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Talking Points:

  • A holiday weekend and the end of the month/quarter presents a strong motivation for speculators to balance their exposure
  • The S&P 500 ended its consecutive quarterly advance at 9, and the stain of volatility lingers as a trend risk into Q2
  • Dollar may better suit trading conditions over the next 48 hours with a clear range, but it is only for the specialists

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The Convergence of Liquidity Drain

With Thursday's close, much the Western World has closed their books for the week owing to a market holiday. While Good Friday is not a global closure; taking the US, most of Europe and a number of Asian financial centers offline will all but snuff out liquidity. There will still be a market, but it is not the type of conditions that there is any hope of starting - much less sustaining - a critical market move such as a major breakout or new trend. What makes our circumstances even more remarkable was that this early deflation for the week coincides with the technical end of the month of March and thereby the close of the first quarter. It was impossible to see this transition coming; which in turn suggests the activity we had seen heading into the session close was period-end adjustment. A rebound in US equities matched a jump in emerging market assets, junk bonds, Yen crosses and other sentiment-aligned markets to signal a risk bounce. This is not a committed move necessarily but rather a reflection that there was a strong speculative push to the preceding two weeks' slide, and easing back form extended exposure meant lightening up on 'short risk'.

How the S&P 500, Dollar and Bitcoin End the Quarter

Trading Conditions Ahead

If you intend to trade the final 24 hours of this trading week, be aware of the conditions you will face. With few financial systems open, there will be a heavier presence of activity reflecting necessary transition and unrealistic speculation. That will translate into an unreliable trading environment. Market depth does not determine when unexpected event risk - especially as it relates to political risk and trade wars - but it can distort the response to such developments. Abrupt volatility and gaps with fast moving markets are possible when there is a systemic jolt, but developing trend is extremely difficult - Randolph and Mortimer demanding the exchange to turn the boards back on from Trading Places comes to mind. Yet, just as there was a substantial unwind into this collective period end, there will be a mass reinvestment when markets reopen for Q2. The US will be on Monday, but Europe and others coming back online Tuesday after a four-day weekend will be the real start to the period. Watch capital flows through this period.

Risk and Dollar

With the rebound in risk assets as the last move for the close of the quarter, we have put a pause on the risk aversion that rose in March. Yet, this temporary receding of the tide does not absolve the markets of their issues. Liquidity breaks are good at lifting the speculative spell that momentum can instill, but the motivation that we have seen so far in 2018 was not merely an inspired speculative run. If mere moderation, the two months (February and March) declines barely dent the exceptional, one-sided market conditions of the past nine years. Further, the extension of trend in more recent years has been heavily dependent on uninterrupted speculation for the bullish run; and the first quarter has caused a schism in complacency. Volatility is now a lasting scar on the market with two strong declines from benchmarks like the S&P 500 and Dow. It will be difficult to pick up with the fundamentally-light momentum play that defined the landscape for so long. For the Dollar, the same break from norm does not in turn significantly raise the probability of reversal. While the currency is a deep discount after 15 months of struggle, the development of trade wars and local political risks threaten a further systemic altitude loss.

How the S&P 500, Dollar and Bitcoin End the QuarterHow the S&P 500, Dollar and Bitcoin End the Quarter

Ranges for the Holidays and After

If you intend to trade during the holiday period, it is best to seek out ranges. While the DXY Dollar Index or EUR/USD range may look like an ideal congestion pattern, even this restrained trading boundary is too wide for the kind of conditions we should expect over the next 48 hours of trade (Friday and Monday). It is important to set realistic expectations for targets and stops. And, setting a trade during an illiquid period to play through into more active trading in the second quarter means placing a trade with the intention of maintaining through a fundamental environment change. In essence, it would be a different trade. For the return to liquidity, ranges are still best until critical levels - like the US indices trendline supports - give way. Ranges from the likes of gold and oil are more realistic alongside EUR/USD. However, a more productive drift is possible as well. The Canadian Dollar has more room to run both fundamentally and technically. We discuss all of this in today's Trading Video.

How the S&P 500, Dollar and Bitcoin End the Quarter

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