The Greatest Rally of All Time? The Day of 1987 Crash

Boris Schlossberg

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Howard Marks, the famed investor who runs more that 100 Billion at Oaktree Capital, tells a story of a phone call that changed his life. He had a conversation with Michael Milken who was just starting out as the king of junk bonds at the time. Milken told him that, “If you buy AAA or AA bonds they only have direction. If you buy single B bonds, and they survive, all the surprise will be on the upside.”

Out of that brief encounter Marks took away the lesson that all investments are about price. As he tells Business Insider, “There’s no such thing as a good investment idea, until you’ve discussed price.

Investing well is not a matter of buying good things, it’s about buying things well. And people have to understand the difference. And if you don’t understand the difference you are in big trouble.”

Mark’s observation made me think about the great stock market crash of 1987. I am embarrassed to admit that I am old enough to remember it. And ironically enough I was at Drexel Burnham Lambert, the very firm that Milken made infamous, when the crash occurred.

What very few people realize is that the 1987 crash was also the day of one of the greatest stock market rallies of all time. At around noon, after a vicious sell-off in the morning, stock staged a massive rally that brought the indices almost to breakeven. All in all, the move from the bottom to its apex was more that 200 Dow points or greater than 10% gain in matter or hours. Trader who bought the bottom and exited midday made a fortune. Of course, equities then faded into the afternoon and ended up down more than 500 points on the day or more than a 22% drop -- still the biggest one-day decline in US stock market history. But if you were a trader, there was almost as much money to be made from the long side as there was from the short side. All of which leads me to conclude that in trading just as in investing price entry is everything.

So as traders, we should banish the concept of oversold or overbought. We should stop worrying if we are aligned with trend or not. The only real question to ask whenever you make a trade is -- did I get a good entry or not? The answer to that query will determine your chance of success far more than any strategy you use.

USDCAD Rally Halted?

USDCAD Rally Halted?

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USDCAD Rally Halted?

USD/CAD experienced its strongest one-day decline in 8 trading days. The currency pair is finally waking up to fundamentals after trading erratically on Friday. Oil prices rose another 2.67% on Monday after increasing sharply on Friday. At the end of last week we learned that Canada added 67k jobs in the month of September, the largest increase since April 2012. There was a decent mix between full and part time work, which helped to lift the participation rate to 65.7%. Manufacturing activity also accelerated quickly with the IVEY PMI index jumping to 58.4 from 52.3, the highest level since January. Given these reports USD/CAD should have traded sharply lower particularly in light of the softer non-farm payrolls report.

Technically, the currency pair has fallen back below the 200-day SMA and now appears posed for a move down to the 50-day SMA near 1.3060. If it rises back above 1.3250, then a run to 1.33 becomes possible.

USD/CAD Will 1.3200 – Stop the Rally?

USD/CAD Will 1.3200 – Stop the Rally?

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It’s be a remarkable rally for USDCAD as the pair is up almost 700 points in the month of May despite the fact that Crude is closing in $50/bbl level. The run in the pair is partly due short covering and partly to a more bullish outlook on the US dollar as the FOMC meeting minutes yesterday suggested that a hike may be coming in June. Such a move would widen the rate differentials between the two currencies and could push the pair towards the 1.3500 level.

But before that can happen -- USDCAD needs to overcome serious resistance as the 1.3200 mark. Tomorrow’s Retail Sales could do the trick if they miss forecasts. Markets are already anticipating a decline of -0.6% from 0.4% the month prior but a bigger miss of more than 1% could push the pair well through the 1.3200 figure and open the way to a run towards 1.3500.

Fade USD/CAD Rally

Fade USD/CAD Rally

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Fade USD/CAD Rally

Wild swings were seen in USD/CAD today, which broke below 1.2900 and hit a 5-month low before recovering quickly and aggressively to end the day near 1.3000. The intraday reversal in the currency pair caught everyone by surprise because there was no news or catalyst. Canada’s economy grew 2 times faster than anticipated in the month of January and this helped lift year over year GDP growth to 1.5% from 0.6%. Oil prices also edged higher while the U.S.-Canadian 2 year yield spread moved in favor of losses in USD/CAD. Policymakers don’t appear alarmed with the rise in the loonie with Bank of Canada Deputy Governor Patteron even citing loonie weakness as a source of strength for exports this morning. As such, we believe that the latest USD/CAD rally should be faded as the pair is likely to make another run for its 5 month lows.

Technically, as long as USD/CAD remains below 1.32, the downtrend is intact. In fact as long as it holds below its former support level of 1.3000, the next stop should be the October low near 1.2830.

AUD/NZD – Can the Rally Last?

AUD/NZD – Can the Rally Last?

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AUD/NZD has been on a tear lately -- up nearly three big figures in the past two days alone. Part of the rally has been due to better risk appetite and better Chinese equity which favors Aussie disproportionally over the kiwi. Part of the gains have been due to selling pressure on the kiwi which continues to suffer as Dairy Auction prices lose ground every month.

However, tomorrow the market may get the data that will determine if the rally will last. Over the past year the one key indicator that has propped up the Australian economy has been jobs. Despite all the slow down in China Australian labor markets have been remarkably resilient keeping the RBA away from easing further. This month the market is once again looking at Australia to pump up jobs, however if the number fizzles fresh concerns should flood the market and AUD/NZD could see a sell off back towards the 1.0600 mark.

