De-risking ahead of election followed by re-risking after election
The DJIA dropped ~2,500 points (9%) from mid-October to last Friday’s low but recovered those losses in 4 days this week. Volatility jumped sharply when the indices fell but collapsed this week when stocks bounced back.
I was short stock index futures as they tumbled the last 2 weeks of October and took profits Thursday of last week. I wanted to be out of the market ahead of the election fearing very choppy short-term price action.
The US Dollar index has been the mirror image of the stock market
The US Dollar rallied in late October as a “safe haven” while stock indices tumbled. This week the USD wasn’t needed as a safe haven and fell hard as stock indices rallied and volatility collapsed. The US Dollar Index closed this week near a 2 ½ year low.
Investor sentiment on the US Dollar is very bearish and futures market speculators have been heavily long the Euro against the USD since June.
I was shorting Euro and CAD against the US Dollar the last 2 weeks of October. I was stopped out of those trades early this week.
Asian currencies have been strong
Asian currencies have been rising against the US Dollar for the past several months. The Chinese Offshore Renminbi (CNH) hit a 12 year low near the end of May but has rallied >8% since then and is now the best it’s been in 28 months. (Falling prices in this chart mean that it takes less CNH to buy one USD.)
This week the Japanese Yen had its highest weekly close against the USD in 4 years.
The Euro/Yen cross rate is another major market that reversed trend on the early September Key Turn Date.
The Canadian Dollar has followed the stock market’s lead
The ups-and-downs of the Canadian Dollar have been highly correlated with the ups-and-downs of the US stock indices this year. The CAD had its highest weekly close of the year this week and is very close to the best levels it’s seen in the past 2 years.
Gold fell in late October but rallied hard this week
Gold drifted lower in late October as stock indices tumbled and the US Dollar rallied. This week gold jumped >$100 from last week’s lows as stock indices came roaring back and the USD tumbled.
With retail demand for gold down sharply this year in both India and China the ETF market has been an important source of demand. Global gold ETF buying year-to-date is ~1,020 tonnes with ~750 tonnes bought between March and August when gold jumped ~$600. Total gold ETF holdings are now ~3,900 tonnes. (Source: World Gold Council.)
The huge gold rally since 2018 has been highly correlated with the sharp decline in real interest rates. That relationship has suffered a “disconnect” lately with gold and real rates both rising.
In previous posts I’ve shown charts of several different markets that reversed trend on the Key Turn Date (KTD) at the beginning of September. In this TIPS chart (my rough measure for real rates) I’ve circled the All Time High that happened on the KTD. (Rising bond prices = falling interest rates.)
Trading: This was a good week to be patient
I had a good run with my trading in October and wanted to be mostly out of the market going into the election. I was worried price action would be very volatile and I would give back the profits I’d made in October. (The old saying is that it’s easy to make money trading, just tough to hang onto it!)
I stayed short CAD and Euro into November (Euro ended October right on its lows) but moved my stops down tight and was stopped out very early in this week. Just as well. Both CAD and Euro rallied hard most of the week.
I sat on my hands Monday to Thursday. I didn’t see anything to do that didn’t have “too much” risk. I re-shorted CAD late Thursday thinking that the 4 day rally was overdone but got stopped Friday when CAD rallied above Thursday’s highs. (I don’t like holding a losing position over the weekend in the hope that it will turn around next week.)
It may be that stock indices sold off ahead of the election on “de-risking” and then bounced back after the election results were “OK.”
I don’t want to speculate about the “reasons” for all the wild price action. My view is that the indices are back to where they were 2 weeks ago, volatility is way down and I’m flat at the end of the week. I’ll look at the charts over the weekend to see what I might do next week.