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Sector Rotation in Anticipation of Rate CutsMarkets have rebounded sharply after last week's fear-driven decline. Despite this, rate cuts are still anticipated in the upcoming FOMC meetings. Changes in monetary policy often benefit some sectors over others, providing investors a chance to adjust their portfolio allocations accordingly. This paper delves into a comparative analysis of sectors around monetary policy pivots to highlight how a spread between S&P Financials Select Sector and S&P Utilities Select Sector stands to benefit in the coming months. It also describes a hypothetical trade setup using CME E-Mini S&P Select Sector futures which can be used to express the view in a margin-efficient manner. RATE CUTS WILL HURT FINANCIAL FIRMS Financial firms benefit significantly from higher rates, as these drive net interest margin (NIM) expansion, boosting their bottom line. However, when rates start to decrease, this positive impact reverses. The Financials Select Sector ETF (XLF) is comprised of 25% banks, 31% financial services firms, and 16.6% insurance firms. All these firms have benefited from higher rates, albeit the strongest impact may be limited to banks and insurance firms whose overall bottom line is significantly impacted by expanding NIM. In the last three monetary policy pivots, XLF has declined by an average of 5.6% over the following six months. Conversely, at the start of rate hikes, the ETF has typically risen by an average of 3.7% in the subsequent six months. While the most recent pivot in 2019 saw an increase in XLF, the overall average trend suggests a decline. The trend is visible even when examining the relative performance of XLF and SPX. Following rate cuts, the spread declined by an average of 2.8% while during rate increases, it declined by just 1.1%. There is another headwind facing the XLF ETF, particularly banks – rising credit delinquencies. Credit card delinquencies are especially concerning as they stood at the highest level in 13 years as of Q1 2024. Overall delinquencies are also rising and near the highest level since 2021. Updated data from the New York Fed has shown that conditions remained stressed in Q2 with total delinquencies at 3.2%. Particularly concerning were severe (>90 days delinquent) credit card delinquencies at a staggering 10.93%. Consumers are increasingly relying on unsustainable credit card debt to cover expenses. As delinquencies remain elevated, issuing banks must increase loan loss provisions which impacts earnings directly. Source: New York Fed As credit card usage becomes unsustainable, another class of companies in XLF – payment processors - will also be hurt. The largest payment processors (Visa, Mastercard, and Amex) represent nearly 15% of the XLF index. RATE CUTS WILL BENEFIT UTILITY FIRMS Unlike financial firms, utility companies have struggled in a high-rate environment. As their huge capital expenditure is often fueled by debt, higher rates result in narrower profits. As rates decline, debt payments decrease, leading to expanded profit margins for utility firms. Historically, the ETF has shown a significant average increase after rate hikes and a smaller increase after rate cuts. This behavior might be due to investors anticipating a weakening economy following rate cuts, which would favor utility firms. However, the index tends to correct later once rates remain elevated for some time. The impact is close to even when comparing the relative performance against the broader S&P 500 with both periods resulting in a ~6% increase in the spread. Utility firms are also likely to outperform in case of a US recession. Although some of the concerning economic data has normalized over the past week, the risk of a recession in the US persists. As utility firms provide essential services, their cash flows are relatively stable even during recessions. While consumers may cut down on discretionary spending, spending on essential services remains unaffected. Mint Finance previously covered these factors in a separate paper. HYPOTHETICAL TRADE SETUP A pivot in Fed Policy is expected in the upcoming FOMC meetings with the CME FedWatch tool signaling 100 basis points of rate cuts in 2024 itself. Rate cuts will impact different sectors differently. While utility firms stand to benefit from lower rates, financial firms may see lower profits. Source: CME FedWatch The spread between CME E-Mini Utilities Select Sector Futures (XAU) and CME E-Mini Financial Select Sector Futures (XAF) has been rising since March as it has favored XAU. The spread responded strongly to a shift in rate cut sentiment as well as the recession signal at the start of the month. The recent correction over the past week offers an improved entry point into the spread. A hypothetical trade setup using XAU futures expiring in September (XAUU2024) and XAF futures expiring in September (XAFU2024) is described below. CME offers margin offset totaling 60% for this spread reducing the capital requirement to USD 3,740. MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme. DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CME_MINI:XAU1!Long
by mintdotfinance
IWM/SPX spread - Long smallcapsBeen watching for a reversal of the trend between the 2 indexes and a breakout of this bullish falling wedge for a while. Fundamentally it made sense to look for this breakout result because of the looming interest rate cuts and frothy bond yields since the start of the year. Small caps are highly sensitive to such things. Long IWM or TNA is the play on this breakout. But the best value will be found in heavily beaten down individual small caps. If you want to hedge against a market correction long small caps short large would be the other play.
AMEX:IWMLong
by cc1
1
Using TSLA/NVDA spread to find cluesIn yellow is the TSLA/NVDA spread or ratio, and here it shows the jump off the all time lows with the huge price spike post Musk vote. With spread charts you can gain clues on future price action based on the other ticker. For the continued TSLA bull case, we get a pull back in the ratio to form the right shoulder of the IHS and then continue upwards. In that case as long as NVDA continues to consolidate or trend up TSLA will remain bullish too (and outperform).
NASDAQ:TSLALong
by cc1
4
BTC is down >10%; Is this a buy-the-dip moment?Just because something is cheap does not mean it is a good buy, and just because something is expensive does not mean it is a sound investment. This investment adage applies to Bitcoin (“BTC”) ever more so than now. Bitcoin prices dropped 11% over the past week, triggered by substantial BTC sales by the German government. Concerns loom about the forthcoming Mt. Gox repayments, which are likely to increase near term supply. Persistent downward pressure is anticipated as further sales are pending. Yet BTC ETFs are witnessing significant inflows, indicating that investors are capitalizing on lower prices. This paper explores a hypothetical spread trade involving short micro BTC futures and long micro-ETH futures, given the near term headwinds facing BTC and the tailwinds of ETF approval imminent for ETH. BTC DECLINES 11% DUE TO LARGE SALES BTC prices have plummeted by 11% since July 1st, breaching the critical USD 60,000 support level and 200-day moving average. This sharp decline was propelled by a series of negative factors: 1) German government liquidating its BTC holdings: The German government has been liquidating its BTC holdings which were seized by the German police earlier this year. The government has already liquidated 10,000 BTC (USD 550 million at current prices) since mid-June. Crucially, the German government still holds more than 42,000 BTC (USD 2.3 billion) which could have a major impact on markets if sold. The consistent outflows to exchanges in July suggests the impact could be felt in the near term. 2) Mt. Gox begins repayments: On Friday 5/July, Mt. Gox stated that it had started transferring BTC and BCH to its customers 10 years after the exchange was hacked. More than 47,000 BTC was moved out of the Mt. Gox cold wallets on 5/July, suggesting the repayments are ongoing. Given the size of the transfer, the impact could be substantial. While the repayments will take place in a staggered manner, most customers are expected to receive their BTC within the next six months. Aggregate repayments will total up to 140,000 BTC. 3) Large Long Liquidations: Due to the sharp market moves in the past week, BTC derivatives saw large liquidations for both long and short positions. However, the overall liquidations were much larger last week. BTC longs worth more than USD 210 million were liquidated on 4/July and 5/July. The large liquidations further exacerbated the decline. Large short liquidations over the past 12 hours suggest volatility persists in both directions. Source: CoinGlass 4) Fear Sentiment Dominates BTC: BTC’s fear and greed index has rapidly fallen to its lowest level in the past year. Over the past month, sentiment has shifted rapidly from extreme greed to fear. Heightened fear sentiment could impact the resilience of BTC holders. At the same time, periods of extreme fear can also represent buying opportunities. Source: Alternative.me Crypto Fear and Greed Index Long-term BTC holders (HODLers) who have not moved their tokens in more than 1Y have been remarkably resilient so far. Although the balance from this cohort has declined 7% YTD, it has been due to GBTC outflows, the impact of which was absorbed by other ETFs such as IBIT and FBTC. As sentiment swings the other way given the current sharp decline, more holders could start to sell their BTC. 5) BTC ETFs saw huge inflows last week: Following a mixed June which saw outflows from BTC ETFs total USD 1 billion, ETFs are once more seeing inflows. Since 27/June, more than USD 200 million have flowed. The largest inflow was on Friday 5/July, when price fell sharply. This suggests ETF buyers are using the price corrections as an opportunity to buy more BTC. This presents a potential bullish driver for BTC if prices fall too low. ETH RELATIVELY RESILIENT AS ETF APPROVAL BECOMES IMMINENT Mint Finance covered the relative outperformance of ETH to BTC in a previous paper . Approval for ETH ETFs is imminent. Bloomberg analysts previously suggested that approval could come through in early July. However, due to delays and re-filings, the updated approval deadline according to Bloomberg analysts is currently 15/July. Recent re-filings with the SEC showed minimal changes in the applications suggesting the applications are close to their final form and should be ready to trade within next few weeks. ETH ETF approval will drive spot buying and support ETH price. This is likely to drive specific outperformance of ETH relative to BTC. HYPOTHETICAL TRADE SETUP BTC faces multiple near-term headwinds. However, a directional position may be inadvisable given the bargain buying for ETFs and the sizeable, short position liquidations as price recovered on 8/July. Volatility remains high which presents a risk to a directional short position. Instead, investors can opt for a spread trade consisting of a bullish view on ETH and a bearish view on BTC. The spread trade effectively balances out price movements by offsetting declines in one cryptocurrency with gains in another. This approach provides investors with exposure to the relative performance of BTC and ETH. The recent decline in price has led to a decline in the ETHBTC ratio offering a compelling entry point to benefit from the ETF approval while maintaining a bearish view on BTC. The following hypothetical trade setup combines a long position in 19 x METN2024 and a short position in 1 x MBTN2024. • Entry: 0.05295 • Target: 0.05750 • Stop Loss: 0.05050 • Reward to Risk: 1.75x Notably, this trade does not match notional exactly as the current BTC/ETH ratio is 18.85. Alternatively, CME offers Ether/Bitcoin Ratio (EBR) futures that enable investors to gain exposure to the ETH/BTC ratio through a single transaction and match notional exactly. Each contract of these futures corresponds to an exposure of USD 1,000,000 multiplied by the index value (approximately USD 52,280 at a ratio of 0.05228 as of May 31). These contracts enable investors to obtain relative value exposure on these closely correlated assets without taking a directional stance. The EBR contract is also substantially more margin efficient than individual futures on both legs. Liquidity on the EBR contract is lower than the MET and MBT contracts for now. Volumes in the EBR contract saw a strong uptick in June suggesting greater investor activity in these futures. MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CME:MBTN2024Short
