NASDAQ: The Good, The Bad, and The Ugly

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Stocks… We Hope they Go to Zero!

One of the best things about being in an investment which can do well when markets are down is the fun you can have at cocktail parties, in the locker room at the golf club, and dinner with friends. A -334 point down day in the Dow and around -5% move off of all time highs starts to  bring out the shrugs and exasperated expressions, as those well to do’s around you murmur their version of the timeless classic:

“Tough day in the markets today, huh?”

And here’s where it gets fun… because our go-to response is usually:

“Sure was tough… we hope they go to zero.”

For those from the world of traditional investing, or better yet – those who’ve only been around the last five years – this can be a bit unsettling and cuts a lot of conversations short.

“Go to zero? What?”

While we don’t actually want market to go all the way to zero (we still want a functioning society and all of that), we welcome with open arms the volatility that would accompany some fear and panicked selling. Because, you see, we’re mostly in the business of volatility. Or to be more precise – the business of profiting off of volatility expansions from periods of consolidation and dampened volatility.

As we have laid out before, managed futures tends to do well during market crisis periods because of their ability to go short global markets. In 2008, managed futures programs found themselves short nearly every type of market not considered a safe haven, be it stock indices, energies, foreign currencies, metals, grains, or softs. Fast forward to the past few weeks, and we’ve seen several managed futures programs start to initiate such short positions in markets like US and non-US stock indices, energies, foreign currencies, grains, and metals.

Quite simply, we’re cheering the markets to zero because the lower they go in this move down, the better for our clients in their long volatility investments. Of course, past performance is not necessarily indicative of future results and there are clients and programs and positions which may lose money in an extended move lower.  But generally speaking, such down trends work to the benefit of the managed futures space in our experience.

So for now we’ll be cheering… “Go to Zero!”

Russelll To Zero(Disclaimer: Past performance is not necessarily indicative of future results)
Chart via Finviz.com

The Best Images from “StockToberPocalypse”

Part of the reason many believe social media will never die, is because of days like today. Stocks experienced their single worst day of the year. The Dow plunged 300 points (-1.97%), The S&P had it’s best day of the year yesterday, followed by it’s worst day in six months (down -1.98%), and social media exploded with posts, comments, and charts trying to explain just what was happening – as if we had just lived in a dream land where stocks only went up the past five years. Is volatility in stocks here to stay? Why did stocks gain 2% yesterday, and lose all of it the very next day? Is this another 2008? Are we all F*(^% crazy as Reformed Broker says.

First, some funny ones…

Stocks Crushed

I’m confused… Is the lighting crushing something? Is the Lightning stocks? Or is it the Tornado? Is the Tornado volatility?

 CartoonCourtesy: StockTwits

And some serious ones…

 

Man on PhonePicture Courtesy: CNBC

The obligatory serious looking trader guys… (is that guy on the right wearing a Flyers shirt… what trading floor is that?)

Dow Oct 9thChart Courtesy: Reformed Broker

Wild Market MovesChart Courtesy: CNBC

Vix ChartChart Courtesy: Ryan Detrick

Alt Links: A Changing Market Environment

Market Environment:

Managed futures enjoy rare strong performance – (The Star Phoenix)

Commodities & Futures:

Gold retreats on firm dollar, down almost 6% in September – (MarketWatch)

U.S. Corn Prices Fall to Five-Year Low on Higher-than-Expected Supplies – (Wall Street Journal)

USDA grain stocks report does little to effect markets – (Ohio’s County Journal)

Corn Stocks Up 50%, Soybean Stocks Down 35%, All Wheat Stocks Up 2% — (Ag Web)

Ebola poses threat to Ivory Coast cocoa output, exporters say – (Reuters)

Is Ebola really the Cause of the Cocoa Move? – (Attain’s Alternatives Blog)

Investors Head for Exit as Commodities Extend Slump – (Bloomberg Businessweek)

Long the US Dollar… And Loving it – (Attain’s Alternatives Blog)

Regulation:

CME Group hires three people to expand international business – (Reuters)

Allocation: 

San Diego County reconsiders leverage, outsourced CIO – (Pensions & Investments)

October funds: Beware rising rates – (USA Today)

ICYMI:

108 Tools to Grow your CTA Business – (Attain’s Alternatives Blog)

Long the US Dollar… And Loving it

While hardly scientific, we tend to have a knack for highlighting a certain market move or environment on the blog, and that market or environment quickly reversing course upon our piece hitting the airwaves. It’s the futures market equivalent of the old contrarian magazine indicator.

The latest example looks to be the Currency Markets, where our talk of record low volatility at the beginning of the summer has given way to some of the most volatile currency market trading in recent memory, with the U.S. Dollar Index up around 6% in the past three months {past performance is not necessarily indicative of futures results} during what Bespoke Investment called  “The Best Quarter for the Dollar in Four Years,

Bespoke Long USD(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Bespoke

If you do any currency trading or have actually exchanged currency in the past and are asking ‘the US Dollar versus what?’ – the US Dollar Index measures the dollar against six different currencies (and mainly the Euro), so a lot of what is happening here is reflective of the Dollar rallying against the Euro. But it’s not only the Euro that’s been selling off against the US Dollar. See if you can spot any downtrends [US Dollar up] in  the Canadian, Aussie, Yen, Pound, or Swiss Franc.

Currencies in One Chart(Disclaimer: Past performance is not necessarily indicative of future results)
Charts Courtesy: Finviz

Now, to be fair… we did ask rhetorically (and wishfully) in our beginning of summer piece whether this was the calm before the storm? So we can’t quite say this was a contrarian move that caught us, or systematic traders, off guard.  In fact, this ‘storm’ is just the sort of volatility expansion systematic futures folks like to see. It’s directional volatility, meaning the market has become more volatile (is moving more day to day) AND is moving in generally the same direction (in the case of the US Dollar, up).

