What do you see

Going back to basics is a good process reminder in the macro businesses every once in a while. Reviewing one's long held beliefs, areas of strength and taking a simple view of the macro picture can sometime reveal interesting points. Why have I been fighting this market, how did I miss this move and most importantly, what is the current set up are some basic questions every macro trader needs to ask themselves.

Are you wrong or are you early? The answers offer two very different learning outcomes. If you are wrong, then clearly your market model or informational inputs need adjustment. If you were simply  early, then how can you work on the timing. (Note its a lot easier to rationalize you were early vs wrong. If you cannot admit you are wrong sometimes good luck in the markets). Even when you are correct in the market analysis from the beginning, there is always something to learn, perhaps this trade can be automated for future use?

For me going back to basics involves a nice dose of looking at the charts. While chart reading can easily be taken to the extreme with complex Elliot wave counts, Gann lines etc, or simplified away with moving averages, in the hey-day of macro trading from what your author knows, many a billionaire global macro trader primarily armed himself with a hefty dose of chart reading (along with an understanding of the business cycle and monetary policy, which pre QE was not something every market participant understood). While today macro is global, interconnected and much more specialized, a glance back at the charts every once in while helps this author to gain perspective.

Below are a few price charts most macro players will be aware of, with the names, prices and time frame removed. Can you guess which is each one? What do you see in the charts?

You author has also found that fundamental charting works pretty well too but is away from his trusted Bloomberg today. Do let us know in the comments section if you would like to see a fundamental "chartology" follow up.


Chart 1: This is your author's favorite looking long chart. A long complex correction looks to have formed over the long term, while in the short term we almost went back to the lows but now look to be heading higher. This set up offers a nice risk/reward trade to buy at market and put a tight stop near the recent low


Chart 2: OK I cheated a little and added in a 50% fibo retracement from the long term high which nailed the recent high to almost the tick. Your author isnt sure if this is a bullish or bearish set up, though obviously the recent double top was a nice trade missed.



Chart 3: Looks like a clean base break out to me, with some consolidation working the over bought conditions out.
Chart 4: Another bottoming type chart, but unlike Chart 1 this one hasn't proven to me its bottomed just yet. A longer term moving average has been added to help point out the previous point but an astute chart reader should also see a bottom has been tested multiple times but with little follow through. At some point bottoms like these hold and the trend changes. But right now your author is probably more bearish than bullish on the chart. 



Chart 5: Probably you have seen this chart many time and can guess it right away. I can't help but be bullish, at least until the previous swing highs are taken out on the downside.


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Anonymous
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January 16, 2017 at 3:28 PM ×

could figure USDCAD, UST10Y and SPX. What is the firts one?

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checkmate
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January 16, 2017 at 4:16 PM ×

I don't use your method of charts. Charts for me are about finding inflections points in the past that might still be relevant ,but first and foremost I do not use them to check my macro economic analysis. Interestingly, this is currently an issue because I have ideas about sterling based upon my analysis of how the EU/UK relationship might go from here. Meanwhile I have turnips in the Asian market at least who think macro economic analysis might just be a new dice game. I would not allow a chart so influenced impinge upon analysis of the situation. I deal with it through position sizing. The old people can be stupid longer than I can be solvent as yet to be an issue.

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IPA
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January 16, 2017 at 4:18 PM ×

@Anon 3:28

First chart is Gold

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johno
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January 16, 2017 at 8:08 PM ×

