Ok, I've been hangin' around ET for some time, and though I'm not the 'journal type' thought it was time to give a bit back. The aim here is to describe and track a medium-term strategy I call 'Tis the Season.' Basically what we do is identify, in advance, a market that is poised to hew closely to a regularly occurring, fundamentally driven seasonal move. Now obviously markets don't adhere religiously to past seasonal patterns. Our objective is to identify short to medium term opportunities where there is a fundamental, identifiable driver behind a recurring, seasonal move, in any market, and where fundamentals and set-up support a recurrence of that seasonal move in the period at hand. I will get to the first 'trades' in the next post. But first about methodology for this journal. I don't believe in posting my specific trades online for several reasons including: 1. I may not have time to update position adjustments in a timely manner and I don't want to incur responsibility for keep everyone up to date on my portfolio. 2. Traders tend to hold or defend a position longer if they've taken a public stand for it. I don't want my judgement, today, to be swayed by what I may or may not have posted in the past. 3. I typicallly trade these seasonal moves in 'campaigns' that comprise different types of positions and activity depending on the particular market/instrument and how the move is panning out over time. Campaigns require flexibility and I don't want to get bogged down in explanations in a journal while I'm working a campaign. Instead, for the purposes of this journal I will simply describe, in general terms, the types of positions and trading that I intend to implement. The good part is that I can typically lay out that strategy in advance of actually undertaking it. Ok on to the first two campaigns ...
Ok the first campaign I will track (loosely) in this journal is a seasonal rally in the Yen coinciding with the semi-annual financial close for Japanese corporates at the end of Sep. A review of the seasonal chart shows a recurring, strong Yen rally from about 5-10 days into September lasting through about mid-Oct: Some important points on why this is an attractive candidate: 1. An identifiable, fundamental driver behind the move: rebalancing of Japanese' corp balance sheets ahead of semi-annual close. 2. Fundamentals supporting a stronger Yen (Honestly, this just means I am long-term bullish on the Yen anyway. Who the hell really knows what the fundies are on this except after the fact?) 3. Immediate Yen price action is closely hewing to seasonal tendencies, i.e. Yen is leaning weaker into the last days of August. This gives us a good entry and some margin of error. Better to 'buy low,' as they say. 4. A review of recent years suggests this pattern has held. 2005 was an exception caused by the 2005 election in which Koizumi won a resounding victory. Election results are a prime example of fundamental events that can throw seasonal tendencies out the window for a period of time. To my knowledge we don't have a contentious election ahead of us that could throw this off. *I understand Koizumi will step down soon - something I will check in the days ahead. Next post will cover basic anatomy of a campaign, using this long-Yen move as an example.
*Note that I am in Singapore so my updates to this journal will typically take place in the 6-10am EST timeframe. With that out of the way, on to: Anatomy of a Campaign (or how to work a medium-term trend): My first position typically comprises an ITM short option position. This becomes my 'Stalking Horse' position. For the Yen campaign, this will mean selling ITM puts if one is trading the Globex futures, or ITM calls if one is trading cash. Key here is that I don't take another position until two key criteria are met: 1. The Stalking Horse position is well into the green. If the horse never commits to profits, the play is dead. 2. Not only must the Horse be green, market action must show signs of confirmation that the trend in question has gotten underway. This takes a bit more judgement, but is absolutely essential. *My stop-loss on a Stalking Horse is that point at which I am convinced the probabilities lean against the seasonal move materializing. Almost always in this instance we swallow a loss on the Horse. Once the Stalking Horse and Initial Action confirm the move has begun, I may buy options and otherwise lean into the trade via futures or underlying. This is where, as Soros said, it is important to be a pig. Oink. How it is acually played depends on the market and instrument. (Hence my desire not be tied down to posting actual trades - I need flexibility.) I also believe in actively 'working' the trade. This entails keeping up on events that will move the market. This type of work is perhaps best left to other threads/journals. Finally, the exit is identified in advance. In the case of the Yen, an exit is expected in mid-Oct. We could extend this if fundamental developments change over the course of the campaign. If we've also generated lots of green and momentum suggests, we might also hold longer, but place tight stops. We might also look to position for the turn, though this can be tricky - I don't do this perhaps as much as I should. To review the three stages of a campaign: 1. Place the Stalking Horse and confirm the move in question. 2. Get greedy, fast, as the move gets underway using long options and direct positions. 3. Plan your exit. *4. Test a reversal. (For my purposes this step is optional and on a decidedly smaller scale than the previous positions. ) Ok for the Yen trade my plan is to take my Stalking Horse position in the Sep 4-6 timeframe, and we go from there.