by mintdotfinance
Copper's Short-Term Demand Woes, Long-Term GapsCopper is known as the electrifying metal. Copper's warm glow and durable spirit, copper wires the heart of many a machine. This reddish rarity has been super bullish in the recent past but less so now. That doesn't make it less investable. Just that nuanced investing approach is called for. Outlook for copper has become mixed once more, with near term demand remaining downbeat given the continued slowdown in the Chinese property market and buildup in copper stock at SHFE. In the longer term, supply challenges risk pushing copper into a supply deficit with major copper miners Codelco and Anglo American facing supply challenges. Given the mixed outlook, copper has continued to trade in a tighter price range over the past two months. Counter to conventional wisdom, a sideways market also presents opportunities for savvy investors. This paper describes the diverging outlook for the red metal and how investors can deploy a calendar spread using CME Micro Copper futures amid the diverging short and long-term outlook. CHINESE COPPER INVENTORIES BUILD UP BECAUSE OF DEMAND SLOWDOWN Chinese copper inventories have surged to one of their highest historical levels. Furthermore, inventories have been rising during the part of the year associated with drawdowns. Source – Bloomberg Lower demand is one of the factors behind the increasing inventories. The Chinese real estate sector is a major consumer of copper. With the ongoing slowdown in the sector, copper demand has been hit hard. Moreover, manufacturing sector in China is also experiencing a slowdown as China’s official manufacturing PMI dipped back into contraction in May. Source: TradingEconomics Combination of property market slowdown and lower industrial activity is hindering copper demand in the near term. Furthermore, refined copper production among Chinese copper smelters has remained near all-time high levels over the past few months. Source: Bloomberg BULLISH SUPPLY SIDE AND INDUSTRIAL RECOVERY POSE UPSIDE TO COPPER While near-term demand outlook may be downbeat, the medium- and long-term outlook for copper remain bullish. In the medium term, higher demand from the rapidly growing PV (photovoltaic) manufacturing and EV industry are absorbing some of the higher copper supply. While both industries have slowed in recent months, analysts expect them to recover. At their current pace of copper consumption, these industries are more than compensating for the slowdown in the property market. Source: Reuters Additionally, major copper miners, Codelco and Anglo American are dealing with lower production. Codelco, the world's largest copper producer, reported a 9.4% decline in production in the latest quarter compared to the previous year. This decline is attributed to falling ore grades, water restrictions, union protests, and logistical challenges exacerbated by the global situation, including the pandemic and geopolitical tensions. Anglo American also announced plans to reduce its copper production in 2024 as part of a strategy to cut costs and adapt to market conditions. Lower output from major copper miners is a cause for concern given the rapid pace at which the new energy industries such as EVs and PVs are growing as well as the rapid growth in data centers which require substantial amount of copper. With inadequate supply, copper supplies face the risk of being pushed into a deficit. ASSET MANAGERS HAVE REVERSED VIEW ON COPPER BULLISHNESS While asset managers had built up substantial long positions during the sharp rally in copper which took price to an all-time high, they have started to close some of those long positions indicating that in the near-term price may have run ahead of themselves. Source: CME QuikStrike Over the past week, September CME options have seen a buildup in puts while calls have declined. The November contract has seen a similar trend. However, the March 2025 contract has seen a surge in call OI. Source: CME QuikStrike In a similar vein, CME copper future’s term structure has shifted from a steep contango to backwardation over the last three months. However, over the past week, this has started to shift once more as premium of later contracts over front month has started to rise leading to a steepening term structure. HYPOTHETICAL TRADE SETUP Given the diverging outlook for copper in the near-term and later term, investors can express a view on the shift in term structure using a calendar spread consisting of CME Micro Copper futures. The below hypothetical trade setup consists of a long position in Micro Copper futures expiring in March 2025 (MHGH2025) and a short position in Micro Copper futures expiring in August 2024 (MHGQ2024). Investors can also deploy the same trade setup using CME full-size copper futures. The CME full-size copper futures also provide a margin offset for the trade, a calendar spread with the same contract can be deployed with maintenance margin of USD 2,500 as of 24/June. The below hypothetical trade setup provides a reward to risk ratio of 1.43x. Entry: 1.011 Target: 1.055 Stop Loss: 0.98 Profit at Target: USD 492 Loss at Stop: USD 342 Reward to Risk: 1.43x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
COMEX:HGH2025Long
by mintdotfinance
Long ETH, Short BTC on Expected ETH ETF Approval SEC's unexpected nod for Ethereum Spot ETFs (“ETH ETFs”) through the approval of 19b-4 forms has ignited a fresh wave of excitement in crypto markets. This paper delves into the impact on ETH/BTC Ratio fuelled by this development. The ratio has been a laggard throughout the current bull run. ETHER ETF ADVANCES TOWARDS APPROVAL On 23rd May, the SEC unexpectedly approved the 19b-4 forms, permitting CBOE, Nasdaq, and NYSE to list ETH ETFs. This surprised participants who anticipated a rejection. Take note that this does not signify that spot ETH ETFs are approved for trading yet. The applications must still clear the next hurdle, which is the approval of the S-1 form. This process could potentially be drawn out over the next couple of months but there are encouraging signs. Last week, Blackrock updated its S-1 form for its iShares Ethereum Trust (ETHA), suggesting that the issuers and SEC were working towards fine-tuning the details. The Block reported that other issuers were told to send in their updated S-1 filings by Friday 31/May. Additional rounds of revisions are expected before a final decision. Bloomberg analyst Eric Balchunas opines that approval could come as soon as June. A key point of interest for ETH ETFs will be whether the ETH held in these instruments can be staked. Staking Ethereum generates 3.4% APR (Annual Percentage Rate) as of 3rd June. Staking is exposed to risk of losses through slashing. Yet, it makes Spot ETFs attractive to investors. ETH ETF WILL DRIVE SPOT DEMAND Like the spot Bitcoin ETFs, ETH ETFs will drive additional spot demand for the cryptocurrency. Since launch, Bitcoin ETFs have seen more than USD 13 billion of capital inflows . Spot ETFs represents new source of demand and in the month following its launch, inflows drove large price moves. ETH ETFs are unlikely to attract the same level of demand as Bitcoin ETFs. Inflows into ETH ETFs are expected to be a fraction of those into BTC ETFs, with ETH assets constituting about 10%-20% of BTC assets in various regions, according to comparisons of currently listed instruments. Source: Eric Balchunas on X Projecting this level of spot demand, ETH ETFs could witness inflows between USD 1.1 billion (10% of BTC inflows) to USD 2.2 billion (20% of BTC inflows) over the next three months. ETH HAS LAGGED IN THE CURRENT CRYPTO RALLY BTC has been the clear winner in the current crypto rally. BTC is the only large crypto to exceed its previous all-time-high until now. In terms of relative performance, other cryptocurrencies have displayed robust performance too. Other crypto-assets Solana, Dogecoin and Binance Coin have surged to outperform BTC over the last six months. ETH has been a noticeable laggard. ETH had been underperforming even BTC until 20th May. Following the rally after approval, ETH has just managed to catch up to BTC performance but still lags relative to smaller (and riskier) crypto assets SOL, DOGE, and BNB. To get a sense of relative performance, we can plot the ratios of these crypto assets with BTC. This chart makes ETH underperformance relative to BTC even clearer. This underperformance might suggest that investors have moved away from ETH. That risk when flipped could also present an opportunity for ETH to outperform BTC in the coming weeks. ETH/BTC ratio is a mean-reverting quantity and relative to the peaks seen during past cryptocurrency bull runs, the ratio is low. Notably, the ratio rallied sharply after BTC reached new all-time-high levels in the past. HYPOTHETICAL TRADE SETUP Approval of ETH ETFs in the near term is likely to translate into spot buying, driving up prices. A hypothetical trade consisting of a long position in the ETH/BTC ratio will benefit as ETH outperforms BTC. Investors can execute a spread trade on the ETH/BTC ratio using CME Micro Bitcoin and CME Micro Ether futures. Each contract of Micro Bitcoin futures provide exposure to 0.1 Bitcoin and each contract of Micro Ether futures provide exposure to 0.1 Ether. Eighteen contracts of Micro Ether are required to balance notional value on both legs of the trade. • Entry: 0.0547 • Target: 0.0600 • Stop Loss: 0.0520 • Profit at Target: USD 655 • Loss at Stop: USD 336 • Reward/Risk: 1.95x Notably, this trade does not match notional exactly as the current BTC/ETH ratio is 18.28. Alternatively, CME offers Ether/Bitcoin Ratio (EBR) futures that enable investors to gain exposure to the ETH/BTC ratio through a single transaction and match notional exactly. Each contract of these futures corresponds to an exposure of USD 1,000,000 multiplied by the index value (approximately USD 54,810 at a ratio of 0.05481 as of May 31). These contracts enable investors to obtain relative value exposure on these closely correlated assets without taking a directional stance. The EBR contract is also substantially more margin efficient than individual futures on both legs (USD 6,800 vs USD 28,000 for the same notional value). However, investors should be aware that these newly introduced futures have poor liquidity compared to individual Ether and Bitcoin full-size and micro futures contracts. MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CME:MBT1!Short