Interesting you have CAD there. I've just ventured to go short CAD. Canadian exports to the US is 19% of GDP (less than Mexico, but far more than other Trump-trade favorites like KRW). Also, Canada has a 5% GST on all imports. Border tax 'em back! (Wilbur Ross hearing on Wednesday). There's no risk premium in CAD when regressed on oil and rates. Inflation is low and the housing market (the other shoe to drop) is cooling. Vancouver imposed foreign buyer taxes, Toronto is considering it, and Chinese banks are now having to match outflows with inflows, i.e. flows from Chinese into real estate should be pressured. Canada's household has nuclear leverage. Canadian short rates got dragged up with US rates, and that seems questionable to me. Positioning is clean and the 200 DMA is close, so you'll know if you're wrong at low cost (if you believe the 200 DMA is worth a damn). Also, oil - a big driver of CAD - is losing momentum here and is super crowded with longs.
So, what is the flip side of the argument? I'd really like to hear it, please! (always preferable to learning after-the-fact with trading losses)

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Anonymous
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January 16, 2017 at 10:45 PM ×

One positive argument on CAD: the fiscal deficit spending trend

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Anonymous
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January 17, 2017 at 1:14 AM ×

Nico needs to take a look at the SPX chart - the one pointing up and losing him lots of money...

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Anonymous
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January 17, 2017 at 1:52 AM ×

@Johno...

I have been eyeing going long USDCAD as well but the price action has really deterred me from pulling the trigger. Just trying to play devils advocate:

- Housing cooling in in Cad tho to me is not a reason to be short Cad, I think the cooling was necessary and angled for so i do not see an immediate BoC reaction to this.
- Cad's short end rates has been higher as a result of US rates but also BoC has been more hawkish (at least to me). Frankly they do not look like a central bank with an eye on the rate cut lever.

Given that Cad leverage much more to the US economy than something say Aud (which is to china), wouldnt it make more sense to short AUD? Australia has most of the issues you mentioned above plus some.

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Nico G
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January 17, 2017 at 3:48 AM ×

anon 1:14 i admit i have made a big mistake all this time i was lying in bed next to my computer and the chart was pointing down, until i sat back up

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koolbong
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January 17, 2017 at 4:00 AM ×

Why have I been fighting this market, how did I miss this move and most importantly, what is the current set up...
thank you for the reminder... I don't look at charts much myself, so my answers probably different from yours... but always nice to be reminded of the basic questions...

anon@1.52...
why would you put AUD in the same bucket as CAD... the commodity complex that helps the AUD seem to be holding up pretty nicely (unlike oil), the hit (if any) Australia gets from TPP not coming into being is negligible compared to how a NAFTA revision affects Canada and regardless of what Fitch might think, AUD housing leverage / bank exposure to that sector are on a far better track than a year back...
in fact I think long AUDCAD might be a nice trade... though personally I'd prefer NZDCAD...

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Up_Side_Down
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January 17, 2017 at 7:47 AM ×

@ Nico

Brilliant :). So does that change your positioning now you're up!

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Nico G
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January 17, 2017 at 8:26 AM ×

the minute i got up chart that pointed up pointed down so i'm up, up side down

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Rossco
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January 17, 2017 at 11:08 AM ×

It will be interesting to see whether the Chinese capital controls are a meaningless gesture or not. Pacific rim property and Macau gaming revenues would seem to be the first places for that to show up.

I've noticed next to nothing mentioned about European equities of late apart from the litter rally in the banks.

If the Euro has indeed become a funding currency then let's see what happens to them with some stress in fx carry trades? Other than that, if there is anything in this Trump repatriation of dollars trade then Eurodollars presumably become somewhat more expensive.

Seems like they're in a corner.

US equities? Hanging into a short in R2k. Giving no love

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Anonymous
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January 17, 2017 at 12:19 PM ×

Huge fluctuation in EURUSD in short time periods. Could it really be that gold actually did mark a bottom and preluded this, and is it part of the Trumpflation fade?

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Anonymous
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January 17, 2017 at 1:45 PM ×

Jesus there are some amateurs here.

US equity indexes are at or near ATHs, poised to push higher. EU equity indexes are catching up to ATHs. Every small fall in equities is a BTFD trade, and retail chumps on these boards are trying to get short. Christ, no wonder 95% of people fail at trading.

