The iShares 20+ Year Treasury Bond ETF (NASDAQ 🙂 (maturity 20+ years) and ultra-long T-Bond futures contract (maturity 25+ years) closed the week at their highest prices since the beginning of the year.

If bond markets were worried about inflation, that wouldn't happen, so it must be a fear-induced supply, given that the short term foresees at least two interest rate hikes of the Fed next year. This is an 11 point increase from last Friday's low, the biggest / fastest increase since the COVID ramp in February 2020.

The US Dollar Index had its highest weekly close in 16 months

When market sentiment becomes fearful, the offer gets. The following currencies closed this week at their lowest levels since the start of the year:,,,,,,, and, of course,. Many other currencies are very close to their lowest levels for (at least) a year. (Notable exceptions,,.)

The canadian dollar closed lower for seven straight weeks, as did the. (closed lower for six consecutive weeks.)

The CAD had a brief rally on Friday on the, much stronger than expected, but as stocks and crude fell and the USD rose, the CAD reversed to close at its lows.

Gold rebounded from around $ 120 on 'inflation' history in early November, but gave it all back in the past two weeks

The open interest on the Comex shows that speculators chased the price of gold higher, then bailed out as the price fell back to levels of a month ago.

fell as low as $ 3.50 (14%) from mid-November highs, with Comex open interest falling to near its 8-year lows.

WTI crude oil fell 27% from a 7-year high of ~ $ 85 to ~ $ 62

The first month's WTI fell more than $ 11 on Black Friday. The HUGE premium of the first month's WTI over the deferred months has evaporated. OPEC + continued its planned increase of BPD 400,000.

My short term trading

In the On My Radar section of, I said I wasn't sure if Black Friday's spectacular (Omicron-inspired?) Plunge into ultra-thin liquidity was the start of "something" or just a flash-in-the-pan- but I was leaning towards "something."

Stock index futures and WTI opened sharply higher on Sunday afternoon (Omicron wasn't that bad after all.) Stock indices hit Friday session highs before the session opened. Monday. Friday's nose dive looked like a flash-in-the-pan, so I bought the Dow and the CAD.

Those positions were closed for small losses Tuesday morning when Powell said "transient" goodbye.

Over the next few days, I traded the S&P and CAD, looking for a rebound. I bought futures and sold OTM S&P put options with a 30 vol. Each trade has first played in my favor. I won and lost money, but my P + L went down about 0.50% over the week.

I was flat before the weekend, sadly wondering how I had missed out on making money in the short term.

On my radar

If I think in terms of the multi-month lead time, my bias is to believe that the "hunt" for risky assets is MUCH late for a correction. In terms of the daily schedule, I think we've had a pretty good correction over the past couple of weeks.

I try to avoid taking a position based on a " story "(Eg must go much higher due to global electrification and a shortage of new mining supplies.) I understand that many successful traders have made their fortunes because they bet big and were right on a story. . (The big short.)

You don't hear about all the people who believed a story, bet big, and sank with the ship because they knew they " must have given it a little more time.

Stories are alluring, and maybe you have to believe in something to make money trading / investing. Or maybe you have to believe in yourself and your method.

Last week I referred to an excerpt from Peter Brandt's interview with Jack Schwager (Market Wizards). I watched the full interview on RTV this week. Jack said the 70 very successful traders he featured in his books seemed to have no personality traits or upbringing in common, but they all found a way to participate in markets that were right for them.

They all had a strong appreciation for risk management / control, as their long term success depended more on risk management than their methodology.

Jack said succinctly that wizards had " no loyalty to a position. "I understood that to mean they didn't believe in stories.

Some would say that you need some degree of "belief"in a trade to be able to stick with it during a short-term setback (however you define" short-term decline. ") I would respond by saying that I would stay with a trade until my trailing stop is reached.

I believe each person needs to find their own way to trade / invest - that successful traders have found a unique way to trade that suits their personality, time frame and risk tolerance.

Thoughts on Trading

"Reminiscences of a stock operator" has been my bedtime reading lately. I bought my first copy of this book over 40 years ago and have read it every two years since. It was written about 100 years ago, but it still rings true today.

It is the story of a man who succeeds in negotiating by trial and error. His style is probably MUCH too aggressive for most people (including me), but his observations of himself, the people around him and the markets make him a good read. I recommend it to you.

Quotes from the notebook

"I don't believe in much, but I do believe in mean reversion. " James Clarke, successful options trader, 2019

My comment: In the 1980s, Jimmy worked for a props company in an unnamed office on the doorstep, 19 floors above the CBOE. He described his trading methodology as " being the buyer of last resort for OTM S&P options. We were having dinner in 2019 - the first time we've seen each other in several years - and the topic of "What do you believe in" has come.

" Anything that will generate a return is monetized. Diego Parrilla, 2016

My comment: I had been impressed with the book Diego Parrilla, and Daniel Lacalle wrote, " The world of energy is Flat. "This quote is from a later interview. One of my" opinions"At the time, the volatility of options was MUCH lower than it was" should be "Because people were selling theft to generate return - this return search had become the most crowded business in the world.

"The thirst for performance overwhelmed Prudence. "Bob Hoye, 2017

My comment: My friend Bob Hoye has been a treasure trove of quotes, and this one fits Diego's selection perfectly.