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Thursday, December 22, 2016


“It’s shaping up to be one hell of a seesaw battle!”

We’ve maybe got a couple of days next week that perhaps could show some kind of intraday volatility for trading purposes, but sitting here today looks & feels very much like a pre Holiday nothing burger. The USDJPY volatility algorithm’s threshold HVALUE has yet to be seen, and gold is so dead I’ve seen better EKG’s from cadavers at the county morgue; so, not much to report on today, which means it’s a perfect learning day.

What can we learn from 2016 markets, and how do we project that into 2017? The first lesson to be learned from 2016 is that there are no such things as “fundamentals” in any market; you can break down the MT4 markets into stock indices, FX, precious metals, energy, and USDJPY.

Stock indices, at the moment, are a complete trading joke; intraday volatilities have collapsed to the point where you could be stuck inside the spread on a CFD for hours, and not see the other side. World wide manipulation by central banks to eradicate volatility and create the illusion of stability through stock prices is doomed to failure; you’d think they would know this, but anybody who dreamed up negative interest rates to cure deflation is stuck in an alternative universe anyway, and in their collectivist delusional mindset this makes perfect sense. It remains to be seen how long this charade can continue, but I do know one thing, “never underestimate the power of government to either change the rules of the game or continue the Ponzi scheme unabated, right up until the time you have no more money left.” At some point in 2017, world stock indices have a “reckoning” with reality, most likely caused by some perceived disappointment with the Trumpster , and volatility returns with a vengeance.

However, one of my major disappointments with brokerage houses and LP [liquidity provider] banks is that their CFD’s [in pretty much all of the stock indices] are grossly mispriced in favor of “the house” and grossly overpriced for retail specs [you & me]; and when you add in round turn commissions [RT], if applicable, and it’s even worse.

For example, take the best spread available, which is in the DOW30 at ASSETS FX of 1.8 index points, add the RT of another 1 point, and your “net” trading cost is 2.8 index points. Assume you have $1,000 in your trading account and use leverage of about 10X; that translates into 0.5 lots [1 lot = $1 per index point; DOW30 at approximately 20,000, so ½ lot = approximately 10,000 notional value]. Let’s also assume you trade, based on algorithm signals, about 4 times each day; your cost for the day’s trading = $0.50 * 2.8 * 4 = $5.60; for the year, assuming approximately 240 trading days [20*12] = a cost to your account of $1,344. 

Now compare this to USDJPY; at current rates you would be trading 0.12 lots 4 times per day, with total “net” costs of 0.7 PIPS. The math looks like this: $1 * 0.7 * 4 = $2.80. For the year, $2.80 * 240 = $672.

So, comparing the two, by trading the lowest “net” cost stock index, you’re paying the LP & the brokerage house almost 70% the value of your account EVERY YEAR for the privilege, OVER AND ABOVE WHAT YOUR COSTS ARE IN USDJPY WHICH HAS MUCH DEEPER AND BETTER LIQUDITY AND MUCH MORE CONSISTENT VOLATILE RANGES.

Now, this obviously begs the question of “then why trade it if I’m giving substantial sums of money away for free and getting very little if anything in return?” Cuz here’s the secret folks; with 10X leverage, as your account grows so do your volumes and that approximate 70% you’re giving away, over & above USDJPY, to the lovely scumbag LP every year as a percentage of your account stays exactly the same! EXIT QUESTION: “Is the DOW30 consistently 70% more volatile than USDJPY? SHORT ANSWER: “Bwaaaahahahahaha!”

Let’s turn to FX; outside of USDJPY, a complete disaster with flash crashes du jour, substantially lower volumes [about 30% in 2016] as retail specs & hedge funds abandon the markets in record numbers, and last but not least stop hunts & slippage on the rise. Unless the Euro collapses, and broken into its component country parts, what’s going to propel volumes here in 2017? “Me neither.”

Gold … crickets … Any idea how many people got totally crushed trying to pick a bottom in gold, and/or stayed long from “Brexit”? Well, I’m here to tell you it is significant, and those traders won’t be back in 2017; they bought into the “gold is the best performing asset class of 2016” financial press BS, and if continues like this I’ll be rich! Outside of intermittent rallies from short covering, unless there is a complete global economic meltdown, it’s hard for me to get excited about gold; it very much looks like a dead market on life support. Until $15+ ranges start appearing again with regularity, you can expect intraday volatility to be lower than average, and slippage to be greater than normal from LP games; all in all, there are better sandbox’s to “play”.

And if you’ve been paying attention to the gold versus USDJPY correlation matrix, literally the second USDJPY stops going down is when gold gets crushed by the dealer & bullion bank community in their never ending zest to sell, sell, and sell some more. The way it goes down isn’t smooth and it isn’t pretty, and liquidating into this leads to some “eye watering” fills that are guaranteed to be off the market.

The problem I see with crude oil right now is simple: seems like every day is an “NFP Friday”; what with rig counts, IEA inventory reports, the DOE inventory reports from Cushing, OK. every Wednesday morning, and last but certainly not least the constant “blah blah” from OPEC & Russia about either production or production cuts, any position you take is akin to being in a dynamite factory when somebody walks in the door with a lighted cigar. “What could possibly go wrong here?”

Another problem is the fact that one day you’ll see a $3 range and the next it’ll be $0.75; the wide discrepancy in ranges makes it difficult to stay with a position with any degree of probabilistic certainty. The spread, and contract specs at LMFX are the best you are likely to get anywhere in crude oil; “net” trading costs are $0.03 per 1 lot [1 lot = 100 bbls.], so it’s not the cost of trading that prevents, in my opinion, from making WTI crude oil a “primary” trading market, it’s the total uncertain “news flow” that creates “bat excrement” volatility over a few minutes time frame. Now, “that’s great if you’re on the side of the bat; not so much if you’re the statute in the park.” Cuz, remember, if you’re on the wrong side, you have a stop somewhere in there, and that stop is going to be nailed up on a cross; God help you with the fill. So, it very much becomes a very delicate exercise in risk management.

Which brings me full circle to USDJPY; unless Kuroda & the BOJ suddenly wake up and smell the coffee, which is highly unlikely, I can’t see anything on the horizon which would make me see this “asset class” of “risk on … risk off” going to sleep and intraday volatility taking a significant hit. And even if it did somehow, that would mean everything else, with the possible exception of crude oil, would be in the doldrums as well; stock indices & gold would be dead.

From a macro perspective, I think the surprises will come from 3 areas; 1) people will be surprised at how fast Trump implements his priorities and programs, and thus the impact on interest rates have the potential to be significant [up and down], 2) a more rapid deterioration and disintegration of the Eurozone; I can’t see Merkel hanging onto power in Germany, and Wilders is poised to take power in the Netherlands; add to that the disaster that is Italy & Spain, and it will be a miracle if the E.U. can make it to 2018, and 3) never, ever underestimate Kuroda & the BOJ to do utterly “stupid shit” at anytime and turn “risk on … risk off” into a roller coaster.  

Given this, 2017 looks to be full of trading opportunity galore. Until tomorrow …

Have a great day everybody!



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