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johno
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January 17, 2017 at 2:25 PM ×

Thanks to Anons at 10:45 and 1:52 for comments on CAD.

Question today is what Trump interview in WSJ means for USD. Border adjustment seems dead to me, if Trump won't get behind it. That's a significant dollar negative. But what does Trump want? Sounds like more direct approach, like tariffs? But I'm guessing that would be more targeted and therefore less broad and impactful to the dollar. And what's his plan to address a "too strong" dollar?

It is amusing that so much space on this board is dedicated to whether or not short equities when two Trump trades (dollar and rates) have already had significant pullbacks from their extremes.

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thud
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January 17, 2017 at 4:31 PM ×

@johno: I believe the direct approach is more aligned with Trump's realpolitik. I agree with the question of the day re: what it means for USD, but at least I think we can surmise that Trump plans to address USD strength via Twitter. Which I hear is a valid method these days.

To your second point re: equities, should expectations of tax reform and stimulus be re-priced? Although if we do that, I believe we effectively return to pre-election status quo. And once there, perhaps the uncertainty of Trump-ness is yet again replaced by Central Bank perceived certainty. To infinity w/ 12y.o. HFM?

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johno
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January 17, 2017 at 5:31 PM ×

It's funny, the true weak hands in this market are the HFs who punt USDJPY and Treasury futures (not these retail guys we imagine buying equities). For the most part, that's how HFs have played "Trump," not equities. So it shouldn't be surprising that it's in those markets that we've seen the sharp corrective action. Equities are just tough ... if recession risk isn't rising, there's just no catalyst. Maybe I'll get lucky on my short-dated NTM put spreads on some profit-taking into the inauguration, but I shouldn't hold my breath for it. Made back last week's losses from screwing around in ES from just shorting USDJPY for a few hours.

Total cluster-f-ck in GBP today. Cut it loose at 0.872 and 0.868 (EURGBP). Market action tells me the pound is just too cheap given the current state of things. Maybe we start seeing uncertainty showing up in the #s and it starts feeling expensive again, but it'll be a show-me story for the bears. Taking it off my screen unless I see bad data or 0.88 again on EURGBP.

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Anonymous
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January 17, 2017 at 5:56 PM ×

What is chart 3?

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James Zhan
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January 17, 2017 at 6:43 PM ×

Please do let us see a fundamental "chartology" as i couldn't figure out a few charts as yet but i'm very interesting at this delicate time of the year.

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IPA
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January 17, 2017 at 8:15 PM ×

@Anon 5:56

Chart 3 is JPM

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Anonymous
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January 17, 2017 at 8:32 PM ×

I believe we are the beginning of a 4000-5000 drop in NIKK.. the end of the CARRY trade and fixed and fake market..

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Widow Maker
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January 17, 2017 at 9:38 PM ×

@Anon 8:32 pm. At least give credit to Bamabroker when you quote him word for word..

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Anonymous
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January 18, 2017 at 3:05 AM ×

Thanks for the post: returning to fundamentals is always a good move -- especially when unclear things abound.
Also, I second the request for additional, "Chartology." (mostly because it sounds like a Charlie Parker tune...)

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Nico G
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January 18, 2017 at 5:11 AM ×

Parker, Miles, Monk, Coltrane, Maya and Mohamed Ali - black lives matter !

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Nico G
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January 18, 2017 at 6:23 AM ×

https://www.bloomberg.com/politics/articles/2017-01-18/rustbelt-china-province-admits-it-faked-fiscal-data-from-2011-14

"the data were made up because officials wanted to advance their careers"


紙牌屋 (house of cards in Chinese)

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Anonymous
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January 18, 2017 at 7:26 AM ×

Nico - agree with all your political comments, nevertheless equities will go higher because they are supported for political ends.

