[October 23 Trading Strategy] "Toward a historic bull market" ~Emori Tetsu's Real Trading Strategy~

Tetsu Emori's Real Trading Strategy October 23, 2017 8:00 AM

Broadcaster: ECM

Good morning.

I appreciate your continued support today as well.

Both U.S. and Japanese stocks have begun to move significantly.

The previous strategies have been working well, but they’ve risen quite a bit in a short period.

Long-term outlook remains unchanged, but let’s watch carefully and proceed with caution.

〔EQUITY MARKET〕

【Market commentary and analysis of the U.S. stock market and Western bond markets】

U.S. stocks continued higher. Fueled by expectations for tax reform under the Trump administration, the Dow Jones Industrial Average rose for a fifth straight day to a new high, and the Nasdaq Composite hit a fresh high for the first time in two days. The S&P 500 likewise reached a new high. The U.S. Senate approved a budget resolution that outlines the framework for the 2018 budget year by a large majority, approving provisions that would allow up to $1.5 trillion in tax cuts over the next ten years. With the Trump administration aiming for substantial tax cuts, investor risk appetite strengthened. Solid corporate earnings reports for the July–September quarter also supported stock prices.

According to Thomson Reuters, among the 88 of the 500 largest U.S. firms that had already reported results, more than 70% had earnings above market expectations. As geopolitical risks such as the North Korea issue ease, strong corporate performance should further lift stock prices.

September existing home sales were annualized at 5.39 million, up 0.7% from August and down 1.5% from a year earlier. Single-family home sales rose 1.1% month-over-month to 4.79 million, while multi-family sales fell 1.6% to 0.60 million. The median sales price was $245,100, up 4.2% year over year. At the end of September, inventory stood at 1.90 million units, up 1.6% from August, representing 4.2 months’ supply at the current sales pace.

Bank of America Merrill Lynch (BAML) reported that $7.5 billion flowed into U.S. stock funds for the week ending the 18th. In contrast, Japanese stocks saw an outflow of $4.4 billion, the largest ever. About 86% of the outflow was related to ETF redemptions. With the House of Representatives election looming, markets appeared to be taking profits. Global stock funds saw inflows of $8.8 billion, with European stocks up $1.1 billion and emerging markets up $1.8 billion. Bond funds saw inflows of $5.8 billion, of which $3.6 billion were active funds and $2.2 billion were passive funds. Among them, government bond funds with lower yields saw a $1.0 billion outflow for the fifth week in a row. Additionally, as risk appetite rose, precious metals funds saw $0.4 billion flow out, the largest outflow in 12 weeks.

Yellen, the chair of the Federal Reserve, visited the White House again the previous day. Although she had just met with President Trump on the 19th to discuss the next chair, it appears that she visited to have lunch with President Trump and Gary Cohn, the NEC chair. Meanwhile, in a TV interview, President Trump indicated that among the leading candidates for the next Federal Reserve chair are Yellen, Powell, and Taylor, Stanford professor, and that he is also considering nominating someone to the vacant vice chair post. He stressed that the candidates to be chair appear to be Powell and Taylor, and suggested that Yellen’s continued tenure could be possible. The next chair is expected to be announced before Trump’s Asia trip begins on November 3.

The suggestion that the chair candidates include Powell and Taylor has drawn attention, and Trump emphasized that he "likes Yellen. Really likes her." He also indicated that there is a possibility of extending Yellen’s term as chair beyond February next year when her current term ends. The next chair is expected to be announced before Trump’s Asia visit begins on November 3.

The five chair candidates are Yellen, Powell, Taylor, Warsh (former Fed governor), and Cohn (NEC chair). Trump has reportedly completed interviews with all five, and the process is in its final stage. It is generally expected to be either Yellen or Powell in the end.

Meanwhile, Fed Chair Yellen gave a speech in Washington warning that the likelihood of reintroducing the extraordinary quantitative easing employed after the Lehman Brothers collapse is uncomfortably high. She added that because the neutral policy rate is now lower than before, we should be prepared for a return to zero. Furthermore, she noted that unconventional monetary policy tools such as quantitative easing through asset purchases, which are different from policy rate manipulations, helped the U.S. economy recover, and she projected that inflation would reach the Fed's 2% price stability target within two to three years.