by mintdotfinance
7
Long S&P and Short Real Estate on Higher for Longer Rates“The only bad time to buy real estate is later” cites investment wisdom. But, when interest rates soar high, real estate investments can and do hurt. Last week FOMC reiterated its resolve to fight inflation down to its target 2%. Inflation has been stubborn and sticky. It has shown signs of trend reversal towards resurgence. Chair Powell’s made clear that rate cuts may take longer to arrive than anticipated. Elevated rates are restrictive for businesses. It leads to shrinking sales and profits. However, recent earnings show heavyweights posting robust growth. While others have shown disappointing earnings. The difference boils down to the industry and sector. Some sectors fare worse than others. Real Estate is extremely sensitive to rates. Higher rates directly impact mortgages impeding buyers from getting into long-term mortgages. Unsurprisingly, the Real Estate Select Sector index has been the lowest performing sector since the start of the Fed’s rate hiking campaign. Underperformance has continued well into 2024 and has also been observed during periods of market rallies. With sustained headwinds facing real estate, underperformance is likely to continue. This provides suave investors a tactical spread opportunity consisting of a long position in the wider S&P 500 index using CME Micro E-Mini S&P 500 futures and a short position in the CME S&P Real Estate Select Sector futures to harness a reward to risk ratio of 1.5x. FED REAFFIRMS HIGHER FOR LONGER Fed fund rates will remain at 5.25%-5.5% for longer given the stubborn inflation trend over the last 12- months. Forget rate cuts. Those hopes are diminishing. The CME FedWatch signals just two rate cuts this year as of 5/May, down from six expected at the start of the year. Source: CME FedWatch Chair Powell’s speech hinted that even two rate cuts is overly hopeful stating that the expected inflation may not be enough to cut rates this year. HIGHER RATES WEIGH ON REAL ESTATE SECTOR Higher rates adversely impact the Real Estate sector. Elevated rates push up mortgage and financing costs. Large financing costs constrains demand. Last October, the 30-year mortgage rate climbed to its highest level in 23 years at 7.79%. Following that peak, the mortgage rates eased to as low as 6.6% in December as expectations of rate cuts started to firm up. Since then, the rates have rebounded. As of 29/April, the 30-Year mortgage rate average (calculated by Freddie Mac) hovers at 7.22%. A measure calculated by the Mortgage Bankers Association showed that as of 1/May, the mortgage rate continues to rise and is now at 7.29%. Higher rates are forcing housing demand lower. New home sales have declined 5% and existing home sales have fallen by 25% since the rate hiking cycle. Home prices continued to rise despite a slowdown in sales. House price index is almost 10% higher since 2022 as inventory of houses hovers near an all-time-low. COMMERCIAL REAL ESTATE FACES IDIOSYNCRATIC RISKS Commercial Real Estate (“CRE”) has been hit with a double whammy from dwindling office space demand and prohibitive cost of financing. Office space vacancy rate reached a new record high of 19.8% in Q1 2024 as per Moody’s data reported on Bloomberg . Recovery in office space demand remains unlikely in the near term pressing CRE sector down. HYPOTHETICAL TRADE SETUP The real estate sector has been hammered. The S&P Real Estate Select Sector Index is 20% lower since the rate hiking cycle began. The benchmark S&P 500 declined at first but has since recovered and now stands 13% higher. For investors to build a directional short is not prudent as the sector has suffered brutal markdowns. This paper argues in favor of a spread between S&P 500 and the Real Estate Select Sector Index using CME futures. S&P 500/XLRE spread has delivered a stunning 45% outperformance since 2022. Investors can utilize CME Micro E-Mini S&P 500 futures which provides exposure to USD 5 x S&P 500 Index. This is one-tenth the size of standard E-mini futures enabling granular risk management. The CME Micro E-mini S&P 500 futures first launched exactly five years ago on 6/May/2019. The demand for these micro contracts has spiked. In April 2024 , these contracts witnessed an Average Daily Volume of more than one million contracts which represents 15.7% YoY growth and 22.7% MoM growth. Micro futures allow for smaller position sizes. It broadens market access and allows for granular and effective hedging by matching notional values closely in spreads. This hypothetical trade consists of a long position in 2 lots of Micro E-mini S&P 500 June futures (MESM2024) with a notional size of USD 51,615 (= 2 (number of contracts) x USD 5 (contract size) x 5161 (index value) ) and a short position in 1 E-mini Real Estate Select Sector futures (XARM4) with a notional size of USD 45,500 (= 1 (number of contracts) x USD 250 (contract size) x 182 (index value) ). Consider the two scenarios which can lead to a shift in the spread ratio: 1) S&P 500 rises from 5161.5 to 5408.6 while Real Estate Select Sector index remains unchanged at 181.8. The ratio becomes 5408.6/181.8 = 29.75. The overall profit, which comes entirely from the S&P 500 position would be (5408.6 – 5161.5) x 5 x 2 = USD 2,471. 2) S&P 500 remains unchanged at 5161.5 while Real Estate Select Sector index falls from 181.8 to 173.5. The ratio becomes 5161.5/173.5 = 29.75. The overall profit, which comes entirely from the Real Estate Select Sector index would be (181.8 – 173.5) x 250 = USD 2,075. • Entry: 28.5 • Target: 29.75 • Stop Loss: 27.5 • Profit at Target: USD 2,471 • Loss at Stop: USD 1,620 • Reward to Risk: 1.53x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CME_MINI:MES1!Long
by mintdotfinance
Will Copper Shine Brighter than Gold?Intricate dance between gold and copper prices is a tale beyond mere metals. It reflects global economic sentiments, industrial demand, geopolitical angst, and investment trends. Gazing into the crystal ball to decipher the future of the gold to copper ratio, a fascinating narrative unfolds, particularly highlighting copper's brighter prospects. Copper is displaying record futures premium unseen since 1994 fueled by supply side concerns. Beacon of positive economic data from China, is helping Copper shine brighter than Gold. This paper delves into the forces propelling copper and illustrates how portfolio managers can use the gold-to-copper ratio to gain risk reduced exposure to copper’s ascent. COPPER SUPPLY IS FACING PLENTLY OF HEADWINDS Mined copper and Refined copper are facing potential supply disruptions. Copper miners have benefited from the growth in supply over the past year. Australian mining giants reported higher annual copper production (BHP up 7% and Rio Tinto up 3%). Both benefited from a higher realized price. Copper mining costs for Australian miners were higher due to outages. While copper operations have done well, other commodities have not. Iron Ore, Aluminum, Platinum Group Metals, and Nickel prices are performing poorly. This has negatively impacted performance of mining majors. BHP profit was flat while Rio Tinto was down 9%. It is likely that miners will start scaling down production to boost profitability. Some have already started. For instance, Anglo American announced that it would lower its copper production guidance by 20% to 730k-790k tonnes. Mine outages are another source of concern. Macquarie Bank highlighted that disruptions remain elevated resulting in supply deficit of 700k tonnes in 2024. Copper shortage risks exacerbating the ongoing raw material shortage at refiners. Chinese copper smelters announced a rare joint production cut last month due to shortage of ore. Consequently, Chinese copper spot treatment charges (measure of refiner profits) plunged 75% in merely two months. Recent guidance from BHP (+7%) and Rio Tinto (+11%) point to a sharp increase in copper production signaling strong demand. Rio Tinto’s own smelter projects are coming back online this year, and its guidance suggests refined copper production will surge 40%. This will exacerbate ongoing raw ore shortage. COPPER FUTURES PREMIUM SURGES TO HIGHEST SINCE 1994 Potential supply disruptions are evident in the market. The contango for copper futures on CME Group is sharply steeper signaling even higher prices in the future. Source: CME QuikStrike Front-month futures are trading sharply higher than the spot price. According to Bloomberg, the gap between LME copper 3-month forward and cash market is at its highest since 1994. Copper prices are clearly sensitive to supply side shocks. CHINA’S RECOVERING ECONOMY SUPPORTS COPPER DEMAND Copper prices are shining bright. Supply constraint is not the only reason. Demand outlook is promising. Chinese economy has started to build up pace. Outlook however remains uncertain. Copper is overwhelmingly impacted by industrial and manufacturing activity and growth. Caixin’s China manufacturing PMI surged from 50.9 to 51.1 in March. It marked the fifth consecutive month of manufacturing expansion which augurs well for copper demand. However, demand side headwinds remain. Besides manufacturing, housing is a key sector driving copper consumption. Housing construction consumes copper for wiring and piping. Persistent housing slowdown will drag down copper demand. TECHNICAL SIGNALS POINT TO BULLISH COPPER COPPER GOLD Both copper and gold exhibit strong bullishness. Technical signals for copper are marginally greater than those for gold. Copper shows stronger positive momentum according to RSI while Gold’s momentum is fading. Gold also faces resistance at its R1 pivot point while copper has found support at its R1 pivot point. OPTIONS MARKET BODE WELL FOR COPPER RELATIVE TO GOLD Positioning on CME options market signals that both copper and gold have a bullish outlook. However, copper’s put/call ratio is lower, indicating a more bullish sentiment. Unlike gold, copper has seen a buildup of bullish positioning over the past week too. COPPER CME copper options have a put call ratio of 0.44 as of 4/April. Source: CME QuikStrike Changes to open interest have been bullish with a larger growth in calls relative to puts over the past week. GOLD CME gold options have a put call ratio of 0.72 