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Polemic
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January 18, 2017 at 8:26 AM ×

And meanwhile in GBP land the Media is being taken to the reputational cleaners. What a load of rubbish is out there.

http://polemics-pains.blogspot.co.uk/2017/01/the-end-of-land-of-free.html

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Nico G
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January 18, 2017 at 8:30 AM ×

1999-2000 'it is the new economy, the sky is the limit'

2006-2007 'housing will always go higher because they are supported for political ends'

seriously, don't you think politicians would have prevented the 2000 and 2008 bursts if they could, and supported prices higher until we hit Dow 36,000?

bubbles just burst and politics can do nothing against market forces. Trump is inheriting a gigantic equity + bond bubble and people will LOVE to put the blame on him when it bursts (cf. the parallel with Hoover doing the round in the blogosphere)

if you think the market can go up another 4 years without an accident, you are probably born in 1999

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Rossco
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January 18, 2017 at 10:43 AM ×

Think you may find that European equities (Eurostoxx 50 being the most widely traded and liquid) was somewhat higher in 2007. But don't let facts get in the way of a good rant

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Anonymous
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January 18, 2017 at 12:00 PM ×

Trump wants tariffs to protect US companies, immigration controls to favour US workers, fiscal spending to boost the economy, and now a lower dollar (presumably to boost exports)?

Is this really happening? Doesn't he realize that he cannot have everything? Does he not realize that it is a matter of trade offs? He will be able to boost one or the other but not having it all. I mean, the impossible trinity is a kids tale compared to what Trump's proposing.

He will definitely end up disappointing a lot of people.

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Anonymous
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January 18, 2017 at 12:25 PM ×

anon 12pm

imo he wont, because after 8 years of obama trump voters are desperate for any policy that breaks their way (thirsty in the desert u r thankful for any drink).

Trump just has to deliver 1 or 2 firmly (immigration and something on the economy imo) and "fight the good fight" but lose on the rest and he will have exceeded most expectations of his supporters.

the market however is a different matter of course.

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washedup
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January 18, 2017 at 1:44 PM ×

@anon 12:00 on 'He will definitely end up disappointing a lot of people.' - of course, but even if he believes that it doesn't matter since I am not so sure disappointment is a yardstick for him - he may have crossed that moral boundary where good attention and bad attention are completely equivalent.
I think from Trump's perspective its far more important to look like he is on the side of his supporters than to compromise - everything he does will be geared to that and amplified and advertised for maximum effect - any resistance to it will be vilified and republicans will soon be very scared of opposing his agenda simply because of how they will be made to look by him. It is very very clear to me he will fight trade wars at least - the other stuff I am not so sure.
There will be a time in the future when markets come to regret their embrace of this guy, but these things always take long.

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JohnDoe
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January 18, 2017 at 5:26 PM ×

This article is definitely worth a read:

https://www.thefelderreport.com/2015/01/22/the-single-greatest-mistake-investors-make/

(Short version: Buffet et al prove that equity returns for 10yrs to come depend on equity valuations. If valuations are too high, equities will either return little money or a loss over next 10yrs. Currently valuations are v high.)

Now a question for you all. Why are equity indexes undergoing such marked volatility compression these past few weeks? Any views??

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Anonymous
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January 18, 2017 at 6:22 PM ×

Well, although I agreed with Nico's comments on overvalued US stocks. It seemed that the inauguration day is very likely to have a spike: DOW would give it another try at 20,000. It is purely a psychological play: to me, the market is waiting for a dip on inauguration day which suggests that it won't get it. 1/20 is also an option expiration day (easy to have funny price actions) and a huge spike to the upside might bring the max pain.

