WHAT DID WE LEARN THIS WEEK TO MAKE MONEY NEXT WEEK?
After introducing guest trader Zach Karabell, aka "The Academic," the gang immediately dives into the main lesson learned after stocks soar to end the week (the highest close since June). The dollar also "exploded," with its biggest jump in 8 years against the euro. "Currencies typically do not move like that," says Dylan of the USD's 3.3% gain this week. The strong dollar pushed back commodities, which led the S&P 500 to its best week since April, due in part to the commodities pullback -- it ended the day up 2.4%.
Adami agrees with Dylan that there is a "dollar-led commodity move to the downside." Commodities are "broken" with the dollar rising, he says, and also firmly believes the USD will continue rising for the rest of the year. "Sell commodities into rallies; you don't buy the dips."
Macke agrees that commodities were an "overplayed group" and isn't going to fight the trend. "Even without the dollar, I was saying commodities were broken -- this breaks them more."
Carabell, however, feels it may be too early to say commodities are done for the year as there's still strong global demand. "It's still a demand-driven story... and this is not traded purely off of dollar weakness."
Dylan, in a quick bit of Trade School, underscores the fact that commodities are priced around the world in U.S. dollars, despite what currency is used to purchase them -- this is what ties the dollar to the global commodities markets.
Carabell says some companies will have anticipated the dollar's upward movement and have hedged their prices. So while not suggesting buying commodities on Monday, he's suggesting this pullback may not be long-term.
Macke disagrees, with a rant about a "Bad Trade Graveyard" and finishes, "This is going to bury people... on anything commodity-related."
Karen says it's not clear what's starting the dollar-commodities cycle, nor does it matter. "I wouldn't be long or short here." She also points out the effect on equities, "The momentum trade out is more powerful than any of the fundamentals." Still, it doesn't give her enough reason to go long on stocks yet.
Adami says a 6-month downturn in commodities is feasible. He says Europe is worse off than the U.S. but aren't going to raise rates. For his trading position, he says that some commodities have been so devalued that they've become attractive again, and as an example points out Freeport-McMoran, which has been "obliterated," its stock down around $30-35: "the valuations have become compelling."
Macke: "You have to trade the market you have, not the one you wish for." It's impossible to fight rallies. He plans to go long in the dollar and trade commodities like he does financials -- "buying the panic" but on a short leash.
With the last word, Carabell says, "I'm long Ms. O'Leary's cow."
BANKS SHAKE OFF BAD NEWS
Also today, banks made a bit of a comeback from its recent downward movement, rebounding 4%. Karen, who's been shorting a lot of them, did nothing with them today and is "absolutely sticking with them." She's comfortable with her short position, from data she's seen in equities, such as the Commercial Mortgage-Backed Securities (CMBS)getting wider.
Adami says we're getting to the levels where Jeff is saying "sell the rips." He points out UBS was up 3.5% today, when it was $20.57 stock a couple of weeks ago -- before its "powerful capitulation." Now, he advises, might be the time to profit from those banks that were capitulating. AIG also gave an opportunity today to buy during a dip and closed $5 up.
Zach says, "I'd be a lot more uncertain about the fundamentals underlying the financials then the fundamentals underlying commodities." It's been "a really good trade" and this may be the peak for the next several weeks.
Macke add that in term of financials, "don't confuse taking profit with getting short." He respects how financials have traded up despite recent bad news. He has no explanation for "how you can buy back all these munis and not have them cost you any money, which is the logic people seem to be using to buy financials." His advice: "Don't short it, but wait for buys."