However, she cautioned that the neutral policy rate, which neither stimulates nor cools the economy, is extremely low compared with the past, leaving less room to cut rates for stimulus. She warned that even if a recession as severe as the financial crisis is not reached, there is a possibility of needing to implement zero-lower-bound policies again. She urged readiness to reintroduce non-traditional measures such as quantitative easing, forward guidance, and paying interest on excess reserves. This likely reflects a concern that the recent stock market rise could be a bubble and that a collapse may follow.

This is similar in spirit to remarks former Fed Chairman Greenspan made when the tech bubble was in its middle-to-late phase. While it is understandable for a central banker to voice such concerns, the difference now is that stock prices are not as expensive relative to earnings as they were then. If one understands that prices are not as overvalued as in the past, such warnings can be treated calmly. Ultimately a bubble would burst and the stock rally would end, but whether we have reached that point now is hard to say.

U.S. Treasuries yielded higher. In response to the Senate’s approval of a budget resolution outlining the framework for the 2018 fiscal year, concerns about growing federal debt and higher inflation led to selling of Treasuries. The 2-year yield rose to 1.580%, its highest in about nine years. The 10-year yield rose to 2.392%, a two-week high. The rise in the 2-year yield reflects expectations that tax cuts will accelerate growth and hasten the pace of rate hikes. Meanwhile, with the budget resolution passed, Republicans in the Senate now have a conducive environment to pass the tax reform bill on their own. If the tax cuts permitted by the budget resolution are enacted, the federal deficit could expand by up to $1.5 trillion over the next decade, feeding higher interest rates. However, this would ultimately be negative for the dollar. On the other hand, moves surrounding the next Fed chair may have contributed to bond selling. Brexit and Spain’s Catalonia independence issue also create uncertainty, leading to limited selling of U.S. Treasuries, traditionally a safe asset. The direction of the next Fed chair will continue to influence interest rate trajectories. Cleveland Fed President Mester, who has voting rights on the 2018 FOMC, stated that a "gradual path of rate hikes is appropriate." She also suggested that growth could be somewhat stronger than for other Fed officials, and that the pace of rate hikes should be somewhat accelerated. Regarding a rule-based approach to monetary policy, she noted that the adopted rule should be revised in light of the economy’s structure, and that a systematic review of information and a policy framework with limited discretion is a good idea. Next year the pace of hikes may accelerate.

European bond markets saw rising yields, following the U.S. leads. German 10-year yields temporarily rose by about 6 basis points to around 0.46%, a one-week high. While the ECB’s cautious stance toward tapering remains in focus, expectations for U.S. rate hikes and fiscal stimulus lifting growth appear to be spreading. Also, Austrian Central Bank President Nowotny said the ECB is likely to decide to reduce its asset purchases next week, but warned that slamming on the brakes would be dangerous, suggesting cautious judgment will prevail. Meanwhile, the yield spread between U.S. and German 2-year notes hovered near its highest level in about 17 years.

【U.S. Stocks Trading Strategy】

The Dow, the S&P 500, and the Nasdaq will remain long. The basic rule remains unchanged. Given how strong the moves have been, it’s not hard to understand Yellen’s concerns. Ultimately, if those concerns become real, prices will fall. It was the same during the tech bubble. Yet after concerns were voiced, prices rose for 2–3 years. This is the critical period. After concerns are voiced, the real action begins. From here, markets could move toward a bubble and then burst it, though there is quite a distance to go. We are in an era of “global synchronized growth” among major economies. The global rally in stocks is just beginning, and the U.S. is leading the way, with Japan about to join. This is now the time. If you’re uneasy, you could step off the peak of the mountain. Once you step off, you may never get back on. The bus may not return. It could be a one-way ticket. But at the peak, that’s how it is. If you step off in the middle, there is a downward bus waiting. When and at what timing you board that downward bus depends on the yield spread between 2- and 10-year Treasuries. If the spread flattens, you should prepare to ride the downward bus gradually. There is ample time before then. For now, there is no need to worry. Therefore, maintain a long-term view and monitor market dynamics with an eye toward developments years ahead. If signs of change appear, recheck at that time. Third-quarter U.S. corporate earnings are broadly solid. Thomson Reuters projects that net earnings for major companies in Q3 will be up 4% from a year earlier. A large number of companies are beating expectations. There is solid backing for stock price rises. There is nothing to worry about.

