Moving away from individual securities and US equities on the whole, along the quest for value, I love venturing into my bigger passion, Global Macro Investing. Don’t get me wrong, I’m a sucker for a great undervalued company trading well below book value. But at the same time, my friends will usually find me analyzing TradingEconomics.com and studying futures charts in my free time. If you were wondering, yes, I am writing an article about the price movement of silver during the Final Four, sue me. I tend to find this stuff more interesting than a basketball game (hockey however, is a different question). Nevertheless, let’s get to the hypothesis. In my early learning quest for all things Global Macro, I stumbled upon Macro-Ops.com, and it is now one of my bookmarked investing sites. One of the great things I learned from Alex and the boys over at Macro-Ops was their criteria for investment hypothesis. Let’s break it down: 1) What are the macro economic factors at play? (Tightening or Loosening), 2) What is the hypothesized reaction in the underlying security / commodity depending on the macro situation? (Long or Short), and 3) What do the charts say about the price action? (Where is the trend, and what are my resistance and support levels).
Global Macro Picture
When making global macro trades, I focus on liquidity, but not in the typical investors term. When I say liquidity I mean the flow of money and how tight or loose the monetary policy is. For this, I look nowhere else than the Federal Reserve. Stanley Drunkenmiller once said, “It’s not earnings that move markets, it’s the Fed”, and that’s true.
The Federal Reserve is starting to tighten their monetary policy by raising rates 0.75% about a month ago. This shouldn’t be the only rate hike as the Fed expressed interest in potentially two to three more rate hikes.
- So, overall, the global macro picture presents with a tightening monetary policy, and a higher probability of lower future returns in US equity markets.
What Security Do We Use, and How Would it Be Affected
Now that we’ve highlighted our global macro hypothesis, we move onto which security / commodity to play in order to give us the best risk / reward ratio, while at the same time presenting us with the best set up for maximum profit. Initially, one could think, “Well, why not just short the S&P or short DOW Futures?” That’s a fair question, and it’s a trade I made Thursday on my Paper Trading account for a $200 day trade profit.
With Global Macro, you’re not necessarily looking for a day trade. You’re looking for a long-term trend that you can ride for maximum profit, with minimal risk. Once again, risking 1% of AUM in order to achieve the greatest returns. So, with this is mind, I thought that with spreads tightening between the riskier assets and the safer assets, it reduces the desire and incentive to hold and purchase riskier assets such as US stocks. From that, I hypothesized where investors would put their money if US stocks all of a sudden became less attractive to purchase from a risk premium standpoint. Naturally I went to commodities like gold and silver. Gold and silver usually trade hand in hand with silver correlating highly with the price movement of gold. I liked silver because I thought I could understand it more, and silver also serves a lot of physical purposes in smartphones and semiconductors, as it is a great source of electric connectivity.
2. We will use Silver Futures.
What Do The Charts Say? What is the Price Action?
The main reason I chose silver was because of its chart set up. Using technical analysis, investors CANNOT predict the future, what they can do is spot past trends, and see points of consolidation, and give higher probabilistic trades a chance to become reality.
Here is the weekly chart of silver: Silver. As you can see, there are two important factors that impact my hypothesis. If you look, you can see that the price of silver has crossed not only its 50 Day MA, but also crossed its 200 Day MA. This is an obvious bullish trending signal. Even more convincing, the last trading price closed higher than the open for the day, giving my bullish hypothesis a stronger probability. (Side Note: I am never trying to predict with certainty, I am trying to develop a stronger probabilistic hypothesis of potential scenarios). Silver has fallen from $34 in July 2013 to $18.74 as of 27 March 2017. Could we be experiencing the start of a bullish trend in silver? Let’s put it all together.
Putting it All Together
Given our overall global macro hypothesis in the US markets, we deemed that tightening monetary policy will lead to slower growth, which in turn will lead to a tightening of the spreads between riskier assets and safer assets such as bonds. Due to that overall hypothesis, we then conclude that investors will seek other opportunities to invest their capital, which we believe will be commodities like gold and silver. Putting those two hypotheses together, we culminate it with the price action and the chart pattern that presents a bullish trend upward has a higher probability than that of a breakdown.
I like the entry-level at these points, and given the global macro trade set up, I would enter now at $18.25, and set a stop-loss at $17.70, which would be the bottom end of the candlestick for the last days close. Remember, we risk 1% of our AUM per trade, nothing more. This means that for this trade, your stop loss would be at the point in which you would only lose 1% of your AUM.
Disclosure: No positions in Silver over the last 72 hours.