Wednesday, August 5, 2020

Morning Note

Asian equities traded higher virtually across the board overnight, Europe's following suit this morning, with only 2 of the 19 indices we track in the red, and the US certainly won't be left out; Dow up 285 points (1.1%), the S&P 500 up .59%, Nasdaq up .28% and the Russell 2000 up .66%.

The VIX (SP500 volatility) is down 2.06%, to 23.27, VXN (Nasdaq vol) is down .89%, to 28.85.

Oil's up over 3%, Gold's up $47, silver's up another 3.8%, copper's up 1% and the ag complex is mostly higher this morning.

The 10-year treasury is taking a hit (yield higher), while the dollar's getting crushed this morning.

Well, that "potential" near-term dollar spike I'm looking for certainly isn't manifesting itself this morning. Now, don't get me wrong, as a portfolio manager I have no complaints, our core portfolio is once again outperforming stocks (well, except for the 30-stock Dow) this morning (so far), up .70%, thanks to our commodities, and commodity-related equities, exposure. Our top 5 performing positions as I type are silver, materials (equities), base metals, energy (equities), and gold. As a consumer, and one who's concerned with consumers who are struggling to make ends meet, well, no, a weak dollar is anything but welcome. While those who invest in commodities (and not to mention stocks) are loving it, those who spend the bulk of their money on commodities (read food and fuel), well, aren't!

So why, amid record government borrowing (last month's budge deficit was over $800 billion, next week's treasury debt issuance will set a new record) and Fed money printing, can I even dream of even a near-term spike in the dollar? Well, again, as I've expressed at length herein of late, I'm longer-term bearish on the dollar, hence our increased commodities and commodity equities exposures, however, in the very short-term I see technical factors potentially coming into play.

Here's a look at the latest positioning among those who speculate in US dollar futures. That's rare, multi-year, net short exposure. Should the dollar catch a bid -- say on the next stimulus package -- we'd likely see a few shorts panic and exacerbate the rally (something we've experienced over and over again in stocks during the current rally):

Now, in contrast, here's the current net positioning among those who speculate in Euro futures; the Euro is by far the largest counter currency position represented in the US dollar index. This is all-time record net long positioning among futures traders:

In last night's note I mentioned the "oversoldness" of the dollar; here's what that looks like on the graph. Note the red circles around the spots where the Relative Strength Index had the dollar oversold to not even quite the current degree; the arrows point to the subsequent bottoms in the dollar:

Lastly, here's a look at the "overboughtness" I mentioned last night in the Euro. Note the red circles and the arrows:

Now, if that's not an actionable trade setup we don't know what is, right? Well, yeah, and it does have us playing a little wait and see before we increase our overall commodities exposure. But, here's the thing, as I've expressed herein the Fed is absolutely desperate to keep the dollar under wraps, which no doubt largely explains the current crowdedness of the short-dollar trade. But, then again, the Fed -- contrary to popular belief -- is not all-powerful, and the foreign exchange market trades to the tune of $5 trillion every single day! That's a lot, even for the all-mighty Fed to control...

We'll keep you posted...

Have a great day!

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