Yesterday’s Atomic Green Bomb

Ouch… that was one heck of a day yesterday for those long the US Dollar and short just about everything else against it, including Grains, Energies, and Foreign Currencies (we’re looking at you – Euro).  When things are up this much in a single day… over 1.25% in stocks, +2% in metals, plus 4% in energies, over 1% in grains and some +2% to +3% moves in foreign currencies – the quote board starts to take on that atomic green color (Atomic GreenNuclear Green) {Past performance is not necessarily indicative of future results}.

Neon Green numbers(Disclaimer: Past performance is not necessarily indicative of future results)
Table Courtesy: Finviz

The good part about trend following strategies are their ability to capture significant parts of -50% moves down in Gold and -20% moves down in the Euro. The bad parts, are that they aren’t quick enough to avoid quick spikes like this in the opposite direction. They can’t be, or they will get stopped out of those long moves. They don’t react to every feint, instead preferring market prices to ‘verify’ when a trend is over.

But here’s the silver lining. With nearly every position in their portfolios going against them yesterday, many systematic programs we track were only down between -1.5% and -3.0%, showing that even when an Atomic Green bomb blows up in its face – the risk management is in place to limit collateral damage.  The next question, and more important than a day’s movement, is if this bounce turns into full on trend reversal in the US Dollar, which will add to the pain until positions are reduced/eliminated.

 

Euro by the Numbers

For the first time since 2003, the Euro currency exchange has dropped below 1.10, and just like that, Americans are rapidly booking trips to Europe to take advantage of the low price difference (maybe). We won’t get into the nitty gritty details of euro politics (Germany has all the money, while Greece has all the debt), the question on some minds is if the Euro will even be around 5 years from now?  Will Germany keep supporting the periphery countries in the name of the Euro?

Euro(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Finviz

Traveling the EuropePhoto Courtesy: New York Times

We’ve spent a good amount of time talking about a “Trending U.S. Dollar,” and why it’s good for Managed Futures, but we haven’t spent much time talking other currencies, specifically, the Euro’s drop over the past 6 months. We talked a little bit about the Euro vs USD back in our “Complacency Everywhere,” where the currency experienced the tightest consecutive monthly ranges since the inception of the currency.

Market Range(Disclaimer: Past performance is not necessarily indicative of future results)

But despite all the “problems” in Europe – the Euro Currency is still at a premium to the US Dollar 107% approximately, even if it has dropped from a premium of 140% just a few months ago. Although that may change soon, with the Euro at fresh 10 year lows and threatening to break the psychological par level (1.00).  Who knows if that will happen, but while we’re waiting to see – why not take a look at the Euro Currency by the numbers:

333 Million – People in the Eurozone

125,000 – Numbers of Euros in one Euro Currency FX contract (CME)

220 – Numbers of months since Currency was officially adopted  (European Parliament)

-23.43% — Move since it’s last high in May 2014

19 – Number of Countries in the Euro Zone – (Countries that use the Euro)

-17.1% — Move over the past 6 months

11 – Years since Euro Fell below 1.10 to USD

8 – Consecutive Monthly Loss against the US Dollar (on track for 9)

-5.3% – Move over the past Month

3 – Consecutive Weekly Losses

2 –  Numbers of times another currency was pegged to the Euro (pegging and de-pegging)

$1.6038 – all time high vs the dollar (July 2008) (X-Rates)

$1.17 – price when launched (Jan. 1999) (Wikipedia)

0.90 – Goldman Prediction of where the Euro will be by the end of the year – (Wall St. Journal)

$0.8252 – all time low vs the dollar (Oct. 2000) (CNBC)

Asset Class Scoreboard Two Months In

In a “business as usual” market environment with new all time highs in the stock market indices over the past year, it’s fun to play the game, which asset class has done the best since the beginning of the year or over the past twelve months. You might be surprised as to who’s on top and who’s not.

