Currency View. Right here. Right now.

Surfacing from pup training to share two words on currencies. I was prompted by a DM this morning from a sub who follows EM ccys very closely, and by the price action this morning/late last week, which to me has evolved in favor of seeing some USD softness soon. (Just look at today’s intra-day reversal in silver.)

I have posted below his question (pretty sure my assumption that the sub is a ‘he’ is correct) and my brief answer. Please feel free to follow up with questions in the stream or in DMs.

Question:

“Hi Mark, what is your best estimate of when a short USD / Long EM position is tradable? I take that this is to some extend data dependant and we probably need to see a bit more softer US data to conclude that the top is in for rates and the USD, but given the sharp corrections we have already seen in certain EMs, I am starting to getting increasingly tempted. Do you have any thoughts in terms of the timing here? Cheers!”

Answer:

Hi. So, first one has to specify if we’re talking about a trade or a position. And if you are looking to position EM ccys, you have to start with what your current weighting relative to your benchmark/mandate/risk tolerance is. I would want to be modestly overweight here from a strategic POV. So, if you are underweight EM ccy, it makes sense to add here IMO. Need to leave room in case the EM unwind goes further (easily could), but I think the levels and the dynamic warrant adding. If you are flat, you can still start here to get overweight, but, again, make sure you leave room to add. On the tactical side, makes sense IMO to take a shot here at being more aggressively short USD, but with stops in mind/in place. Yes, for a short USD position to really run the data would have to cooperate somewhat, but the positioning and psychology is at least now somewhat favorable to try short USDEM here.”

Markets in the Medium Term

This week was unusual for me in that I had three institutional investor friends come a-calling here in my sleepy little hamlet. Always great to see old friends who speak the same language. Lots of good discussion.

The Three Books

I get asked often about what books I would recommend for getting a better handle on behavioral finance, markets, macro, pattern recognition, etc.

Back in 2012 I posted The Book List that covered a lot of ground–especially on the behavioral side. But I got asked again today, and I boiled it down to three books, one on behavior, one on central banking, and one on patterns and markets. This is where I recommend someone start.

Guesses as to where we are in this correction

We’ve sold off very sharply in a short period. Many investors—probably the majority—think this is mostly technical and the basic global fundamentals have not changed. This group will be buying this dip. Others are worried that so much stimulus on a fairly full-employment economy will lead to inflation the Fed will have to stamp out, and, more concretely, fear the January Average Hourly Earnings number triggered a broader market realization of this. This group sees maybe a bounce, but more trouble ahead now that global central bank normalization is unambiguously on.

Behaviorally, after such a long, strong run, the BTD crowd is the more likely to prevail. The muscle memory is fresh. Traders like successful retests. And the overall case for this selloff being predominately technical is pretty strong. I’d cuff 75% odds that Friday was the bottom of this correction. And if that’s the case, it’s almost a certainty that we’ll be shocked at how fast market sentiment toggles back to the bull case.

Obviously, if this is wrong, the next leg down would likely be panicky and painful once investors realize it wasn’t.

However, if Friday was indeed the local bottom, my guess is that we rally back to or near the previous market highs. And it would be in the run up to those previous highs where we start looking for divergences to gauge the strength of the bounce. At least, this is the road map I am running with unless/until thing change.

For divergences, you’d want to look primarily to market internals. Advance-decline lines, new highs vs new lows, momentum indicators, these are the kinds of things you want to track. Vol needs to work it’s way lower too.

If you want to add risk here and are in a position to do so, I would recommend, as a general guideline, the sectors and names that held up best in the correction, not the ones that sold off most. It’s counter-intuitive for many of us, but strength tends to beget strength—even if constitutionally some of us are hard wired to shop for ‘laggards and bargains’.

Whatever you do, make sure you get your sizing and your stops right to manage that risk. Good luck.

Update on Bitcoin $XBT $BTC

I wanted to follow up briefly on the bitcoin post from December. 

To me it still looks like a bearish pattern has to finish playing out.  Just going by the pattern–and bitcoin has been textbook both on the way up and on the way down–it looks like there’s at least one good down-leg left.

The reason bitcoin has adhered so well to textbook stock patterns is because there are no fundamentals and the emotions run very high. Basically it gives you an exceptionally clean read on sentiment.

If you’re short, though, remember to keep your size in check because in this last bounce alone it has been oscillating between 10 and 14k. Makes it really hard to hang onto if you’re carrying any size.

Here’s the chart:

Daily chart of XBT

Good luck.

 

 

Tricks for Hanging On in a Melt Up

Human nature anchors on the high tick of mark-to-market gains. It’s virtually impossible not to. And this makes it excruciatingly hard to stay fully positioned during a melt up. Every intra-day dip, every tape bomb, every ominous indicator du jour begs us to lock in paper gains before they slip away.

Even if you are fully cognizant of this problem you can’t make this feeling disappear. But there are some modest tricks that can help you, at the margin, manage it:

For some people all of this is just too hard. It certainly is not easy for me, and I’ve been doing this for a long time. If you find yourself chronically under-invested because of a macro hair trigger, maybe passive investing or systems-based trend following is a better approach. Discretionary trading–especially in macro–is not for everyone. It’s better to go with what works best for your forma mentis. There is certainly no shame in that.