For a while there in 2011 and 2012, we were asking for more volatility without being specific enough and got some non-directional volatility (aka whipsaws), which doesn’t really help anybody out.  You can see the US Dollar “break out” of its past range in the gray shaded area in the chart above (and for the more technically inclined – the 50 day moving average cross over the 200 day moving average), and that is just the sort of move systematic multi sector traders like global macro, trend following, and managed futures plan for. They suffer all of that flat to slightly down performance in exchange for being able to capture moves like this.

So it’s no coincidence that the ‘best quarter for the dollar in 4 years’ coincides with the best managed futures performance in 4 years.  This is just the sort of move that managed futures programs are designed to capture.  It’s a heck of a move in its own right, but it represents so much more than that, for it actually means that multiple currency markets are trending. And what’s more – a trending Dollar can actually affect non currency markets as well. Remember that all those Gold, Corn, Oil, Cotton and other commodities are priced in US Dollars – so all else being equal – a rising US Dollar means a falling commodity priced in US Dollars.

As short term proof – we can see the Newedge CTA Index up 1.48% so far in September after gaining 3.94% in August, to put YTD performance at up +5.57%. (it’s almost like someone said this was a generational low in managed futures around this time last year). But we’re interested in more than just the latest example, and wanted to see just how good a trending US Dollar has been for managed futures over time. Turns out a trending US Dollar is one of THE best environments around for managed futures, at about 3.5 times the monthly return of periods when the US Dollar isn’t trending. (we considered the Dollar trending if its 14 period ADX reading was increasing from one month to the next, looking back to 1989).

Average Trending Days(Disclaimer: Past performance is not necessarily indicative of future results)
Data: Barclayhedge CTA Index starting in 11/’85

So keep  cutting interest rates and doing buybacks ECB.  And keep the Abenomic experiment going, BoJ. And keep growing US Economy – because we want to keep riding this US Dollar up trend (aka Euro, Yen, Pound down trend), although we may have just jinxed it with our contrarian magazine article powers.

Is Ebola really the Cause of the Cocoa Move?

If you haven’t been paying attention to the Cocoa market the past couple of days, it’s certainly been on the move. How big of a move? An 11%, Coo-Coo for Cocoa Puffs kinda move since the end of last week. That would be like the Dow going from 17,000 to 18,870 in a week!

Cocoa Daily moves(Disclaimer: Past performance is not necessarily indicative of future results)

Now by the headline, you’ve already gathered that some are linking this sudden move to the Ebola outbreak in Western Africa. There are 5,800 confirmed cases in Guinea, Liberia, Sierra Leone, and Nigeria. What’s more troubling is just this week; the CDC estimated that the outbreak could reach 1.4 million cases within the next four months.

Our thoughts are with the people in these countries fighting to stop the spread of such a deadly disease, and we hope the Red Cross, the CDC, and WHO can effectively find a way to control what could turn into (if it isn’t already) a pandemic in Africa.

In the meantime, if Ebola does spread as fast as the CDC predicates, the disease could easily find its way into neighboring countries like The Ivory Coast, and Ghana. And that’s where Cocoa comes into the picture. Those two countries produce around 60% of the world’s Cocoa. The Wall Street Journal explains that this would halt exports of the crop, because of the way Cocoa is transported.

“Cocoa is grown on tiny plots, with growers selling their beans to middlemen who ride from farm to farm on motorbikes gathering the crop to transport to the coast for export. The travel restrictions and quarantines used to contain the disease could quickly isolate millions of farmers, choking off supplies to the world’s chocolate makers.”

This also seems good and logical until you take a step back, and think about the big picture. The first case of Ebola was identified back in March… and Cocoa was actually lower a few months later in May, before inching, and now shooting, higher.

[Read more...]

Commodity Exposure Breakdown YTD

Here’s our monthly look at the various commodity ETFs and how they track a simple strategy of buying December futures and rolling them annually. Plus, a comparison to Ag Traders and an overall commodity index.

Some notes:

  1. Impressed by that UNG outperformance? check these stats
  2. The averages of the ETFs and Futures all are within a percentage of each other.
  3. Ag CTA’s (Active long short agriculture trading) are posting a 8.99% return, beating out the Commodity Index DBC. (See Trade commodities instead of “invest” in  them?)

(Performance as of 8/31/2014)

Commodity ETF Over/Under Performance 2014

Commodity
Futures
ETF
Difference
Crude Oil$CL_F
1.78%
$USO
1.25%
-0.53%
Brent Oil$NBZ_F
-2.03%
$BNO
-5.66%
-3.63%
Natural Gas$NG_F
-2.67%
$UNG
7.59%
10.26%
Cocoa$CC_F
19.06%
$NIB
18.80%
-0.26%

Coffee$KC_F
67.53%
$JO
75.02%
7.50%
Corn$ZC_F
-19.16%
$CORN
-15.79%
3.36%
Cotton$CT_F
-15.12%
$BAL
-15.83%
-0.71%
Live Cattle$LE_F
16.75%
$CATL
9.90%
-6.85%
Lean Hogs$LH_F
15.72%
$HOGS
2.77%
-12.96%
Sugar$SB_F
-9.15%
$CANE
-0.28%
8.87%
Soybeans$ZS_F
-9.78%
$SOYB
-6.39%
3.39%
Wheat$ZW_F
-12.01%
$WEAT
-12.81%
-0.78%
Average4.24%4.88%0.64%
Commodity Index $DBC-2.42%
Long/Short Ag Trader CTAs8.99%

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