as of 4/April. Source: CME QuikStrike Puts open interest has been on the rise, especially in near-term contracts over the past week. COMMITMENT OF TRADERS ALSO FAVOR COPPER OVER GOLD COPPER Asset managers have switched from net short to net long positioning over the past month in CME copper derivatives. However, the most recent report shows short positioning being built up sharply. GOLD Asset managers built up a large net long position beginning March in COMEX Gold. Since then, positioning has since remained unchanged at net long. Asset managers have also been consistently scaling back short positions over the last month. HYPOTHETICAL TRADE SETUP Copper is faced with the potential of worsening supply disruptions. Supply of raw ore for refiners is already disrupted, forcing them to become unprofitable. This situation is likely to worsen as Rio Tinto’s smelting plants come online through the year consuming even more raw ore. Supply of ore is also being cut by miners as they face unprofitable conditions. Supply of ore is also rising. Australian miners stated that production is expected to rise this year. Supply may become resilient if refiner’s scale back production. Demand favors copper with consistent economic recovery in Chinese manufacturing. Housing remains a headwind creating downside risk to demand. Copper prices are high and so is uncertainty on the path ahead. Prices are up 10% YTD as of 4/April. As such, a straightforward long position is risky. Demand at present is not higher, as suggested by the spot discount. In case the disruptions do not materialize, prices could pull back sharply. Alternative to an outright position in copper is the Gold-Copper ratio which exhibits strong mean reversion. The ratio is also elevated right now, owing to the massive rally in gold prices through 2024. Gold is trading near its all-time high, which is limiting demand and further price appreciation. Contrastingly, copper is still far from its highs of 2022. Expecting copper outperformance, a short position in the gold-copper spread can be used to gain exposure to copper’s tailwinds with lower risk. The following hypothetical trade setup comprises of a long position in CME Micro Copper Futures and a short position in CME Micro Gold futures. The position requires two contracts of Micro Copper for each contract of Micro Gold to balance the notional values. Each Micro gold contract provides exposure to 10 troy ounces of gold (representing a notional value of ~USD 23k. Each Micro copper contract provides exposure to 2500 pounds of copper (representing a notional value of ~USD 10.6k). • Entry: 558 • Target: 531 • Stop Loss: 567 • Profit at Target: USD 1,402 • Loss at Stop: USD 333 • Reward-Risk: 4.2x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
COMEX:GC1!Short
by mintdotfinance
Shrinking Inventories Lends Support to Oil PricesCrude oil prices have remained lacklustre and rangebound in 2024. Slow economic growth and abundant production have kept prices muted. OPEC's efforts of supply cuts haven’t helped. Neither have geopolitical tensions. Over the past two weeks, oil prices have once more started to pick up steam, supported by trend of shrinking inventory. Despite the price buoyancy, we expect prices to remain rangebound with supply and demand in balance. Yet even during these periods, positioning tactically can allow traders to harness positive gains. This paper posits a calendar spread in CME Crude Oil futures which provides a reward to risk ratio of 1.3x while remaining directionally neutral. PERSISTENT GEOPOLITICAL RISKS FAIL TO INFLUENCE PRICES While price, the options skew and IV may not reflect it, geo-political risk for oil supply has not dissipated. Geopolitics remains tense with the conflict in Ukraine and the middle east showing no signs of ending anytime soon. Cease-fire negotiations are stuck in a stalemate. Houthi rebels continue to target ships passing through the Red Sea. Conflicts are dragging on. The risk of escalation remains high. Earlier this year, Ukrainian drone attacks on Russian refineries reportedly destroyed approximately 12% of Russia’s total oil processing capacity. According to analysts , continued disruptions and attacks on Russian oil infrastructure is likely to pressure Russian production and exports. Confluence of these risk factors suggests the potential for upside risk in oil prices. Yet, IV does not reflect this sentiment. CVOL index for CME Crude Oil options is at a four-year low and skew is close to zero suggesting demand for call options remains subdued. Source - CME CVOL It is difficult to establish a directional stance based on geopolitical risks given the fragile situation. REOPENING REFINERIES PROVIDE MUCH NEEDED CRUDE DEMAND Towards the end of January, a divergence in crude inventories & gasoline stockpiles started to emerge. US crude inventories saw large buildups while refined oil inventories had large drawdowns. This suggested that while demand for crude products was strong, seasonal refinery outages meant demand for crude oil was subdued. The refinery outages were exacerbated by the cold blast in January which led to unplanned shutdowns. The impact – excessive buildup of crude inventories which led to bearish prices. At the same time, inventories of refined crude products like gasoline showed that demand at the downstream has remained strong. Gasoline inventories have fallen sharply over the past month and stand near their 5-year lows. Data Source - EIA Over the past month, though, refineries have come back online much faster than anticipated. Refinery utilization rate has surged from 80% in early Feb to almost 88% as of 15/March. Data Source - EIA Increase in refinery utilization has provided much needed demand for crude oil. Crude oil inventories have shifted from their huge buildups to drawdowns over the past week. At the same time, gasoline inventories continue to decline at a rapid pace suggesting strong fuel demand. Data Source - EIA In EIA’s weekly petroleum status report for the week ending 15/March, crude inventories fell more than expected (2 million barrels vs 900k barrels expected). The reason for the surprise – higher exports and refinery activity. This suggests that the demand for crude oil in the near term is stronger than many expected after the huge buildups in Feb. OPEC+ SUPPLY CUT EXTENSION FAILS TO ENTHUSE MARKETS At the meeting on 3/March, OPEC announced the extension of their voluntary production cuts till June. Cuts remain at around 2 million bpd, unchanged from previous guidance set in November 2023. Despite the extension of cuts, crude prices remained muted. According to S&P Global , many participants were already expecting the extension. Source - OPEC Monthly Report Moreover, the recent non-compliance of production quotas by some members has become a major concern. In January, OPEC members exceeded their quota by 139k bpd. In February, members exceeded their quotas by 208k bpd. Source - OPEC Monthly Report Most of the non-compliance is coming from a select few nations - Iraq, Kazakhstan, Kuwait, the UAE, and Gabon. Source - OPEC Monthly Report Over-production raises concerns over seriousness to production cut commitments and its long-term sustainability. It is likely that over-production and the eventual roll-back of supply cuts will lead to a higher supply of crude oil later in the year. HYPOTHETICAL TRADE SET UP In the near term, crude inventories are likely to see increasing drawdowns given the rapid ramp-up of refineries and persistently high fuel demand. Outages in Russia are also impacting near-term supply on a global scale. Yet the supply outlook later in the year is less promising. The compliance of OPEC+ supply cuts are fading. Seasonal trends show that crude inventories tend to rise during the summer. Data Source - EIA Investors can take advantage of these trends by executing a calendar spread consisting of a long position on near term CME WTI Crude Oil Futures and a short position on a later expiry. Though, the backwardation on crude oil has become steeper over the past month, it potentially has scope to steepen further. The following hypothetical trade comprising a long position on the near-dated contract expiring in April (MCLK2024) and a short position on the further dated contract expiring in May (MCLM2024) provides a compelling reward-to-risk ratio of 1.4x. A calendar spread using WTI Light Sweet Crude Oil Futures is directionally neutral. It is also beneficial from a margin standpoint. CME offers margin offsets for calendar spreads due to its relative lower risk profile of the trade. The spread requires maintenance margin of just USD 40. • Entry: 1.0063 • Target: 1.0135 • Stop Loss: 1.0003 • Profit at Target: USD 57.8 • Loss at Stop: USD 48.6 • Reward to Risk: 1.2x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
NYMEX:CL1!Long
by mintdotfinance
Stock Market Logic Series #7Options Spreads strategy, let us talk about it. If you want to buy high-probability spreads, there are specific places where you have the advantage. And, there are other specific places where it is just pure gambling. And, we don't gamble, EVER. We take calculated risks, where the probability of success is much higher than the probability of loss. -------------------------- In spread options, what matters the most is where the price will be at the expiration date. WHY? Because your profit can only be realized near the expiration date unless the price moves dramatically into your favor and far away from the spread strikes. So, if what matters is where the price is at the expiration date, you want that in this future date, the price of the stock to be away from it, with HIGH PROBABILITY. As you can see from the drawing on the chart, the blue channel signifies the probability area of where the price should be in the future. So if in the future, you are in the probable zone, as seen in the RED spreads, at the expiration date, the price could be below or above your strikes, and thus be successful or not successful, so your odds are more 50-50. since the price can just stall there, and oscillate in this area, since it is the probable area where the price should be. But if you look carefully at historical data, you can see that in the GREEN (MONEY ZONES), the price gets immediately rejected... WITH THE HELP OF T-I-M-E And when you buy spreads, you want TIME to be on your side... So now you can easily see... how to make TIME which is a HUGE factor in spreads, on your side! The trend is your friend... IF... you let it TIME to help you... When you use options, and trading options in general you need to know which strategy fits which scenario, and where your HIGH probability trade waiting for you. Just in case you don't know what options spreads are... In simple words... You choose 2 prices of the stock (aka strikes): ------$100 ------$90 and you speculate that if the price in a month will be above $100, you profit 1 point. and if the price in a month will be below $90, you lose 1 point. So it is a 1:1 risk-to-reward strategy. So your advantage comes from knowing where are the pivot points. But not all pivot points have the same advantage... As I just showed you in this post...
