CoT reports indicate extended positions, reversal coming

Outlook:

As noted above, the FX market was supposedly closed when the second FBI let-ter was disclosed around 3:30 pm ET. At least two important retail brokers, Oanda and FXCM, consider the open at 5 pm and therefore show an opening gap in all currency prices.

Here's the problem: our data source for intraday data is eSignal. eSignal has trades starting from 1 pm and no gap. If we use the eSignal data for our hypothetical track record, we have the leeway to close positions at our stops and even reverse on Rule 4. But if we use the retail broker open—on a gap—we take a giant loss. This is what happens in futures, for example, where the open is a regulated thing and everyone has the same number (one of the advantages of futures over spot, but we know that ship has sailed). Do we stick to our protocol or disregard the eSignal data as aberrant? Right now it looks like the fair and reasonable approach is to disregard the eSignal data and go find the true open on the chart.

Here's an appeal to readers: please send us an email stating what time your broker opens on Sunday and the name of the broker.

As noted above, the FX market was closed around 3:30 on Sunday afternoon when FBI chief Comey released another letter saying there was nothing in the new crop of emails, after all, and he was sticking to his July decision—nothing here to prosecute. You can't put the genie back in the bottle—how many voters cast early votes based on the first letter saying the case might be re-opened? The FBI's behavior is a disgrace. It would possibly form the basis of a challenge to a Trump victory, should that awful re-sult ensue. We personally think the President should fire Comey right away, plus those pro-Trump guys in the NY field office who pushed this whole thing and put confidence and respect for our institutions in such danger.

The FBI Affair reminds us that we can forget the upcoming data and the Fed's putative rate hike in De-cember. The only thing that counts is the election. Last week's risk aversion was nearing panic levels, with the S&P down nine days in a row for the first time in decades. VIX closed at 21.86, better than 22.08 the day before but not in friendly territory. The dollar has been tanking. Gold was up. As we see from the response to the FBI's second letter, we can expect all this to reverse when Clinton wins. Is that right?

Yes, and not only because the probability of a Trump win is so low. The COT reports indicate extended positions in more than one place, including the euro. The charts indicate a reversal is coming, too. See the S&P chart below. It's very rare for a price series to break both the Bollinger band and linreg chan-nel bottom for very long. These two indicators measure the recently normal. It may happen that the S&P does indeed proceed to the 62% retracement line (about 2067.95), but then rise back up. The line-ar regression us as good a target as any and it lies at 2118.25 on Tuesday.

But beware! Bloomberg reports that the S&P swings an average of 1.5% on the day after the presiden-tial vote, but doesn't tell you what happens afterwards: "gains or losses over the first 24 hours predict the market's direction 12 months later less than half the time."

The currency charts are not as tidy as the S&P chart and we don't get the same result from the dollar index or the euro—but we do get the same result in the USD/CHF. See the second chart. The price keeps outpacing the Bollinger band and while still inside the channel, at an unsustainably steep slope. The Friday close (0.9680) is not all that far from the previous lowest low close (0.9635) from Sept 29 (Deutsche Bank crash).

It looks like traders are fixing to buy as soon as a Clinton win is announced. For all we know, they will begin even before the result is known. That's why they call it "speculation." Or maybe they will buy no matter who wins, having already priced in the worst-case scenario. But before then, we will see some backing and filling. Conventional wisdom has it that prices—equities, currencies—will fall on a fairly straight line after the Event from before the Event. Gyrations surrounding the Event are just noise. Noise that can profitable, to be sure, but not a lasting trend-changer. That's assuming Trump does not win.

Something else we still need to watch is oil. We enjoy being sarcastic about what moves the oil market, but there are some interesting developments. Even if we assume OPEC is able to forge a sustainable output cut and it pushes prices up, the US drillers are not giving up without a fight and are poised to respond. Any rise in prices will put them back in business. The FT reports "... the industry's surviving companies, having hunkered down during the crude rout, are regrouping. Earlier forecasts for a slide in US output look dubious in light of recent statistics." Last week the EIA data showed crude production at an average 8.744 million barrels per day in August, 51,000 b/d more than July and 404,000 b/d more than the agency had previously forecast for the month. Last week the rig count went up by 9 to 450, the most since Feb.

WTI was under $45 around Sept 28 when OPEC first talked about a freeze. It went to $52 by Oct 19, but then fell right back to $44.68 on Monday. "US producers took advantage of the brief rally to buy insurance against a weaker market in 2017, analysts say. Government data reveal that the category of trader that includes producers increased forward sales of WTI futures and options contracts by 4 per cent to 608m barrels equivalent — the biggest gross short position on record — in the two weeks be-tween September 27 and October 11." And all those shorts will have to be covered.

But now producers are upbeat. Chevron is running 24% ahead of last year. Other companies, including Hess, are also reporting a faster pace of drilling and producing. Something named Continental Re-sources is raising capital spending by 20% this year. In a nutshell, the US industry is counting on a failed OPEC deal, but even a limited deal is okay. The so-called rebalancing is going to take a whole lot longer.

Keep your powder dry.

FX Tidbit: Retail broker Oanda notified clients on Friday that it was lowering allowed leverage on most GBP pairs from 50:1 to 20:1, effective Monday. First message: close or pare positions, or add money. Secondly, expected volatility is going to be huge. Oanda doesn't comment on the reasons, but we guess that buying on the prospect of a soft Brexit is not very well founded. Sentiment can seesaw between hard and soft scenarios, hence the expectation of account-killing volatility.

