Friday’s apparent de-escalation of the Ukrainian conflict was all the market needed to rally hard off oversold levels.

Now the question on the minds of traders everywhere is whether this is the resumption of the previous bull market trend, or merely an oversold rally.

Right now I am leaning toward this being an oversold cleansing rally, but there is always a nagging worry that I am being stubborn.

Last week I sold my VIX position and replaced it with a short S&P 500 and Eurostoxx futures position. I stand by that call.

My best guess is that we are going to chop around here for a week or two, basically going nowhere. In the meantime, as things settle down, I suspect the VIX will drift lower.

After we get this short covering rally out of our system, I suspect the new longer term trend of lower will re-assert itself. But absent some really nasty geo-political event (which is always a possibility), I don’t think it is going to accelerate on the downside.

A choppy market that slowly slips lower would frustrate both the bulls and bears. Given the absent of a catalyst to reprice the market in one direction or another, I think that this is the most likely outcome.

Rallies are to be sold, but don’t expect big declines… yet.

What to buy, what to sell…

I don’t think I am going to pull the trigger today into the second big up day of short covering, but I am still interested in buying the Hong Kong stock market.

Also, although I am currently equally short the US and Europe, I probably should be leaning more short Europe. The ECB is making all the same mistakes as Japan did in the 2000s. They are counting on using the price of credit to influence the economy instead of the quantity of credit. In a balance sheet recession changing the price of credit is ineffective. You need to force feed the credit into the system, otherwise the deflationary cycle just perpetuates. Given the lack of decisive credit expansion by the ECB, I expect the European economy to continue to be muddled in a deflationary morass.


We have been leaning short CAD on the belief that the Canadian economy will continue to under perform the US economy. On Friday this forecast was confirmed with the release of the Canadian employment numbers.

Economists were expecting 20k jobs to be created. Instead a measly 200 jobs were added to the payrolls. The Unemployment Rate declined by 0.1% but that was only because the participation rate dropped. It was a crappy report, and the CAD reacted appropriately lower.

Over the past couple of years, many hedge funds have been busy predicting a Canadian housing crash. I have argued that we were going frustrate them with our “Canadian-ness.” There has been no doubt in my mind that Canadian real estate was going to correct, but that it didn’t necessarily need to crash.

As Canadians we have been borrowing too much to build too many houses.

But that doesn’t need to come to a crashing end.

Instead what I expect will happen is that our economy will slowly be overtaken by the US economy in terms of growth. The Bank of Canada will allow rates to stay low, allowing a declining currency to do the work.

The result will be that as Canadians, we will experience higher inflation and a lower standard of living. But it will keep the debt manageable. We will have resorted to the most Canadian of solutions – allowing the Loonie to decline. We have done it for many decades, and the fact that our personal debt is so high relative to the Americans only means we are going to have to do it all the more this time.

There is probably more of a chance that the Loonie crashes than the Canadian housing market.

Our short CAD trade is working, and if it wasn’t already such a big position, I would probably add to it. This is a long term trend and we will be holding this position for many quarters to come.