NASDAQ:AAPLEducation
by ZoharCho
Bitcoin to continue outshining Gold In 2024Bitcoin (“BTC”) – the millennial gold - continues to outshine traditional gold. BTC prices have climbed higher after the listing of spot ETFs. A wider bull rally in the cryptocurrency markets is also underway. ETH touched its highest level since 2022. The total cryptocurrency market cap is 14% higher YTD. A diverging outlook between BTC and Gold is emerging. After reaching all-time-high in December 2023, gold prices have pulled back this year. Stronger dollar fuelled by delayed rate cut expectations are taking shine off gold. Halving event and bullishness from spot ETFs make for shining prospects ahead for BTC. In sharp contrast, macro backdrop dragging gold down leading to potentially lacklustre price performance. Collectively, this makes for a compelling spread positioning comprising long BTC and short Gold. BTC RALLY HAS MORE STEAM BTC is 12% higher YTD. It has marched higher with solid momentum post the spot ETF launch. Multiple factors point to further gains in store. For one, sustained net inflows to spot ETFs signal strong demand from US investors for BTC. Volumes in spot ETFs reached its highest level since its launch on 21 February 2024. Participation was broad across several investors with 32,000 individual trades (sixty times the average), indicating widespread demand across investors. BTC halving is due in a little less than a month, fuelling additional bullish sentiment. Lower supply of newly mined coins is expected to drive prices even higher. BTC is currently trading 15% below its production cost, calculated by Capriole Investment using power consumption figures from the Cambridge Bitcoin Electricity Consumption Index . This index has served as a strong price floor over several years. Miners are unlikely to sell their BTC holdings below their cost of production, consequently reducing selling pressure below this key support level. While BTC production cost acts as an indicative support level, BTC may continue to trade below this level. For one, miners have built up BTC holdings over the past year, which they can opt to sell for a substantial profit below the new production cost. The surge in BTC over 2023 has started to spill over to other digital assets. A broader digital asset rally is under play with ETH retesting its highest level since 2022 this month. The potential for further appreciation in BTC is high if markets are currently at the cusp of a wider crypto rally. Finally, traders have been avoiding substantial short positions. As Bitfinex highlighted , the short-squeeze ratio is lower this year, compared to previous years which suggests large whale investors have not been taking substantial short positions. However, institutional positioning in CME BTC futures paints a contrasting picture. Asset managers have built up record long positioning while leveraged funds have built up record short positioning on CME BTC futures. DELAYED RATE CUTS TAKING SHINE OFF GOLD Delayed rate cut expectations have led to a resurgence in the dollar causing a pull-back in gold prices. Gold faces a double whammy in terms of asset rotation as both equities and the dollar remain strong. RECESSION IS OFF THE CARDS Mint Finance described gold performance during recessions and soft-landings in a previous paper . In summary, while gold prices rally sharply during recessions, performance is flat during soft landings, a situation where inflation subsides, and economic growth remains resilient. Over the past two soft landings, gold delivered flat returns. While a soft landing is yet to be realized as both inflation and rate outlook for 2024 remains uncertain, a recession in the US has become a remote possibility. In fact, the Consumer Board has abandoned its long-running call for a recession in the US. Consumer Board’s (“CB”) Leading Economic Indicator (LEI) signals turning points in business cycles and near term economic outlook. Since July 2022, the LEI signalled a US recession with the LEI in decline. LEI fell to 102.7 in January 2024, its lowest level since 2020, yet CB has stated that it no longer anticipates a recession in the US. CB still anticipates a slowdown this year with growth expected to be near zero in Q2 and Q3. Yet several LEI components have turned positive over the last six months, including equity performance. An overly hawkish Fed makes the much expected Fed pivot less likely, for now, but the strength in the broader economy across businesses and consumers makes a slowdown unlikely. FUND FLOWS – TALE OF TWO ETFs Fund flows for BTC and Gold ETFs also suggest a vastly diverging picture. Investors have responded exceedingly well to spot ETFs. Cumulative flows for spot ETFs have exceeded USD 3 billion in a month. For reference, it took GLD - the first Gold ETF - two years to get to this point. Though, as a counterpoint, the ETF market and money supply are much larger now compared to when GLD was launched. Net fund flows for BTC ETFs were close to zero for the first few days after launch as GBTC outflows shifted towards lower-cost ETFs. Since February, inflows to spot ETFs (excluding GBTC) have accelerated while GBTC outflows have slowed. The result is sharp growth in net inflows suggesting strong and positive investor response to spot ETFs. Data Source: TradingView and ETFDB While BTC Spot ETFs has been enjoying consistent net inflows, Gold ETFs have been awash with fund withdrawals and redemptions. Data Source: TradingView Contrasting cumulative net flows into BTC ETFs & Gold ETFs shows a stark divergence in expectations ahead for the price of these two similar assets. Data Source: TradingView and ETFDB Outflows from gold ETF’s represent asset rotation out of gold with some of those assets going towards equities and bonds. HYPOTHETICAL TRADE SETUP An unfavorable macro outlook is weighing on gold while BTC faces a positive outlook with tailwinds likely to push prices higher. A position combining a long position in BTC and a short position in Gold benefits from both rising BTC and falling gold prices. This spread does not compromise on performance as past rallies have yielded similar performance in the BTC/Gold ratio. BTC/Gold spread has not been an effective hedge as the ratio does not perform better during downturns. A hypothetical spread trade consists of long four lots of Micro Bitcoin futures (MBTH2024) and short one lot of Micro Gold futures (MGCJ2024). This position requires margin of 4 x USD 1,120 (=USD 4,480) on the BTC leg and USD 830 on the gold leg: • Entry: 25.32 • Target: 30.60 • Stop Loss: 21.30 • Profit at Target: USD 4,310 • Loss at Stop: USD 3,285 • Reward/Risk: 1.3x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CME:BTC1!Long
by mintdotfinance
6
Arbitrage of cryptocurrencies using indicators Many have heard about P2P cryptocurrency arbitrage using bank cards and exchangers. With this, there are a number of problems and risks associated with blocking accounts, freezing money indefinitely or blocking accounts on the exchanges, since in order to effectively engage in this type of arbitration a trader must have not only his personal cards, but also drop cards (relatives, friends, etc.), and in the case of If there are any problems it becomes extremely difficult to solve them, as well as to explain to banks the origin of so many transfers from different persons. The interexchange arbitration of cryptocurrencies is devoid of all these disadvantages, when transactions are made only on exchanges, and coins are sent only between exchanges and no third-party services, exchangers, P2P platforms and banks participate in the process of such arbitration. How do I find and track such arbitration situations? – situations when the exchange rate for a certain asset on one exchange is lower than on another. This will be helped by a set of indicators that track exchange rate differences for the selected asset on different exchanges. Using these indicators a trader can track how the size of the spread (exchange rate difference) has changed over time, what were the extreme values of this spread and how often it occurs at all. Currently, there are three versions of this indicator. 1️⃣ The first version – the lightest in terms of the load on the hardware – allows you to track arbitrage situations for one selected trading pair. It provides a chart of the spread itself, the definition of extreme spread values, as well as a counter for the number of arbitrage situations in three time intervals. 2️⃣ The second version of the indicator has the same functionality on board, but for three trading pairs. That is, using one indicator you can track the spread on three assets at the same time. 3️⃣ The third version is essentially an arbitrage dashboard showing and tracking 12 trading pairs at the same time. As the authors of these indicators and arbitrage screeners, we use a combination of the 2nd and 3rd versions of the indicator in our work. If this is too heavy for your system you can use the 1st and 3rd, or some one. In the large dashboard version (3rd), we track 12 of the most interesting assets at a time, and in the version with the spread chart (1st or 2nd), we are already looking at a more detailed picture of those of them that are of the greatest interest for further work. What else? In all the presented indicators, you can configure: ✅ threshold values at which additional tinting of the spread chart will occur for a better visual representation of the nature of the movement. ✅ threshold values at which the spread value in its extreme values will be displayed on the chart. Since the charts are located in TradingView price zones other than the actual spread values, this option allows you to quickly understand the real historical spread values that were in the past. ✅ threshold values at which alerts from the indicator will be received through the built-in TradingView alerts function. All you need to do is set the threshold value in the indicator, and then add an alert from the indicator in the TradingView alert settings. It is important to understand that the threshold value for all trading pairs selected in the indicator is the same, so alerts will be sent as soon as the spread value exceeds the threshold value for any of them. ✅ time intervals of the counter for the number of arbitration situations. There are three of them. That is, when analyzing a particular trading pair you can see how many times the spread value exceeded the threshold. For example, in the last 5 minutes, an hour and a day. This will give an understanding of the prospects of tracking the selected trading pair in the future. All that remains to be done is to buy the coin at the price indicated in the Buy row on the corresponding exchange and sell it at the price from the Sell row on the second exchange.