As repeatedly noted, the IMF is forecasting that this year Russia, Brazil, and Argentina will emerge from negative growth, and that would bring positive growth for all G20 members—including Japan, the U.S., Europe, and emerging markets—for the first time in seven years. The economy is neither too weak nor too strong, and a “Goldilocks” environment of mild stock and bond gains continues. The concern is that European and U.S. rate hikes could occur too hastily. The Fed is beginning to shrink its asset holdings, and the ECB is expected to decide at its meeting on the 26th to reduce the amount of assets it buys starting next year. Bank of America Merrill Lynch’s institutional investor survey indicates that the biggest risk going forward is “policy errors” by the Fed and the ECB. If such missteps occur, it could send stocks lower and create market volatility. While the market appears to have priced in a December rate hike in the U.S., it remains to be seen whether the market can handle a rate hike in the absence of continued inflation. A rise in the two-year yield, even with no clear inflation signal, could imply a shift in policy, but the overall market response remains uncertain. If the market expects a rate increase or not, the path for future policy could become misaligned with inflation data. The question remains whether the stock market can sustain high levels with slower inflation. If valuations remain consistent with earnings, the current stock levels are not necessarily overvalued. However, the Dow has surpassed the ceiling of October’s bullish scenario and has moved to the top end of this year’s range, which is somewhat concerning in terms of pricing strength.

As noted, Nasdaq is expected to climb about 20% by year-end. If the Fed’s projected balance-sheet unwind does not disrupt the market significantly, the uptrend could strengthen further. The price-earnings ratio remains well below bubble-era levels. As prices approach bubble territory, they could surge and become overvalued. Once perceived as overvalued by the market, prices may continue rising for 2–3 years before entering a true bubble. The true bubble would emerge in the future and is only beginning to form. First, the period from 2019 to 2020 should be observed for a tech-led rally. I expect the Nasdaq to rise to roughly two to 2.5 times its current level.

What matters is building a reproducible, long-term investment strategy by looking at historical data and current market conditions. If you are making judgments based only on near-term catalysts, you won’t achieve good results. U.S. stocks tend to maintain their uptrend for about 17 years once they begin rising. The current uptrend began in 2012; from here, an eight-year rise could lead to a peak around 2019. Then a correction, followed by another nine years of gains that could extend through 2028–2029. The Dow’s average annual return is about 8.75%, and at this pace, if the trend continues, by 2029 the Dow could reach roughly 58,800. I want to approach the market with the view that a historic bull market toward a Dow 60,000 level has begun. If you can hold U.S. stocks for more than ten years, past performance suggests you could secure at least a 2x return. This is a hallmark of U.S. equities. By maintaining a long-term view and steadily buying on dips, stock investing remains the timeless approach. Above all, if you hold U.S. stocks and do not sell, you should reap substantial rewards.

【Dow Jones Industrial Average: 2017 Projection Range】

Bull case: 19,310–23,185 (year-end 22,870) / Bear case: 16,050–20,195 (year-end 17,850)

【Dow Jones: October Projection Range】

Bull case: 21,395–22,800 / Bear case: 16,830–18,350

【S&P 500: 2017 Projection Range】

Bull case: 2,182–2,660 (year-end 2,627) / Bear case: 1,823–2,302 (year-end 1,987)

【S&P 500: October Projection Range】

Bull case: 2,460–2,605 / Bear case: 1,823–2,078

【Nasdaq Composite: 2017 Projection Range】

Bull case: 5,228–6,858 (year-end 6,762) / Bear case: 3,911–5,748 (year-end 4,301)

【Nasdaq Composite: October Projection Range】

Bull case: 5,987–6,528 / Bear case: 3,911–4,873

【U.S. Treasury Trade Strategy】

The 10-year note remains a short. There is little room for lower yields, and it serves as a hedge for U.S. stocks.

【Japan Stock Market Commentary & Analysis】

Yesterday’s Nikkei Average rose, marking a 14th straight session of gains—the first such streak in 57 years. Some media compare today with that era, but conditions are quite different. Still, it is an extraordinary run, and regardless of the specifics, there is no doubt it is a remarkable market. Something has changed. The driving force behind current gains has been foreign investors, who have been sizable buyers in recent weeks. Domestic participants—individuals and pension funds—have been net sellers. For a genuine bubble to form, the market would need broad participation, including individuals and pensions. There remains a long way to go before that. For now, near-term highs may be approached, but earnings expectations should support a solid base going into the September quarterly results for major companies. Reuters reports that for the July–September period, earnings among major firms are expected to rise year over year, and many companies have beat expectations. There is ample backing for a continued uptrend; there is no apparent issue.

