VAR Shock

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It’s all blowing up right now, but tomorrow is Tuesday. First, be ready for ISM!

by Brent Donnelly

August 5, 2024

Probably a bit too easy to guess the code here

Current Views

Short CHFJPY 171.86

Take profit by exiting between 10 a.m. and 11 a.m. NY time

Buy CADCHF between 10 a.m. and 11 a.m.

Stop loss 0.6024

Melting

There it is, the complete demolition of every debasement and carry trade in the world. We are setting up for a textbook Turnaround Tuesday (TT) here as the standard pattern is as follows (table excerpted from Alpha Trader):

This pattern works so well that long stocks on Tuesday in 2008 made money even as the SPX dropped more than 50% that year.

Here are the 1-day returns of TT using a filter of (Thursday down, Friday down, Monday down >2%). The pattern has Tuesday up 21 out of 31 times with an average return of 1.6%. That’s a huge average for a study showing 1-day returns.

A lot of prices are at or through huge levels. For example, the Nikkei is now down on the year, through the 2024 open, but did manage to hold the huge base constructed in Q4 of 2023 when Buffett made the trade popular.

And the NASDAQ is at least temporarily through the 200-day moving averages. The simple MA is at 17784 and we are trading 17719 right now.

While I had written last week that I wanted to be a pig on the CHFJPY trade, I was imagining a trade that would take a month or two to play out (!) On a move like this, I’m happy to cover and reassess or sell a rally if necessary. The risk/reward of staying short CHFJPY into a possible Turnaround Tuesday is poor, so I plan to cover the CHFJPY short between 10 a.m. and 11 a.m. NY time.

Flipping

First of all, a reminder that the hardcore bearish seasonals are not even close to being over. FX vol tends to be bid through the whole month of August, while the other seasonals are like this:

AUDUSD bottoms August 25
CVIX tops September 1
NASDAQ bottoms August 10
GBPUSD bottoms August 27
USDJPY bottoms August 24
Gold peaks September 5

That said, on a very short-term time horizon, things are so dramatically oversold, and Tuesday is such a bullish day of the week that I am looking for tactical fade trades. The one I like best is long CADCHF because:

I think SNB will be smoothing here (selling CHF to reduce the deflationary impact of the CHF rally).
USDCAD didn’t budge on this whole blow up. The market is already short plenty of CAD and the price action speaks for itself, I think.
Mega resistance in USDCAD from 1.3900 to 13970 (post-end-of-COVID highs).
A tradeable bottom in CADCHF at 0.6060 gives you a reasonable stop loss.

So, for the sidebar, I’m going to add the following trade today.

Buy CADCHF between 10 a.m. and 11 a.m. with a stop loss at 0.6024.

I chose that time because 11 a.m. is when FX volumes peak for the day (and CHF buying tends to peak at that time) and that feels like an OK time to start getting long risky things. And while it has nothing to do with the trade ideas, you might find it interesting to know that CADCHF has never traded this low before. Ever.

One other trade you might consider is to find a limited-downside way to sell VIX futures at 4 p.m. today. Outright selling is too hard a trade to risk manage—it’s much safer to do spreads or something with limited downside. I never do trades with unlimited downside. Trade your own view—none of this is investment advice.

Calendar

ISM is big today as it will either add to the pain or staunch the bleeding. There is a big divergence between the S&P Services PMI and the official PMIs, and I would guess the drop in Manufacturing ISM bodes poorly for today’s Services ISM. Looking back to the year 2000, 35 out of 43 times, when Manufacturing ISM dropped more than 1.5 points MoM, Services ISM dropped too. But economists’ forecasts have Services ISM rising 2.2 points MoM. My bet is that ISM is 65/35 to miss (weak). That said, it’s just a big, important number for the direction of the unwind here, either way. A weak number will trigger kneejerk selling of risky assets.