by ArbyTrade
Bullion Ballet: Trading the Gold Platinum RatioGold is the favoured precious metal. Its demand reflects consumer consumption of jewellery, investment demand, and monetary policy conditions. In a previous paper , Mint Finance highlighted these factors in detail. Platinum is also a precious metal, used to create jewellery and to a small extent as a form of investment. Crucially, unlike gold (6% industrial demand), platinum (73% industrial demand) is used more extensively for industrial applications. As gold and platinum share the source of jewellery demand, their performance is generally positively correlated. However, due to the distinct sources of demand as well as the extent to which each precious metal is used for each application, the correlation can break. These periods can offer tactical trading opportunities to benefit from the relative performance of CME Group’s precious metals suite. Particularly in a key ratio called the Gold to Platinum Ratio (“GPR”) which measures the price of gold relative to platinum. WHAT DRIVES THE GOLD-PLATINUM-RATIO The GPR is affected by monetary policy. Though the ratio does not show a distinct impact upon the first-rate cuts by Fed, rapid rate cuts in response to economic crises such as recessions can cause it to rally. The GPR increases during recessions due to investor preference for gold during times of crisis. Interestingly, the ratio has been rising since 2008 as gold price reaches new record highs, while platinum currently faces a cyclical downturn. RECESSION MAY BE UNLIKELY While the GPR faces the potential to increase during a potential recession, there are signs that a recession may be unlikely in the US. US spending remains resilient and has contributed to faster than expected GDP growth in 2023. While growth slowed heading into Q4 2023, it is still expected to expand at a strong 2% in the quarter. Moreover, the January BLS nonfarm payrolls report showed a massive 353k new jobs added. Wage growth was strong at 0.6% MoM, double the analyst estimate. Strong labour market and consumer spending in the US point to a healthier than expected economy. INDUSTRIAL SLOWDOWN WILL STILL HAMPER PLATINUM DEMAND In 2023, 33% of platinum’s demand came from industrial sources according to data from the World Platinum Investment Council . Platinum is used as a catalyst for several crucial industrial chemical processes. In addition, automotive demand represents a further 40% of total platinum demand. In the automotive industry, platinum is used in catalytic converters to reduce emissions. This has been a recent driver of platinum demand due to rising emissions standards and the so-called platinum-for-palladium substitution. In short, palladium is a Platinum Group Metal (PGM) which can be used interchangeably in automotive applications. The surge in palladium prices prompted many automakers to replace it with platinum. These changes will be in place for the lifetime of a car’s production so this trend will benefit platinum for an extended period. While platinum is a standout among the so-called Platinum Group Metals (PGM), the industry has been facing a downturn over the past 2 years with prices sharply lower. Ample above-ground inventories as well as low investment demand has hampered platinum performance. This downturn may not be permanent. Higher automotive demand and growth in hydrogen vehicles are expected to be long-term growth drivers for platinum. For 2024, the World Platinum Investment Council forecasts a smaller supply deficit than 2023. This is largely due to lower industrial and investment demand as well as improved supply. Anglo American, one of the largest producers of refined platinum stated that it expects PGM production to improve, which means ample supply. During 2023, production was hampered in South Africa. Going forward, PGM’s are meant to be a major driver for the mining giant, so efforts to improve production are under way and management also expects prices to recover. However, continued cost pressures may force miners to scale back production. Overall, the slowdown in chemical and petroleum demand as well as ample supply will limit Platinum’s performance in 2024, though price does face upside potential in the medium-to-long term. BENEFITS OF TRADING THE RATIO Platinum faces a mixed outlook in 2024, while there are several long-term demand growth drivers pushing price up, it faces uncertain but bearish production and demand outlooks for 2024. Similarly, gold is benefiting from heightened geo-political risk and strong central bank demand but faces resistance as prices reaches new record highs and a recession looks unlikely. Mint Finance covered some of these factors in detail in a previous post . While the outlook for both precious metals alone is uncertain, a trade on the back of the GPR favours gold. Not only has the ratio been on an uptrend for the past decade, it has outperformed both gold and platinum prices. Moreover, the ratio is not prone to overly large corrections. The largest drawdown in the ratio was smaller than the largest drawdown in gold and platinum prices. HYPOTHETICAL TRADE SETUP To express a position on GPR, investors can opt to use CME Group’s suite of precious metals future. Margin offset of 50% is available for a trade consisting of 1 gold (GC) contract and 2 platinum (PL) contracts. Executing a trade on the May futures contracts (GCK2024 and PLK2024), requires margin of: (Margin for Gold Leg + 2 x Margin for Platinum Leg) = (USD 8,300 + 2 x USD 2,800) = USD 13,900 – margin offset of 50% = USD 6,950. CME options on gold and platinum point to a bullish outlook for both but gold positioning is more bullish than platinum. As of 5/Feb, Gold options have a put/call ratio of 0.48 while platinum options have a put/call ratio of 0.75. Consider the following hypothetical trade setup: Entry: 2.275 Target: 2.530 Stop Loss: 2.100 Profit at Target: USD 23,013 Loss at Stop: USD 15,803 Reward to Risk: 1.46x This position benefits when: • Gold price rises faster than platinum. • Gold price falls slower than platinum. The position loses when: • Gold price rises slower than platinum. • Gold price falls faster than platinum. MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
COMEX:GC1!Long
by mintdotfinance
15
S&P bounces back off September lowOn Wednesday the S&P 500 briefly broke below 4,240 to test support at the lower end of an upward-sloping trend channel that has been building since last October’s low. This took the index back to its lowest level since the early summer and had many traders expecting an extended decline. But it snapped back and in early trade on Friday the S&P had added just under 100 points from Wednesday’s low helped by some better-than-expected US inflation data. Core PCE for August rose 3.9% year-on-year, as expected, but down from the prior reading of +4.2%. This countered the unexpected increase in the CPI readings seen just over a fortnight ago, which appeared to trigger the S&P’s sell-off from over 4,500. Ahead of this week’s rally, the S&P was on course for a September loss of 4.6%, while the tech-heavy NASDAQ 100 was 6% lower. So the positive rejection of support over the last few trading sessions has been a welcome respite for the bulls, if not the bears. But it’s probably too early for the bulls to declare victory. We may see a positive session to end the month and quarter, but there’s still the danger this weekend of a US government shutdown, which, even if short-lived, could be the catalyst for another pull-back. If deep enough, we could see another test of downside support.
