Weekly Notes With Tiho — Issue 11Location: Dubrovnik & Hvar, CroatiaI’m currently in Dubrovnik, the pearl of the Adriatic Sea.For the fans of Game of Thrones, this is where King’s Landing is filmed.The ancient city has been protected by huge stone walls for at least 800 years. It’s a sight to behold.As I take in this wonderful view, I have sat down to write.This week’s financial market observations will be written within a global macro context — something I did consistently for several years with the old Short Side of Long blog.In Dubrovnik, the talk of the town is Game of Thrones season 7.Meanwhile, in financial markets, the talk of the town is falling US Dollar.Investors Become Pessimistic On The DollarLet us put things into context first. The global reserve currency has shot straight up
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Weekly Notes With Tiho — Issue 11
Location: Dubrovnik & Hvar, Croatia
I’m currently in Dubrovnik, the pearl of the Adriatic Sea.
For the fans of Game of Thrones, this is where King’s Landing is filmed.
The ancient city has been protected by huge stone walls for at least 800 years. It’s a sight to behold.
As I take in this wonderful view, I have sat down to write.
This week’s financial market observations will be written within a global macro context — something I did consistently for several years with the old Short Side of Long blog.
In Dubrovnik, the talk of the town is Game of Thrones season 7.
Meanwhile, in financial markets, the talk of the town is falling US Dollar.
Investors Become Pessimistic On The Dollar
Let us put things into context first. The global reserve currency has shot straight up since the 2011 lows.
Furthermore, despite several short pullbacks, the broad Trade Weighted Dollar Index has traded above its 52-week moving average almost consistently for the last six years.
It never really corrected properly.
It was overdue for a more meaningful correction at some point.
The classic Dollar Index has fallen dramatically year to date.
It finds itself right on the technical support, as seen in the chart above. At the same time, hedge funds and other speculators have turned net short.
Various sentiment surveys have also become rather negative.
Daily Sentiment Index recently dropped below 10% bulls, while SentimenTrader’s Dollar Optix dropped below 30% for the first time since March 2014.
Nevertheless, looking at fund positioning in the chart above, one could argue that funds could turn even more bearish on the Dollar.
While this is true, I would like to add some additional data here.
While the market is generally shorting the US Dollar, important point is that hedge funds and other speculators have turned bearish on the Japanese Yen.
So much so, that they are currently holding one of the largest net short positions in currencies modern history.
So basically, the consensus is short the Dollar, but heavily long the Dollar against the Japanese Yen.
Historically, such large short positions tend to be squeezed with a rally.
Contrarian traders should that a note of consensus investor positions, while longer term investors should remember the importance of being denominated in the right currency.
Gold’s Important Decision Point
Gold was up 8% last year. It is also up 10.1% this year.
However, while these figures look good on the surface, they are rather deceiving.
Firstly, Gold is down 6% over the last 12 months.
Secondly, It is down 5% over the last 3 years.
Finally, it is still down a staggering 34% since its August 2011 peak.
Interestingly, Gold is now trading around its equilibrium.
As a trader, equilibrium for me is neither a rising nor a falling 52-week moving average.
It’s a flat line.
And it’s neither an uptrend nor a downtrend (series of higher highs or lower lows).
In other words, Gold’s price has been stuck between a rock and a hard place.
Experienced traders know that markets rarely stay at equilibrium for a long time.
As price continues to coil into a pressure point — a bullish or a bearish decision will have to be made in due time.
This one is worth watching.
S&P 500 is up again in July.
It is now up 16 out of the last 17 months. And also up 9 months in rows.
Volatility Index (VIX) has posted a record closing and record intraday lows in recent weeks.
Annualized volatility for the S&P 500 on a rolling 12-month basis has dropped to a 5% handle.
It has never been lower in the last 100-year history.
Recent sentiment data shows us that the average retail investor now holds the lowest exposure to cash since the year 2000.
A 5% correction has not occurred for 276 trading days, which is almost 18 months.
This is now becoming quite a statistic to worry about. Investors have become conditioned to buy the dip and expect ever-rising prices.
Furthermore, media isn’t helping. The expectation that equity markets will continue to rise is a mainstream theme on every business channel.
While calm persists for now, my readers should be reminded that this streak will not continue forever.
One should be prepared for the rise of volatility.
Furthermore, there might be some important decisions to be made within the Foreign Exchange market — including precious metals such as Gold.
One should be prepared for the rise of volatility. Furthermore, there might be some important decisions to be made within the Foreign Exchange market — including precious metals such as Gold.
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