Last minute election tidbits

The jobs report on Friday was excellent. The US has added over 15.2 million jobs since the beginning of 2010 and the unemployment rate was halved. But Trump called the report "disastrous." The NYT reports "Little wonder that 370 economists, including eight Nobel Prize winners, have signed a letter denouncing him for peddling ‘magical thinking and conspiracy theories over sober assessments of fea-sible economic policy options." The letter was reported in the WSJ on Nov 1. It says, among other things, "He misinforms the electorate, degrades trust in public institutions with conspiracy theories and promotes willful delusion over engagement with reality." Meanwhile, 19 Nobel Prize winning econo-mists endorsed Clinton, also last Monday. It's fun to find a link in the liberal NYT to the true-red WSJ. We can't remember ever seeing such a link before.

The Guardian newspaper reported that some FBI agents in the NY office hate Clinton. They constitute a "Trumplandia" that leaks negative-seeming information to the press and to the Trump campaign. Law enforcement agencies are not supposed to interfere in the political process. The FBI's reputation is in the tank and director Comey's management skills are discredited—and likely to come in for additional oversight.

Possibly not getting enough attention are third party candidate Johnson and McMullin, who may siphon votes away from both major party candidates. We should cheer McMullin, who wants to lead the Re-publican party out of the Trump wilderness and back to sanity. If he won all six of Utah's electoral votes, plus a few more in neighboring Idaho and Wyoming, the party would have to take him seriously. He is on the ballot in only 11 states but voters can write him in in another 20+ states.

FYI, if there is a tie, the decision goes to the House of Representative—yes, those folks who tried to disable Obamacare more than 50 times, voted to close down the government twice in recent years, and passed a bill on swaps literally written by the Citibank lobbyist. We'd rather have a high school student council. For the presidency, each state gets one vote and it takes 26 to pick a winner. Weirdly, the Sen-ate picks the vice-president.

In the last few days before the Election, Clinton is out campaigning with top-drawer names like the president, the first lady and the veep, plus music and sports stars and actual billionaire Mark Cuban. Trump has no top party names out working the crowds for him except for the now-irrelevant Bob Dole, even top Congressmen from states in which he is appearing--just wife Melania, who gave the comedi-ans a lot of fodder (calling an end to cyber-bullying when she could single-handedly halt 90% of it by taking away Donald's phone). Bill Maher said Melania comes from Slovenia, where they are too poor to afford irony.

Do Trump fans notice that no former president or presidential candidate supports Trump? The top polit-icos today, notably Speaker of the House Ryan, are staying as far away from Trump as they can get. Top political commentators like The Atlantic's Frum are never-Trump. The sane and reasonable Ohio Gov Kasich did a write-in for McCain and Colin Powell will vote against him. The Republican party is in ruins.

All this stuff adds up. Anyone who is still undecided on the Monday before an election is an idiot who has not been paying attention. Do Trump voters really think he will behave any differently from what we have already seen—insulting the Gold Star Muslim family, insulting women, insulting the handicapped, insulting blacks and Hispanics? Unless you are a white male, you are not safe. And yet it's one of the ironies of a free country that you are not required to know anything about public affairs and are not required to vote. Compare to those 95% voter participation turnouts in dictatorships. Russia, for example. Still, an uninformed and misinformed public is a great danger to democracy, which is why Plato preferred a specially trained elite.

On Saturday morning around 10 am, the NYT put out its latest estimate of the voting—85% for Clin-ton, 15% for Trump. In 15 battleground states, Trump has a better than 50% chance in only three Ohio, Georgia and Texas. And the Dems have a 55% chance of winning the Senate. The NYT does a good job of disclosing how it arrives at these summaries, listing every poll. The NBC/WSJ poll—the one that showed Trump leading after the first FBI letter—now has Clinton at 44%, Trumps at 40%. Another good one is predictwise.com, which summarizes betting odds. See the table below. On Mon-day morning at 6:28 am ET, the betting odds are 89% for the Dems and 11% for the Republicans, an improvement over 86/14 on Saturday morning.

		Current	Signal	Signal	Signal
Currency	Spot	Position	Strength	Date	Rate	Gain/Loss
USD/JPY	104.46	SHORT USD	STRONG	11/02/16	103.54	-0.89%
GBP/USD	1.2418	LONG GBP	NEW*STRONG	11/04/16	1.2489	-0.57%
EUR/USD	1.1069	LONG EUR	NEW*STRONG	11/04/16	1.1097	-0.25%
EUR/JPY	115.62	LONG EURO	WEAK	11/03/16	114.30	1.15%
EUR/GBP	0.8914	LONG EURO	WEAK	09/19/16	0.8564	4.09%
USD/CHF	0.9765	SHORT USD	WEAK	10/03/16	0.9726	-0.40%
USD/CAD	1.3405	LONG USD	STRONG	09/15/16	1.3203	1.53%
NZD/USD	0.7312	LONG NZD	STRONG	11/03/16	0.7301	0.15%
AUD/USD	0.7677	LONG AUD	STRONG	11/03/16	0.7668	0.12%
AUD/JPY	80.19	LONG AUD	STRONG	10/06/16	78.48	2.18%
USD/MXN	18.6817	LONG USD	WEAK	10/31/16	18.6214	-1.18%