Pavlov’s Bulls

Iran

Pavlov’s bulls came out in full force yesterday, ripping stocks at bad levels on the worn-out idea that geopolitics is always a fade. Yes, it’s a fade when there is visibility on the endgame, but this thing has a bit of a Russia invades Ukraine vibe where some thought it would be a cakewalk and perhaps that’s wrong. Decapitation and regime change are not the same thing.

Yesterday’s equity rip was also fueled by large tax refunds and first-day-of-the-month 401k money, but now that retail has bought at bad levels, they are wondering what to do now.

Meanwhile, Korea was open last night and promptly collapsed 7.2%. We continue to witness an endless series of mini retail bubbles with silver the most recent burst ($121 down to $71) and now the KOSPI.

Any bounce should be limited to the mid-Feb high and 50% retracement zone marked by 885/889. I have no idea whether DRAM prices have topped for good, or not, but the first day down after a bubble like we’ve seen in the KOSPI is not a buy. Note that SNDK, the other poster child of the memory shortage mania, has dropped from $700 to $580 over the past eight sessions.

I am using short KORU as my weapon of choice to fade the madness in Korea as described here: am/FX: Iran, China, and Korea from 27FEB.

That sunbound pegacorn flew too high and last night it dropped from $600 to sub-$400 in a straight line. My target is $310, which would be just above a rough equivalent of 725 in futures. If you joined me in this short idea, I would recommend you trade it like you are long gamma. It whips around in $40 clips for no reason. See chart.

The main pushback I got on the short Korea trade was that some valuations in Korea are still low (SK Hynix at 17x, e.g.). This is not really relevant to the time horizon I am trading here. I am trading a behavioral and technical and tactical view. And if you look at a P/E chart of the KOSPI, it is a sin wave and currently near the highs. Anyway my view is more about:

1. KOSPI rally now exceeds NASDAQ 1999 rally. Bigger move in less time.
2. ETFs with memory shortage exposure traded to massive premiums in China. The Huatai-PineBridge CSI KRX China-Korea Semiconductor ETF was halted trading after the premium over its underlying assets surged to more than 17%. We saw the same thing at the peak of the silver bubble. Smart money doesn’t buy ETFs at a huge premium. It’s a good reverse indicator when this happens.
3. SanDisk double top at $700 and Western Digital opting to dump at the highs.
4. Any tiny reversal can create a massive reversal when it’s a pure momentum trade and every human being in the world is long.

I almost never factor price/earnings into my trading, except as an occasional screener for super cheap or super expensive things. If SK Hynix screens as cheap after a 1000% rally, that tells me there is probably something wrong with the metric, not the lowness of the valuation. Anyhoo. I am looking for one more huge move to the downside in KOSPI and then I will cover everything.

If you are bullish Korea, the dream entry point is 725 in KMH6 (futures) or 300 in KORU (leveraged ETF).

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USDMXN

The USDMXN trade is working so far as the market goes after anything with a position. The market got sucked into a complacent mode yesterday as the BTD flows came in for the start of the month, but now the scary reality of a prolonged conflict in the Middle East where Iran plays some kind of long game is coming back into the mind of the market. There is this lazy view out there that you just buy every conflict. It is probably true, eventually! But the time to get long is when there is visibility on the endgame and right now we have none.

There is no specific macro reason for buying USDMXN. I am simply looking for things that could blow up as people get scared. USDMXN and USDBRL have been viewed as two bulletproof, all-weather safe havens and that is not how emerging markets FX works. It feels like a free lunch for a long time, then convexity strikes. I am trying to position for that convexity. Again, tactical, not macro.

My target is 17.83/17.86, and I am adding a take profit in the sidebar at 17.7940 just ahead of that. Here is the explanatory chart. Note there is a lesser minor high at 17.73 and so watch how it trades there. If you’re bearish USDMXN, 17.80/17.86 is the dream entry zone.

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Final Thoughts

1. When will the MOF or Scott Bessent show their hand in USDJPY? It’s not easy to guess right now, as I presume the U.S. administration has higher priorities than G10 FX and Takaichi continues to show very little concern about a weak yen. Still, above 158, you need to be on guard.
2. If you need something positive, this Fred Again music video will make you happy.
3. Trading Fast Markets… An excerpt from Alpha Trader that feels relevant right now. The link is to Twitter. If you don’t’ have Twitter, this is the LinkedIn version.
4. Retail have wrecked gold and silver. They are no longer safe havens due to crowding. This could change, but for now, when the top trending stocks on r/wallstreetbets are GLD and SLV… That’s not good for the OG goldbugs.

I hope you are able to joust your way to large profits today.

When animating the bird sprites in Joust, artist Janice Woldenberg-Miller referenced Eadweard Muybridge’s 1902 book Animals In Motion, which includes a section on birds.

The chapter features sequential photographs of various birds in motion as seen from the front and side. Cool Christmas present idea for my wife to buy me, if she’s reading this.

https://www.ebay.com/itm/227052473770

good luck ⇅ be nimble