Looking ahead, foreign investors remain net buyers while domestic investors are cautious. The eventual outcome will depend on corporate results and earnings confidence, as well as broader market risk appetite. The market may remain range-bound with opportunities for selective buying on dips.

If foreign investors continue to buy and the political environment remains favorable, the sell-off risk could be contained. The potential upside remains; however, this is not guaranteed.

【Nikkei Stock Average: 2017 Projection Range

Long scenario: 21,395–22,800; Short scenario: 16,830–18,???【日経平均先物のトレード戦略】Longs continue. Following the House of Representatives election results, the market is expected to begin higher. If this week marks the first time ever for 15 straight sessions, that would be historic. In that case, buying stocks would be warranted. The media coverage will likely run hot. This time, it’s okay. History is about to change, so early participation pays off. In the coming years, many investors who started in the stock market are witnessing a level not seen before, with upward momentum. If you cling to the old notion that “it will go up and then come back down,” you’ll miss the historic rally and end up watching for years. What’s happening now signals a departure from the “pity-moves” of past Japanese stock behavior. The current environment is one of intense optimism and unusual risk-taking, and the market is behaving accordingly. There is a lot of optimism about the election results and corporate earnings. If you wait and hesitate, you may miss the early moves. So, participate now and stay with it.

No, please ignore the above incomplete line.If the trend continues, the upside could persist for years. If you cannot stomach the risk, you may opt out, but for those who stay, the gains could be substantial. We must remember that this marks a shift away from the prior weak performance in Japanese equities. The market environment today is highly favorable for players with high risk tolerance. Foreign investors are driving a strong buying push, and domestic players are gradually increasing participation. A cautious stance is prudent, but the potential upside remains.

However, such a trajectory won’t last forever. The market won’t keep rising forever. There will be corrections along the way. The key is to stay disciplined, buy on dips, and not chase rallies relentlessly.This is the beginning of a new era for Japan’s stock market, driven by foreign buyers and a shift in domestic sentiment. The dip-buying approach is a prudent strategy as long as earnings and valuations stay reasonable. The next few years will reveal how long this momentum lasts.

The shift in Japanese investor sentiment toward a more constructive stance could trigger a broader rally. If foreign buyers continue to accumulate positions, the market could advance further. If individual investors and pension funds begin to participate more aggressively, the rally could intensify further. The Nikkei’s upside capacity remains substantial as long as corporate earnings stay robust and global growth remains on track.

There are many opinions about the timing and magnitude of the next moves. The long-term investor would do well to maintain a broad, diversified approach and focus on fundamentals rather than chasing speculative moves.

In summary, the Japanese market remains in a phase of renewed interest, supported by improving corporate earnings and global growth expectations. The path forward is not guaranteed, but the potential for further upside exists as market participation broadens and liquidity remains ample.

Foreign buyers have not yet finished accumulating, and as long as there is room to buy, the market could trend higher. If domestic investors join in, we could see a sustained rally that challenges previous peaks.

This would be a significant shift from the past. The overall tone remains cautiously optimistic.

By the way, there is a separate analysis using an AI model by researchers from the University of Tokyo who analyzed video footage of Kuroda’s press conferences after the Bank of Japan's policy meetings. They reported correlations between Kuroda’s facial expressions and changes in monetary policy. This is considered one of the world’s first such studies, and it could potentially be used to predict policy changes at future BoJ meetings. The study was conducted by Zenri Mizuki (Nomura Securities) and Daito Yu (Microsoft). They presented their findings at the University of Tokyo at a conference on financial informatics. The study involved analyzing images captured every 0.5 seconds from videos of the BoJ governor’s press conferences and using Microsoft's 'Emotion API' to quantify eight emotions (joy, neutral, anger, surprise, disgust, contempt, sadness, fear), scoring changes that are often difficult for humans to gauge. They found that the distribution of emotion scores shifted in notable ways during press conferences before and after policy changes (e.g., before and after the October 2016 and September 2017 policy announcements). The potential implications for predicting BoJ policy changes are intriguing. There has already been inquiry from investment management firms about the utility of this research. The application could extend beyond finance, possibly into sports as well. Historically, macro data and central bank statements have driven market moves; the reproducibility of this method could add a new dimension to event studies and policy expectations. This research suggests new avenues for forecasting policy moves based on behavioral indicators.