USD/JPY Chart – Sell into the Rally

USD/JPY Chart – Sell into the Rally

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USD/JPY Chart – Sell into the Rally

USD/JPY has been on a wild ride this month. Having dropped over 1000 pips in 2 weeks, the currency pair rebounded more than 400 pips in 3 trading days but fundamentally we believe there’s another round of weakness before stabilization. In the last 24 hours, we’ve seen a strong recovery in risk appetite because investors were relieved that Chinese markets did not open sharply lower. Although China’s trade surplus increased, imports and exports fell significantly, pointing to continued weakness in China’s economy. Japan’s economy also contracted in the fourth quarter, making the rally in the Nikkei overnight undeserved. We believe that Wednesday’s FOMC minutes will remind investors how low the chances are for a rate hike from the Fed next month and this could be just the catalyst that the dollar needs to make another move lower.

Technically, we view the recent rally in USD/JPY as a correction within a broader downtrend. We expect the bounce to exhaust near 115. Not only is this an important psychological level but it is also right at the 100-week SMA. If this level is broken, the spike lows near 115.50 still needs to be broken for a stronger move back towards 117. However if the currency pair resumes its slide, support will found at the 50% Fibonnaci retracement of 1998-2011 move near 111.75.

USD/JPY – Sell the Rally

Chart Of The Day

USD/JPY – Sell the Rally

Don’t be fooled by the fragile recovery in currencies because China is still in trouble and poised to bring greater pain for USD/JPY. Investors completely ignored the decline in Chinese stocks overnight – the Shanghai Composite Index dropped 5.3% while the Shenzhen Composite fell 6.6% with both indices closing at their lows and we think that is a big mistake. The China story is not over and chances are there could be renewed weakness in the currency this week as the government struggles to control market moves. Chinese trade numbers are scheduled for release and it should be weak as long as the data is not manipulated. As for data, lower oil prices and weaker wages should weigh on Friday’s retail sales report while market volatility will most likely hamper consumer confidence. Also the latest CFTC report from the shortened Jan 5 trading week showed speculators turning net long yen (or short USD/JPY) for the first time in 3 years. Position adjustment such as these are typically consistent with major turns in the currency. We anticipate renewed weakness in USD/JPY this week.

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Technically USD/JPY is oversold and we see the currency pair potentially bouncing towards resistance, which is between 118.50 and 119. However it should fail near that level and make a move towards the August low of 116.20. There’s also a major head and shoulders pattern forming in USD/JPY with 116 as the neckline.

GBP/USD – 10 Days Without a Rally

GBP/USD – 10 Days Without a Rally

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GBP/USD – 10 Days Without a Rally

Ten trading days have past without a rally for GBP/USD. This is the longest stretch of weakness for the pair since September. U.K. data has been weak and while the trade deficit narrowed in November, the improvement was less than the market anticipated with falling exports reflecting weaker demand from Europe and China. The Bank of England meets next week and given the recent trend of U.K. data and market volatility, they will be less inclined to raise interest rates in the near future, which could accelerate losses for the British pound.

Technically such a long and exhaustive move begs for a relief rally and that may happen near 1.45, the next psychologically significant support level for GBP/USD. However if 1.45 does not hold then there is no major support for the pair until the May 2010 low of 1.4230. Should GBP/USD rebound, it will find resistance at 1.4650 and 1.4800.

EUR/GBP – Ready To Rally?

EUR/GBP – Ready To Rally?

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What’s happening with the pound? At one time the market was convinced that the the BoE would be quick to follow the Fed in hiking rates. Indeed the UK economy has performed even better than the US economy, but you would never know that if you listened to members of the MPC. Today Andy Haldane sent tremors through the market when he noted that inflation risks were skewed to the downside and most importantly stated that the central bank must be prepared to act in either direction in order to combat any weakness in the economy.

Although Mr. Haldane is the most dovish of BOE members, even a mere suggestion of possible easing at a time when the market anticipates only tightening from the BoE sent cable lower creating jitters amongst currency traders. Governor Carney offered no help to cable bulls when he reaffirmed that rates are likely to remain low for a considerable period of time.

With UK monetary officials striking a decidedly dovish posture in their most recent comments to the market the prospect of further losses in GBP/USD is high and the pair could test the 1.5000 level before the week is over and that in turn is good news for EURGBP bulls. With euro finding support at the 1.0600 level the pair looks to be carving out a higher low near the .7000 mark and could rally to .7200 if cable continues to sink further.

NZD/CAD Rally Should Stop Near 0.8850

NZD/CAD Rally Should Stop Near 0.8850

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NZD/CAD Rally Should Stop Near 0.8850

NZD/CAD has been on a tear. NZD’s strength comes from U.S. dollar weakness, short covering, improvement in risk appetite and this week’s better than expected PPI report. CAD’s weakness has been caused by softer data and low oil prices. However on a fundamental basis, the rally in NZD/CAD should be short-lived because the recent decline in dairy prices is negative for New Zealand’s economy and will eventually catch up to the currency. Canada is plagued by weaker retail sales but the primary driver of the currency is oil and based on the recent price action, $40 a barrel is proving to be a very important support level.

Technically the most important resistance level for NZD/CAD is where the 200-day SMA and 23.6% Fibonacci retracement 2009 to 2014 rally converge near 0.8850. Support is the 100-day SMA at 0.8592.