On Sept 18 markets had to rapidly “re-price” their anticipation of Fed policy when the Fed decided to NOT taper…stocks, bonds and commodities all jumped higher while the US Dollar tumbled. In last week’s blog  I wondered if the “re-pricing” would be sustained…or if it would create a “blow-off” top…perhaps even producing a Key Turn Date…when a number of markets reverse direction at the same time signaling an important change in Market Psychology. As we go into October its beginning to look like we had a Key Turn Date on Sept 18/19…setting the stage for big moves ahead.

Here’s what happened since the “re-pricing” of Sept 18 and 19:

Gold: dropped as much as $70 over the next 3 days…rallied back some…closed last week $40 below the “re-pricing” highs.

DJIA: dropped as much as 500 points from the All Time Highs made following the Fed surprise…closed lower in 6 of the last 7 sessions…down 2.7%.

Euro and the Yen: surged higher on the Fed surprise…and pretty much sustained those gains at last week’s close.

CAD: traded to 3 month highs (98 cents) on the Fed surprise but closed last week below 97 cents.

WTI crude:  Hit $108 on the Fed surprise…but closed at $103 last week, down $5.

Bonds: The US long bond had a huge 3 point range Sept 18…closing near its highs. Bonds gained another 1½ points last week to reach 2 months highs…with support from several sources… the Fed said the economy was too weak (bond bullish) for them to cut back on their stimulation (more bond buying)…they caught a “safe haven” bid as stocks were sold…and shorts were scrambling to cover after the big sell-off since May.

Potential market turmoil ahead:

Fed: Will or won’t they taper at the Oct 29/30 meeting…a strong employment report this coming Friday (Oct 4) could renew “taper talk.”

Fed: Who will replace Bernanke?

Gov’t: Facing a shutdown on Oct 1…acrimonious political theater…debt ceiling could be reached by mid-October…more acrimonious political theater.

Europe: Now that Merkel is re-elected what changes in Europe?

My short term trading:

In last week’s blog I wrote that stocks and/or gold could be sold short following their quick “Fed surprise” rallies…and that selling pressure in both markets could intensify if they broke below their pre Fed surprise levels.  I didn’t want to buy the break in the US Dollar (I’m pre-disposed to be US$ bullish, but the chart pattern looked bearish) and I was neutral on bonds (I felt that a short covering rally was over-due but I could see much higher interest rates ahead.)  I chose to short gold because it was already in a downtrend (for the previous 2 weeks, for the last year, for the last 2 years) rather than short stocks which were in an uptrend (for the previous 3 weeks, for the last year, for the last 4 years.)

This past Tuesday (Sept 24) gold traded as much as $70 below its Sept 19 highs…but quickly bounced back. I was thinking that gold might keep dropping…might take out the pre Fed surprise lows at $1291…but it didn’t…so I covered my short term trade with a $38 profit and went to cash…sitting on the sidelines waiting for the market to set up another short term trading opportunity.

I didn’t short the US stock market because it was in an uptrend and picking a top to a bull market that is making All Time Highs is clearly a case of trading what I think the market should be doing rather than what it is doing. I also didn’t short the US stock market because I felt that would be “doubling up” my short on gold…that they were essentially the same trade…that they were both reversing on the same change in Market Psychology. In previous blogs I’ve written that since May I’ve only traded the US stock market from the short side…with plenty of time spent sitting on the sidelines! I’m still pre-disposed to look for an opportunity to get short stocks…but at the moment I’m sitting in cash without a position.

My trading motivation and methodology are intertwined. I don’t like losing money but I’m willing to take risks…I just want to avoid taking stupid risks. So I develop an opinion about Market Psychology to help me gauge where a market is in terms of a bullish or bearish phase…within my selected time frame…and then I wait for a low risk opportunity to establish a position. If the market goes against me I get out with a small loss…if it goes my way I try to add to the trade. If it goes somewhat in my favor, like the gold trade above, but then stops I don’t mind closing the position and going to cash.

Futures and futures options are the best way to trade currencies, metals, stock indices and many other financial and commodity markets. Call 604 664 2842 to talk with Drew Zimmerman