Fade These Crowded Trades

Hey There Income Traders,

After J-Pow, once again, doubled down on transitory inflation and did the moonwalk on draining liquidity, stocks and commodities got a nice boost.

But you didn’t need Powell’s words to know what to do.

The reversal in the US Dollar Index (Ticker: DXY) a week before Powell spoke was the signpost for a move into stocks and commodities …

If you were ahead of Powells consensus narrative, then you are sitting on some nice profits.

How will you know when to take them?

That’s easy: when the consensus narrative shifts from transitory to longer-term inflation.

Today, I will share the data that is critical to maximizing profits and how to generate new profits by trading contrary to the crowded, general consensus positions.

Copper Reacts to the Dolla’rs Every Move

Smart money doesn’t need J-Pow to let them know when to be long or short inflation (meaning long commodities and short the US Dollar).

The US Dollar is all they — and you — need to follow.

Notice the two highs in the US Copper Index ETF (Ticker: CPER) were triggered by lows in the DXY

Forget about waiting for J-Pow to speak before getting in and out of the commodity complex …

J-POW has never understood how the market actually works. He simply uses his powerful words in hopes of swinging the consensus narrative in the Fed’s preferred direction.

Let the market tell you where the money is flowing.

The Brazilian Real Tells the REAL Story

The Brazilian real is a critical signpost to watch as a trigger to higher and longer inflation.

Brazil is a key trading partner for China, who imports everything from wood, iron and steel to meat and grains.

Historically, the real rises when the dollar is weakening and vice versa …

Watch the 5.17 level on USDBRL. On a breakdown of the USD lower compared to the real, I will add to or build additional bullish commodity strategies (i.e. long silver and short dollars via the Invesco DB US Dollar Index Bullish Fund (Ticker: UUP)).

Monitor Net Long Positions

I frequently talk about fading the consensus trades, meaning going opposite of crowded trades that can reverse quickly because the majority of investors are all betting the same way.

The calculation used to measure investor net long positioning is the standard score, often referred to as the Z-score. The Z-score measures the number of standard deviations the current net long position is away from the mean over a set period of time.

The table below shows the Z-score results calculated from the mean over one year. A Z-score of +2 or -2 standard deviations is indicative of extreme net long positions.

For example, a -2 z-score represents an extreme short in relation to the mean over the past year …


Notice the dollar position Z-score shows an extreme long, while oil, copper and silver show extreme shorts.

This is important internal market data that reveals counter trading deflation trades (i.e., short commodities and long dollars is a position that offers a higher probability of success).

Until we see investor net long results shift back towards the mean …

Bring It Home

J-POW’s words will move markets less and less as time goes on.

Rely on market internals to give you an edge in trading …

Personally, I am long puts in UUP and long call spreads in the iShares Silver Trust ETF (Ticker: SLV) and SPDR Gold Trust ETF (Ticker: GLD).

This Thursday I will share more details on what is driving the commodities and dollar and trading levels in the short and longer-term …

Subscribers to Volatility Edge automatically receive the five picks I will share each Thursday in September (starting this week). while Trading Legion members have access to my weekly Macro Monday outlook.

Call our Customer Care team at 888-872-3301 to find the right fit for you and let’s get to work as the market begins a powerful trend into the year’s end.

I look forward to helping you crush it. Until then …

Live and Trade With passion My Friends,

Griff

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