SP:SPX
by TradeNation
Seeking Shelter from Recession in the Utilities SectorBoring is better in a recession. Fed Chair reaffirmed his steely resolve to fight inflation. In short, he wants to break the back of inflation "at any cost" to subdue it down to Fed’s target of 2%. Soft-landing is desired. But overcorrection to fend off sticky inflation could tip soft-landing into a hard one. In a recession, economic activities shrink resulting in declining outputs and softening demand across consumers and businesses. Recession leads to rising unemployment and reduced consumer confidence. History has ample evidence demonstrating that defensive sectors typically outperform the broad market index by more than 10% on average. This paper posits a long position in Utilities Select Sector SPDR ETF ("XLU") to harvest potential outperformance gains plus a dividend yield of 3.3% and combined with a short position in CME Micro S&P 500 Index Futures. INFLATION REMAINS HOT; FED RESOLVED TO FIGHT IT CAN LEAD TO RECESSION Last week, Federal Reserve Chair Jerome Powell reaffirmed his determination to tame inflation down to its target 2%. He reasserted his singular focus on restoring price stability in the US. If that requires higher interest rates for longer to get back to 2% target, then so be it. That was the key takeaway from Jackson Hole Central Bankers Symposium in Wyoming. US inflation is much cooler than a year before. History has taught policymakers an expensive lesson to avoid declaring victory too soon. Softening inflation combined with record low unemployment, strong business climate and resilient consumer balance sheets point to a potential soft-landing. However, over correction could tip into a hard landing. WHAT HAPPENS IN A RECESION? During a recession, non-cyclical sectors, like Consumer Staples, Utilities, and Health Care, have historically performed well. The fortunes of these sectors hinge on non-discretionary spending and hence less sensitive to economic fluctuations. These defensive sectors have outperformed the broad market by more than 10% on average during six of seven past recessions. Tech & Real Estate rank among the worst-performers. Dependant on discretionary expenditure, these sectors are the first to face the heat when businesses and consumers cut spending as incomes shrink. UNPACKING THE S&P SELECT SECTOR UTILITIES INDEX The Utilities Select Sector Index ("Utilities Index") is market-cap-weighted and tracks the performance of the largest thirty utility firms in the S&P 500. It aims to deliver exposure to firms from the electric & water utility, independent & renewable power producers, and gas utility industries. The Utilities Sector includes firms that provide essential services such as electricity, natural gas, and water. These firms marshal stable cash flows and low debt levels. Consequently, the sector is described as a defensive play which performs well during economic downturns. The Utilities Index was launched on 16th December 1998. Over the last decade, the index has delivered an average annual return of 5.5%. It exhibits lower risk with a volatility of 12.5%. It is popular among long term investors looking for a defensive investment vehicle. As of August 2023, the Utilities Index reveals an aggregate price-to-cash flow ratio of 10.1x, price-to-earnings of 19x, and one-year forward price-to-earnings ratio of 17x. Largest firm in the index weighs in with a market cap of USD 136.6 billion. The smallest firm has a market cap of USD 8.5 billion. Weighted average market cap of the index stands at USD 51.15 billion. Top ten constituents forming 59% of the Utilities Index as of 22nd August 2023 are: • NextEra Energy (14.85%) • Southern Company (8.03%) • Duke Energy (7.5%) • Sempra (4.88%) • American Electric Power (4.40%) • Dominion Energy (4.34%) • Exelon Corporation (4.32%) • Constellation Energy Corporation (3.75%) • Xcel Energy Inc. (3.47%) • Consolidated Edison Inc. (3.37%) Twelve-month price targets for the top-10 in the Utilities Index looks compellingly strong except for Constellation Energy and Consolidated Edison. Mean 12-month price targets are on average 14% above the closing price as of August 25th. Investors securing a long position in the index can expect to generate positive returns from capital gains in addition to a healthy dividend yield. RESILIENCE OF UTILITIES SECTOR IN A RECESSION Experts who have been calling recession have been stumped and humbled with the resilience demonstrated by corporations and consumers. A recession may be round the corner. Or we are living through a rolling recession and rolling recovery which impact one sector at a time. The chart below produced by State Street Research powerfully captures various sector performance across business cycles. If a recession is round the corner, then holding a long position in Utilities is an astute investor choice. COMPREHENDING UTILITIES SELECT SECTOR SPDR ETF ("XLU") XLU is a convenient low-cost option for investors to secure exposure to the U.S. utilities sector. It was launched in Dec 1998 and has a low expense ratio of 0.1% of AUM. XLU's AUM stands at USD 14.39 billion. Over the last six months, XLU has had a net inflow of USD 150.2 million. XLU has a 20-day volatility of 12% and a beta of 0.52x. It pays out an annual dividend of USD 2.10 amounting to an annual dividend yield of 3.31%. TRADE SET UP A sector's outperformance does not necessarily mean that it will appreciate during a recession. Since, equity prices generally decline during recessions, outperformance can also mean that the decline in defensive and non-cyclical sectors will be less severe than the decline in growth sectors. Investors can use a spread position to benefit from sectoral outperformance even when equity prices decline. This is because the losses from the long leg will be offset by profits from the short leg which is likely to perform worse. The proposed trade set up comprises of a long position in XLU and a short position in CME Micro E-Mini S&P 500 Index Futures expiring in December 2023 (MESZ2023). The XLU ETF settled at USD 63.63 per share on August 25th. Each lot of MESZ2023 provides a notional exposure of index value times USD 5. MESZ2023 settled at 4463 on August 25th delivering a notional value of USD 22,315. • Entry: 0.0142 • Target: 0.0160 • Stop Loss: 0.0135 • Profit at Target: USD 5,347 • Loss at Stop: USD 2,200 • Reward/Risk: 2.43x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
AMEX:XLULong
by mintdotfinance
Short Semiconductors by Trading SOXS LongThis chart shows the long-term ratio between SOXL/SOXS. The intent is to detect reversals between semi-conductors long and short. At the pivot high, the price of SOXL compared with SOXS is at its highest. With a retreat from the pivot high, the price of SOXL is retreating while SOXS is rising. Historically in 2022 as shown on the chart, pivots were with a ratio of 1,25 to 2,35 while the low pivots were with a ratio of 0.2 to 0.6. At present SOXL has run up and over-extended as part of the AI breakout phenomenon. The ratio of 1.8 is in the reversal zone where SOXL price is dropping while SOXS price begins a significant rise. At present, the mass index is above 27 and awaiting a drop below 26.5. The second indicator rate of change (ROC) detects spikes in the SOXL /SOXS ratio presumptive for a pivot. The last time SOXS ran up over a long term ( with SOXL turning down) was August to October when price increased from $33 to $88 representing a 266% rise. I see this as a prior supertrend that could now be repeated again. In conclusion, this idea leads me to take a swing long position is SOXS which I expect to trend up over a period of a couple of months or more.
AMEX:SOXLLong
by AwesomeAvani
4
TLT / TBT Ratio - a bonds long and short oscillatorOn the daily chart- I have plotted the TLT (Long Bond Leveraged) ETF vs the TBT (Short Inverse) as a ratio. The ratio is running on a cycle between high and low. On the chart for reference is a Hull Moving Average of 20 days. A more frequency cyling could be achieved with a paid Tradingview subscription and a charting time frame of 2 or 4 hours. For the trading idea, when the hull moving average is upgoing and the price is above it, the TLT can be bought while when the moving average of the ratio is decreasing and price is under it, the TBT can be bought. At a high pivot point, all TLT is liquidated and a TBT trade is taken . For a low pivot point, TBT positions are closed and TLT long trades are taken. The best trades are at the pivot points and when a doulble top or bottom are put onto the chart.
NASDAQ:TLT
by AwesomeAvani
What’s for Dinner: Beef or Pork?CME: Live Cattle ( CME:LE1! ), Lean Hog ( CME:HE1! ) When I started my career in commodity futures two decades ago, I took lectures from a former trader at the CME livestock pit. Mike used his favorite trade to explain the complex concept of inter-commodity spread. Here it is: Beef and pork typically had a retail price difference of $1 per pound. For example, a local butcher shop prices pork loin roast at $1.99/lb. and ground beef at $2.99. This price relationship was stable but subject to seasonal variations. Whenever the price spread gets too large, it has the tendency to converge to the long-term mean. Mike believed that cash market price pattern drove futures price relationship. When he observed the spread growing to $1.80, he would short the cattle-hog spread: Sell CME Live Cattle Futures and Buy CME Lean Hog Futures. With this trade, Mike expected hog/pork prices to go up relative to cattle/beef prices, reducing the spreads in both the spot and futures markets. This trade was remarkable in that it mainly relied on common sense and easily observable data. As long as you know beef comes from cattle and pork from hog and could go to grocery stores to check out the prices, you could handle this trade. Could we still deploy Mike’s strategy today? The answer is yes. Comparing to the pre-Internet age, we now have a lot more data available to validate this trade idea. Therefore, besides planning a trip to Costco or Super Wal-Mart, I suggest you read on. Cash Cattle Markets Live cattle trades in Texas, Oklahoma, New Mexico, and Kansas averaged $170/cwt (100 pounds) for the week ending May 12th, according to USDA data. This represents a 21% gain over the year-ago price of $140. Cattle auctions in Nebraska, Iowa and Minnesota averaged $175-176/cwt last week, up 22% y/y. USDA weekly Southern Plains cash cattle price trend shows the five-year average at around $120. Cattle price has been rising rapidly in the past three years. Cash Hog Markets Market hogs averaged $77.31 last week, down $30 (-28%) y/y, according to the USDA. Current price is approximately $5 below the five-year average. The latest CPI data shows that consumer price grew at an annual rate of 4.9% as of April. While food inflation is much higher at 7.7%, the category “Meats, poultry, fish, and eggs” only logged in an increase of 2.8%. However, not all meats are created equal. Beef price continues to go up, while pork, chicken and eggs pulled back from last year’s high prices. WASDE Report USDA closely monitors agricultural market conditions and publishes the monthly World Agricultural Supply and Demand Estimates (WASDE). The latest WASDE, published on May 12th, estimated the total U.S. red meat and poultry production for 2024 at 1% below 2023 level, as lower beef and lower pork production offsets higher poultry production. Beef production is forecast lower with expected declines in both fed and non-fed cattle supplies. Pork production is forecast slightly lower. For 2024, cattle prices are forecast above 2023 on tighter supplies. Hog prices are forecast higher on improved demand and slightly lower supplies. CFTC