It’s finally time to bet on some sustained downside action, and the euro is my vehicle of choice.
I laid out the conditions that would flip my outlook on the euro earlier this month. Three weeks later, the pieces have fallen into place for a bullish position.
I was talking with a relatively new day trader last night at my twice-monthly trader meetups here in Colorado. We were chatting about stop losses. Or more specifically, his inability to stick to his “mental stop loss levels.”
As you can imagine, this was leading to him taking occasional big losses – which were wiping out good runs in the market.
He’d make a few hundred bucks several days in a row. He’d then lose it all (and then some) on one bad trade.
A lightbulb went off in his head when I reframed the importance of not taking big losses. No doubt many of you are shaking your heads and uttering – duh!
But for this gentleman, it took me breaking it down this way for him to get the picture:
We came into the week anticipating some volatility expansion out of this range, which could potentially be playing out given yesterday's action.
This was the largest daily price change for most coins over the last month. Ethereum's broken out of this short-term trading range, with Bitcoin following closely behind.
Many stocks are no where near their all-time highs.
The S&P500 still needs to rally 25% just to get back to its former highs. And that's after the 10% rally that we've already seen in October.
The Nasdaq100 would need to go up another 43% from here just to get back to its highs. And again, that's after it already ripped 12% off its lows this month.
Remember, the average Nasdaq stock fell 44% from its highs during the bear market. The average small & micro cap stock dropped about 50%.
And since most stocks are so far from their highs, investors are having a hard time calling this a bull market.
"They need to make new all-time highs for it to be a bull market", they say to me.
So ok, let's play that game.
None of these prices here below were new all-time highs. So was this a bear market then?
Stocks and bonds are enduring one of their worst years on record. Yet the St. Louis Fed’s Financial Stress Index dropped to never before seen levels. It’s off its lows but still indicates less stress in the financial system than at any previous point in the past quarter century.
Why It Matters: Aggressive tightening by central banks around the world has pushed sovereign yields higher and kept interest rate spreads subdued. That has made financial stress less apparent. Until this changes, there is little impetus for the Fed to pivot away from its intense focus on bringing down inflation.
In taking a Deeper Look we see how the specific characteristics of this cycle may be masking signs of stress that are present just beyond the headlines.