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IPA
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January 18, 2017 at 7:21 PM ×

@Anon 6:22 pm

Agree that Inauguration Day may be a crapshoot but I am willing to be early and wait for my trade vindication. One can't thread the needle on the precise entry here, especially on indices, as there is so much stuff going on all at once. Using a paint brush to enter these positions, no two ways about it. I am staying away from Dow & S&P500 and rather concentrate on the sectors which will be punished the most should Trump trade unwind. I am also looking at their vulnerability to the strong dollar, which I think is going to go through the roof (not to start any deep forex discussion here) whether it's due to higher rates or risk off. The flag pole of 20 points on DXY scares the daylights out of me. So I am buying puts 4-12 mo out on the sectors I think will sell off 10-15% should SPX sell off 6-10%. They will dump the sectors I shorted to hide in safety, imho. I am willing to be early (pre-inauguration) and leave plenty dough to put to work should they ramp the equities up post-inauguration. I actually think that a quick trip above 20K on the Dow followed by two consecutive daily closes below 20K may send a signal to longs to sell, momo traders (CTAs & HFTs) would follow that immediately, may snowball down from there.

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Nico G
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January 18, 2017 at 7:54 PM ×

JohnDoe

realised volatility is almost zero (close to close) you could argue that bulls are waiting for inauguration (to either trim holdings, or more pay to play) and so are the bears (who heard inauguration date is likely the market turn give or take one 20000 spike)

if anything, put buying the past few weeks in anticipation of a correction would be offset by covered calls from big money who might want to lock 20000 level for a couple of months so there is no net demand for vega ever since we reach the sub 20000 plateau

ergo, we are left with a skeleton VIX

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johno
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January 18, 2017 at 8:01 PM ×

Hello mates,
IPA probably right to focus on sectors rather than indices. For my part, I'm not really bearish equities.
I do think CAD is interesting (CADNOK is nice if you want to be neutral oil). Regressed on rates and oil, USDCAD has no risk premium in it, yet, Wilbur Ross just told you renegotiating NAFTA is the first thing he's going to do. Canada imposes a 5% GST on imports, which Ross/Navarro see as an unfair practice, by the way. Bank of Canada is out of the way too. Some had thought we could get a hawkish surprise. Normally I try not to have positions going into material events like rate decisions, but the hawkish narrative for BoC seemed too unreal to me. I did add subsequently too. Poloz said cuts are on the table and said the currency was over-valued.
MXN is interesting too, but the currency is very under-valued if Trump ends up being a big nothing (which he won't for trade, IMO). Positioning is cleaner in CAD than MXN. I do have some short on MXN ... everything is going against them. Investing in Mexico or buying its bonds as a value proposition seems iffy to me when you have an anti-reform lefty becoming President in 2018, as one should expect. Poor Mexico, man.

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Leftback
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January 18, 2017 at 8:30 PM ×

Today's market action shows that Dame Janet was priced in, suggesting that most of the contents of Granny's speech have been leaked to certain market participants ahead of time…. as MM suggested on BBG, she has repeated her hawkish tone.

Bonds are under pressure but seem likely to find support around here (TLT 120.50-121.00), having first broken through the 50-day moving average decisively last week and now backing up to that level. We will do a chart post on this later in the week.

It's worth remembering that the long end of the bond market responds as much, if not more, to global macroeconomic data than it does to FED-speak, even to the utterances of the Chair….

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JohnDoe
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January 18, 2017 at 9:21 PM ×

Thx Nico, makes sense. Just seems strange that we're having such quiet markets.

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Mr. T
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January 18, 2017 at 11:13 PM ×

"What do you see" - this must be the question coming up over and over in board rooms. Take a company like JNJ - 50/50 sales split in the US and intl. A fully global company. Are they supposed to be retooling their production & logistics? How about that new power plant - whats the outlook for environmental laws 10 years out? Taxes? Labor? If we do something wrong are we going to get yelled at by the tweeter-in-chief?

There are some ideas out there for sure that are market friendly - lower taxes, repatriation etc. Fine, I get that. But the rest is a totally opaque mess. I've tried to get my arms around what everyone else is seeing - and am coming up empty. If trade deals are renegotiated you might get a positive outcome, but you also have a precedent that going forward the terms are changing and planning becomes trickier, which gives projects higher hurdle rates. How is any of that pro-corporate profits? It's not. None of this is. The best thing a Trump administration could do for corporate profits is to say "for the entirety of my administration nothing will change". That creates an set of knows that everyone can plan around. This is much different.