COT Report The CFTC publishes the Commitments of Traders (COT) reports and provides a breakdown of open interest for futures and options markets. It categorizes the reportable open interest positions into four classifications: • Producer/Merchant/Processor/User • Swap Dealers • Managed Money • Other Reportable What’s the key takeaway from the May 9th COT report on cattle and hog? Live Cattle futures (LE) o LE open Interest: 317,715, down 8.5% from previous week; o Managed Money decreased long positions by 11.7%; their long/short ratio is 7.1. Speculative traders are still bullish on cattle prices, but they have started to take profit. Lean Hog futures (HE) o HE open Interest: 230,026, basically unchanged (-0.1%) from prior week; o Managed Money increased short position by 14.9%; their long/short ratio is 0.68. Speculative traders are bearish on hog prices. Cattle and Hog Spread Trade – Explanation and Illustration The 20-year chart shows that the price spread between live cattle (LE) and lean hog (HE) broadly stays in the range of $20-$60 per 100 pounds. Whenever the price breaks out of the range, it will get pulled back in. From January to May 2001, the spread fell nearly $50 from $45 to -$2. However, it rebounded strongly to $38 in just two months. Last May, from the bottom of $22, the spread rose all the way to $92 in March. It recently pulled back to $80, which is still well above the upper range of $20-$60. If you study the market fundamentals in hog and cattle, you will find significant uncertainty about future price trend. However, based on historical data, it’s not unreasonable to expect the spread to narrow and converge to the mean, regardless of whether the individual prices are trending up or down. The spread relationship holds true because of the substitution effect. High beef price would nudge consumers to lower priced pork. The change in demand in favor of pork would pump up its price relative to beef price, reducing the spread at the end. If a trader holds this view, he could short the cattle-hog spread like what Mike did 20 years ago: Sell CME Live Cattle Futures and Buy CME Lean Hog Futures. October cattle contract (LEV3) is quoted $166.2 per 100 lbs., while October hog contract (HEV3) priced at $77.425. on May 12th. Thus, the price spread is $88.775. Both contracts are based on 40,000 pounds of meat and require $1,600 in margins. For the spread to narrow $1, our trade would gain $400. If the cattle-hog spread falls back to the upper range at $60, the futures account would profit $11,510. Using the initial margins of $3,200 as a cost basis, the spread trade return would be 360%. The above example is for illustration only. Our trade would stand to lose money if the price spread did not converge. For example, if the spread widens to $92, futures account balance would be reduced by $1,290, a negative return of -40%. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
CME:LE1!Short
by JimHuangChicago
A Beefy Premium.Live cattle recently hit an all-time high, leaving us wondering if the rally has gone too far. The front month contract reached 177 on April 13, surpassing the previous record set in November 2014. Meanwhile, lean hogs have been trading lower since last year. One way to assess this trend is to look at the spread between the two livestock markets. Both the absolute price difference and the Live Cattle/Lean Hog ratio are currently at highs. The absolute price difference is at its second-highest level ever, with only March 2015 having a higher reading. The ratio spread, meanwhile, is trading at the higher end of the range since 2015. So, what's driving this trend? Well, we could start by looking at what caused the surge in 2015. A mix of live cattle rising and lean hog prices falling contributed to the surge in the spread as cattle inventories bottomed in 2014. Looking at the current supply dynamics, we see the smallest cattle herd in eight years, with the previous low marked by the 2014 episode and hog supplies on a downtrend but still above the previous decade’s average. As consumers become more environmentally conscious, they may prefer pork over beef due to the former’s lower environmental impact per calorie. Additionally, with the price gap between beef and pork increasing, price-sensitive consumers may switch to other protein sources as inflation continues to weigh on their mind. In the longer term, consumer preferences could flip to favour hogs over cattle. Seasonality effects are also pointing towards an unusual year. Historically, May marks the low point for the spread as hog prices run up towards the middle of the year. However, with May already underway, the spread is not close to any lows and lean hogs are still trading down. This suggests that the current year’s spread is trading abnormally high compared to past trends. Given that both Lean Hog & Live Cattle Futures have the same contract unit of 40,000 pounds and price quotation of US cents per pound, we can trade the spread of the two contracts using a 1:1 ratio. To express our bearish bias on the spread we can sell one contract of the Live Cattle Futures and buy one contract of the Lean Hog Futures. Keeping in mind the 2015 run took close to 1.5 years to bottom, we will place our stops further out at 110 and take profit at 45, giving the spread a longer horizon and more room to play out. Each 0.00025 increment equal to 10$. So, will you be switching from steaks to pork chops anytime soon? The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description. Reference: usda.library.cornell.edu usda.library.cornell.edu www.cmegroup.com www.cmegroup.com ourworldindata.org
CME:LE1!Short
by inspirante
Gold Shines as Nasdaq DeclinesGold glows as risk blows. Multiple bank failures and shotgun bank marriages are bringing back scary memories of 2008. Amid gloom, demand for gold blooms. Gold is a resilient store of wealth, offers durable portfolio diversification, exhibits lower volatility relative to equities, and serves as an inflation hedge. As described in our last paper , among the six ways of investing in gold, CME COMEX's Gold Futures ("Gold Futures") is most optimal among them. This paper is set in two parts. Part 1 delves into Gold Futures. Part 2 articulates a spread trade case study comprising of long gold and short Nasdaq yielding a reward to risk ratio >1.4x . COMPREHENDING GOLD FUTURES AND ITS PARTICIPANTS Gold Futures is the world’s most liquid gold derivatives. Fifty billion USD notional is traded daily on average. This leads to unrivalled bid-ask spreads enabling investors to gain capital efficient exposure to the price of gold. Launched in 1974 and trading over nearly 50 years, Gold Futures offer tight correlation to physical gold prices. Gold Futures trade 23 hours a day. Trading starts every Sunday 5pm Chicago Time (6am Monday in Singapore) to Friday 4pm Chicago time (5am Saturday in Singapore) providing near round-the-clock access. Gold Futures provide superior capital efficiency with a leverage of nearly 25x at current prices. Gold Futures come in two sizes. Each lot of the full contract provides exposure to 100 oz. of Gold requiring $8,000 in margins per lot. However, each lot of Micro Gold contract delivers 10 oz. of gold price exposure. Micro contracts which require only $800 per lot in margins provides affordable access to investors while helping hedgers fine-tune their risk management strategies with more precious exposure. When trading spreads, investors can further boost return through margin credits. Broadly speaking, investors, hedgers, and speculators form the active participants in the gold futures market. Hedgers use futures to manage their overall gold portfolio risk exposure. They use derivatives to lock in price for future transactions or to effectively hedge against price fluctuations. Speculators participate in Gold Futures with the intent of punting on gold price moves to generate profits. Investors use gold futures for generating return on capital over an extended period. They tend to focus on underlying fundamentals rather than short-term price movements. All three types of market participants are essential for effective financial market operation. Together they help build deep liquidity pools thereby facilitating robust price discovery. GOLD IS SET TO OUTSHINE NASDAQ The Nasdaq Index comprises of one hundred large and most actively traded U.S firms listed on the Nasdaq exchange. The index includes firms from a variety of industries except financials. These include tech, health care, retail, biotech, and industrial companies. The index is weighted by market capitalisation. During risk-off phases, investors rush to shelter in safe-havens. Gold prices rise. Also, when rates rise, companies whose values hinge on future distant cash flows suffer. As those cash flows get discounted at steeper rates diminishing its present value, share prices plunge. As risks and rates rise & remain high, Gold will outperform Nasdaq. Validating this view is the positioning of participants based on CFTC’s Commitment of Traders (COT) report dated March 13th. It shows that managed money and speculators are net long on Gold. COT report of the same date shows that leveraged funds are net short in the CME E-Mini Nasdaq-100 futures. However, asset managers remain net long. The options market also vindicates the above views. Options on Gold Futures have a put/call ratio of 0.6x which signifies bullishness in gold. For every 10 bullish gold investors, there are only 6 bearish ones. However, for Nasdaq, options exhibit a put/call ratio of 2x meaning that for every 10 bullish Nasdaq investors, there are 20 bearish ones. Is a long position in Gold Futures a solid trade? Questionable, given that gold has rallied 10% since the start of banking crises. Current gold prices are overbought based on RSI. If crisis deepen, gold may continue its ascent. However, if market gains comfort from bailout assurances, gold prices will soften. Therefore, a directional long position in gold is beset with risk. However, as rates continue to rise or remain high, Nasdaq will struggle as growth firms get punished with discounted present value. Hence, this case study argues that a spread trade to long gold & short Nasdaq will deliver a compelling positive yield. Yes, growth stocks in Nasdaq have outperformed gold over the past twenty years. Yet, these stocks will struggle during times of crisis and elevated rates. The Gold-Nasdaq Ratio (“GNR”) had a golden crossover in January 2022 as equities came off its peak with rates rising. Since then, long-term (200-day) moving average has been a strong support for GNR. With GNR trading above this level, it provides investors a compelling spread trading opportunity with strong upside and limited downside. A long position in CME Micro Gold Futures expiring in June 2023 (MGCM3) provides exposure to 10 oz of Gold with a minimum margin requirement of $800 per lot. Each contract of MGCM3 represents a notional of $19,940. A short position in CME Micro E-mini Nasdaq-100 Futures expiring in June 2023 (MNQM3) provides exposure to $2 x Nasdaq-100 index with a minimum margin requirement of $1,680 per lot. Each contract of Micro Nasdaq-100 represents a notional of $25,750. Spread trade requires notional values of each leg to be identical. Therefore, a long position of five lots of MGCM3 is required to offset a short position of four contracts of MNQM3 . Margin offsets are available for this spread. The trade entry, target, stoploss, and reward to risk ratio are set out below: • Entry: 15.27% • Target: 16.90% • Stop: 14.20% • Profit at Target: $10,172 • Loss at Stop: $7,230 • Reward-to-Risk Ratio: 1.4x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
COMEX:GC1!Long
by mintdotfinance