Over the weekend we will post a CAD campaign that coincides with the Yen, and potentially offers a USD hedge. The Yen and CAD campaigns will be the inaugural trades for this journal - they will run simultaneously.
Ok, perhaps I should have begun this thread with the CAD campaign (below) given that it begins ahead of the Yen (already described.) Such is the risk of posting a journal that describes real-time strategy formation and execution. Anyway, late Friday we placed a Stalking Horse position to short the CAD vs. USD. This campaign will last through ~Sep 18 and aims to profit from a sell-off of Sep CAD futures contract into expiration: For those of you who like to track the trades of others, the Horse was placed late Friday and closed in the red, largely reflecting transaction costs. In the past I haven't found value in trying to game the entry of a horse. The most critical point on this initial entry is that it not be made too early. This is because many of these seasonal moves are immediately preceded by a set-up in the opposite direction. There is absolutely no virtue in arriving too early to the party and bleeding red during what should otherwise have been the better entry. A couple particular red flags on this trade about which we are particularly cognizant and which will temper our aggressiveness: 1. At this point I'm not entirely comfortable that the SEP contract for CAD has in fact sold off over the past couple years. A perfunctory glance at some charts raises questions. It may be that the multi-year bull run in CAD has overwhelmed this otherwise very short phenomenon we are now trying to capture. I will be researching this issue further over the next couple days as the Horse works. 2. CAD is quite geared to oil and gas prices. With Ernesto now gearing up for a Fiesta in the Gulf, a spike in oil/gas prices could place a floor under CAD in early Sep. That could prompt us to abandon the Horse position and keep our powder dry for our Yen trade come later in Sep. Downside CAD target for mid-Sep is 1.14, or about .8770 in the Sep Globex contract which expires Sep 19.
On more careful review this weekend it appears that CAD hasn't sold off during early Sep in any of the last three years - seems the current multi-year bull run may have overwhelmed the otherwise modest tendency to sell-off early Sep. I'm also not particularly thrilled with the prospect of seeing CAD rally (against me) while storms churn in the Gulf. For this reason, and because the imminent opportunity to buy YEN is so much more appealing, I will exit my CAD Stalking Horse first thing Monday, come what may. Too much opportunity on the immediate horizon to be dicking around with what has come to look like a marginal trade. To summarize where we stand: 1. We've lost our appetite for our short-CAD position and closing it out. Expect to take a nominal loss not much more than total transaction cost. 2. Preparing to begin a buy-Yen campaign in the days ahead. **Given recent action we may make our initial long-Yen Stalking Horse position an OTM option sale, and take the position earlier than planned - possibly next week. Thursday looks particularly well timed. **Eur/Yen chart definitely looks overextended. For the spreaders out there, this might be worth a look.
Upon market open early Monday (we are in Singapore), we exited CAD position at commission cost only. Some comments on pending Long-Yen entry later this week. 1. Notice in the seasonal chart (2nd or 3rd post of this journal) that Yen typically dips in last few days of Aug before beginning a Sep rally. In my experience, it is pure folly to ignore even these small dips in a well prepared seasonal chart. Thus my entry is planned for ~Aug 31 and not a day sooner. 2. That said, Thurs & Fri will be interesting in that Bernanke speaks Thurs afternoon and the Jobs report is out Friday morning. These two events ought to provide some good volatility and offer a good entry for my Stalking Horse position on this trade. 3. Saw this on the wires early Monday: Yen weak on Japanese rate outlook By Alex Richardson SINGAPORE (Reuters) - The yen stuck near a record low against the euro and a one-month low versus the dollar on Monday while Japanese government bond futures hit a five-month high on expectations the Bank of Japan will be slow to raise interest rates ... http://business.scotsman.com/latest.cfm?id=1267522006 Since when does a currency trade due to rate expectations??? USD has been falling for the last how many years in the face of incessant rate hikes. This is exactly the type of headline I like to see as I prepare to get a campaign underway. Giddyap!
I dunno, my gut is telling me the popular trade right now is to go long yen and sell cad, euro against -- would make me nervous to join them, especially if there is some huge bet that someone needs to get stopped out of first.