Oh, Breakout!

Most of the ideas featured on Signalee are short-term mean reversion trades based on core position trading. For good reason: the opportunities happen fairly frequently throughout the year. However, every now and then markets go straight up without pulling back (like now!). If a trader only uses one strategy then they’re stuck on the sidelines while all their trader-friends make money. Worse, they have to listen to their colleague boast about how much money he’s making on the leftover bitcoin he bought three years ago to buy drugs online and then forgot about until just a month ago.

Commodities: the next major trend

Everywhere you look in the world today asset classes are hitting new highs, all the major economies are all growing, and hot money is chasing asset prices higher and higher. Only one asset class is late to the party: commodities. Commodities slumped in 2014 and fell like a stone through 2015 before bottoming and rebounding at the beginning of 2016.

The massive decline was sparked by the Saudi-led price war in energy. Their goal was to bankrupt as many shale oil drillers as possible in the US in an effort to cripple our domestic energy industry. The long-term thinking was that investors would hesitate to commit to marginal shale projects if they knew the Saudis would pump up supplies and depress prices to the point where the marginal projects were unprofitable. Since energy is a major component of the manufacture of industrial metals and a lot of agriculture inputs, the entire commodity space tanked.

The two limiting factors on the Saudis’ success was the need to finance their own socialist welfare state as well as improvements in US shale drilling technology that lowered the breakeven price point. Combine that with a global economy that is experiencing synchronized growth for the first time since the start of the 2007 financial crisis, and commodity prices are finally on a tear.

But is it sustainable?

The hard part about making macro bets is being right (thank you John Madden). It’s incredibly hard to identify the conditions, in real-time, that’ll lead to a big sustained price move in an asset’s price. So this is why we use core position trading.


The chart below shows DJP breaking out of its two-year base. I don’t know if the breakout will hold – that’s always the risk of any new trade.

But to mitigate that risk I’m using core position trading. By only risking a third of my total potential position size, then I mitigate the losses if the trade immediately moves against me. Additionally, with the remaining two-thirds of the position as dry powder I can trade around the inevitable short-term ups and downs.


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