Stimulus etc is no substitute for actual business investment. I must be missing something. In the meantime I'm gonna settle for some modest yield.

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Anonymous
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January 19, 2017 at 12:30 AM ×

Automation appears to be the big driver these days. Right down to retail. Reduce costs through automation and cheap Etf's.

That's fine when the market is grinding up, or bounces after sharp drops. When that herd turns, watch the damage etf's do to the market.

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JohnL
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January 19, 2017 at 1:04 AM ×

JohnO: the 5% VAT is a misnomer, it only applies to goods not destined to a bonded warehouse. A truck load of parts or wholesale goods will only be taxed at the point of sale.
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/gnrl/txbl/mprtsxprts/menu-eng.html

Rules of origin and dispute settlement seem to be areas of interest.
http://www.theglobeandmail.com/news/politics/canada-given-advance-notice-of-trumps-nafta-demands/article33653320/

I would like to see the security and prosperity portion of the agreement opened, it's a definite infringement of Canadian energy sovereignty.
Should be an interesting go around especially with the east and west coast pipelines in the works.

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IPA
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January 19, 2017 at 7:43 PM ×

Here is what I see on Chart #3:

Abee had a very timely post on that huge breakout! But look at what happened right after. What a classic reversal on daily chart divergence, price made a higher high on the earnings day while the momentum was already cratering.

JPM may just be the lifeline of the equity market. Financials benefit from Trump trade like no other sector because of two main reasons:
1) deregulation via very-likely repeal of Dodd-F*ck law, and less-likely (but still possible) repeal of fiduciary rule, 2) and higher rates (probably the biggest reason for the aforementioned breakout). It is important to point out that JPM has not traded below 50 dsma since 9/29/16 and has not had a consecutive close below it since 7/11/16. So with the reversal it is now approaching that moving average fast and if and when it breaches it, especially on closing basis, the algos would kick in and trade a gigantic sell program, so thinks this trader.

Moreover, JPM has had consecutive monthly closes above the upper Bollinger Band only twice before in the last 20 years: in Summer of 2015 and in Summer of 1998. Care to look what happened after each time?! Price suffocated and tanked like a rock.

All of this could just be a daily fantasy of someone who is biased short. I am long puts on KRE (the offspring, but nonetheless) which would take an absolute beating should the Trump trade unwind. So needless to say, I would like to see JPM (the general) lower somewhat. Is it possible? Without a doubt. Once 50 dsma goes, here come the fib retracements, gaps, upper trendline of the broken channel, horizontal breakout pullbacks, and rising 100 dsma. Hey, it's only 10% lower from here right now. Let's have a healthy correction!

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Nico G
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January 19, 2017 at 10:09 PM ×

normally when the underdog sector of an equity market becomes its last overperforming champion, you ought to look the other way

friends at JPM who sit on a 20 year career worth of vested shares cannot believe their luck i remember how they felt when JPM was trading under 20

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abee crombie
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January 20, 2017 at 3:01 AM ×

Interesting thoughts IPA. I share similar views with Jpm though am waiting for confirmation first before getting bearish. Banks live to do a good screw around on earning so I wouldn't read into it too much. But if it starts breaking sharply lower then it will get fun fast.

But I can see this rally continuing as well so I'm not getting short, even with the last 2 days.

Johno, I'm bullish on oil. World wid storage is drawing already. Capex was killed for 2 years. Oil fields decline. And demand is still strong. Ppl are too US shale focused. Outside U.S. Production isn't so hot. And now opec want higher prices. Save for a slowdown in demand via global recession I think we can push higher. Higher oil probably helps Cad to some degree. But rates gonna stay low there so who knows.

Will post some fundamental charts with some more commentary soon.

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