Asset Class Scoreboard Table Feb 2015Asset Class Scoreboard Chart(Disclaimer: past performance is not necessarily indicative of future results.)
Source: All ETF performance data from Morningstar.com
Sources: Managed Futures = Newedge CTA Index, Cash = 13 week T-Bill rate,
Bonds = Vanguard Total Bond Market ETF (BND),
Hedge Funds= IQ Hedge Multi-Strategy (QAI)
Commodities = iShares GSCI ETF (GSG);
Real Estate = iShares DJ Real Estate ETF (IYR);
World Stocks = iShares MSCI ACWI ex US Index Fund ETF (ACWX);
US Stocks = SPDR S&P 500 ETF (SPY)

Different Exposure, Different Price

Long Only Commodities as an asset class has been plummeting since around April last year, and the downtrend continues into 2015. The average move of commodity futures in January came out to be -5.02%, compared to ETFs -7.54%, with ETFs underperforming the futures markets they supposedly track by 2.52% {Past performance is not necessarily indicative of future results}.

Here’s our monthly look at:

1. How the numerous commodity ETFs which have sprung onto the scene the past few years are tracking a simple strategy of just buying the December futures market of that commodity, under the theory that the ETF will have to roll their positions periodically throughout the year, and in doing so take on costs the simple strategy does not have.

2. How the passive investment strategy of being long commodities (either via futures or ETFs) compare to an active strategy going both long and short commodity markets via a professional commodity trading advisor (as tracked by the BarclayHedge Ag Trader Index).

(Data as of January 30th, 2015)

Commodity ETF Over/Under Performance 2015

CommodityFuturesETFDifference
Crude Oil$CL_F
-4.47%
$USO
-12.48%
-8.00%
Brent Oil$NBZ_F
-6.45%
$BNO
-10.57%
-4.12%
Natural Gas$NG_F
-6.63%
$UNG
-7.45%
-0.82%
Cocoa$CC_F
-6.02%
$NIB
-8.45%
-2.43%
Coffee$KC_F
-2.13%
$JO
-3.21%
-0.80%
Corn$ZC_F
-4.85%
$CORN
-6.27%
-1.42%
Cotton$CT_F
-2.53%
$BAL
-1.99%
0.54%
Live Cattle$LE_F
-4.20%
$CATL
-8.08%
-3.88%
Lean Hogs$LH_F
-4.21%
$HOGS
-13.59%
-9.39%
Sugar$SB_F
0.83%
$CANE
1.77%
0.94%
Soybeans$ZS_F
-5.96%
$SOYB
-6.17%
-0.21%
Wheat$ZW_F
-13.41%
$WEAT
-14.02%
-0.62%
Average-5.02%-7.54%-2.52%
Commodity Index $DBC-5.69%
Long/Short Ag Trader CTAs0.61%

(Disclaimer: Past performance is not necessarily indicative of future results)
(Disclaimer: Sugar uses the October contract, Soybeans the November contract.)
Long/Short Ag Trader CTA = Barclayhedge Ag Traders Index

7 Technical Indicators to tell when the Crude Sell Off is Done

Is Oil back at $100 and nobody told us? You would think with the Bloomberg headlines “Oil is on a Gigantic Tear,” and “Oil Enters Bull Market” that the down trend in Oil Prices may be over. Turns out, this is an example of why you sometimes need to read more than just the headlines, in one of those read between the lines / apply some context moments. Here’s Bloomberg’s context:

“After plunging for months, the price of oil has boomed over 20 percent in just the last three trading days. Last Friday it was just over $44 per barrel. Today it’s selling at nearly $54 per barrel.”

Now, Tuesday’s highs were in fact in the $54 range (even though it ended up the day in the $52 range) and the “bull market” math does work out if you buy into the sacred 20% level for signifying a bull market. But it sure doesn’t feel like a “Bull Market” in Crude Oil after the unbelievable veracity of the sell off, does it?  There should be some metric which adjusts the ‘bull market’ level for the just lived through ‘bear market’ levels.

Which leaves us with the question, how can you tell when these articles are just stirring the crude oil pot, and when is the market actually coming out of its months long downturn? How do professional trend followers tell when a trend is over? Or about to be over?

Is it as simple as watching until the market breaks through a carefully drawn trend line on your chart? It can be. But the professional traders who collectively run billions of dollars in managed futures programs with trend following models, actually use a few different methods for determining when a trend is over; looking at everything from moving averages to swing highs and lows, to directional indicators to relative prices.

Using some of these tools, we can look at just how far away (even after this three day “Bull Market”) Crude Oil WTI futures are from signaling an end to the down trend. PS – we assumed a closing price of $52.98 for the numbers below (that’s what was on our screen at the time we started writing).

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