Additionally, not only Nikkei futures but also "options trading" have been discussed in another newsletter. The following is guidance on "Nikkei 225 Options" trading strategies, which have delivered strong returns this year. For example, October-term options yielded 25.6% and September-term options yielded 13.2% return. August-term was slightly negative, but July-term options returned 26%, June-term 11%, May-term 17.2%, April-term 11.1%, March-term 15.3%, February-term 23.4%, and January-term 25.2% returns, providing consistent profits. The year-to-date return has already surpassed 100%. If you want to pursue such sizable returns over a short time frame, options trading can be a highly efficient way to generate income. Options trading is a highly attractive strategy; once you learn the theory, you can apply it indefinitely. There are risks, but they come with the potential returns. Please consider it.

【Nikkei Stock Average: 2017 Projection Range】

Bull case: 18,335–23,400 (year-end 23,020) / Bear case: 14,970–19,915 (year-end 15,620)

【Nikkei Stock Average: October Projection Range】

Bull case: 20,870–22,500 / Bear case: 15,160–17,160

【TOPIX: 2017 Projection Range】

Bull case: 1,473–1,860 (year-end 1,833) / Bear case: 1,215–1,574 (year-end 1,270)

【TOPIX: October Projection Range】

Bull case: 1,680–1,809 / Bear case: 1,235–1,370

〔CURRENCY MARKET〕

Dollar/yen rose. Expectations for tax reform under the Trump administration strengthened the bid, pushing the pair into the mid-113s. The Senate’s narrow approval of the budget framework for FY2018 (FY10/2017–09/2018) had a major effect. With the budget resolution passing, the prospect of large-scale tax cuts took another step forward, increasing investors’ risk appetite and prompting selling of safe assets like U.S. Treasuries, leading to higher yields and a stronger dollar against the yen. Market participants still describe the move as a “risk-on” shift that benefits the dollar due to rising yields rather than simply flight to safety.

There is a perception that the “safe asset yen is being sold,” but this is not simply a correct depiction; it is a market mechanism. When bond selling pushes up long-term U.S. yields, the dollar tends to strengthen and the yen to weaken. That logic must be understood. Meanwhile, coverage around the next Fed chair has also caused some dollar movement; markets expect a decision before Trump’s Asia visit, on November 3, but until then, reports will continue to move the market. If U.S. tax reform progresses, the expansion of fiscal stimulus could accelerate U.S. growth, supporting further dollar strength.

However, in previous Republican eras, larger deficits have tended to weaken the dollar. The Brexit negotiations and the Spain-Catalonia independence issue also constrain safe asset demand for U.S. Treasuries. The trajectory of the next Fed chair will continue to influence interest rate expectations. The IMF, in its current assessment, suggests that global growth will improve and that risk premia will ease gradually. The dollar’s path will depend on policy cues from the Fed and the ECB.

【Currency Trading Strategy】

Long USD/JPY. The important level of 113.20 has been surpassed, and the pair could move higher toward around 114. We want to observe with long positions at this stage. If stock prices keep rising, dollar-denominated assets tend to outperform; if profit-taking drives prices down, the pair will likely move lower as well. The current USD/JPY is highly sensitive to stock markets, so caution is required. If 113.20 is broken again, a downward move could begin, with potential support levels at 111.50, 111.20, and 110.75. The pair is moving away from its theoretical value of 110 yen, so be cautious with long positions as it rises further.

EUR/JPY remains long. The uptrend continues, with potential new highs around 134.41 yen. No need to change the strategy. As long as 131.25 yen holds as medium-term support, there is no need to alter positions. The base strategy remains to buy on dips; long-term support is around 126.10 yen or lower.

EUR/USD remains long. Dollar strength is putting a cap on gains, but the overall trend is intact. The pair dipped below 1.18, but as long as it does not break 1.1650, there is no problem. If it slides further toward 1.1540, buy-side pressure becomes favorable. The base stance is dollar weakness, and with this understanding, one can hold positions for the long term.

GBP/JPY has covered its short position and turned upward. Although the long-term tendency favors shorts, the recent high has been surpassed in the short term and there is room for further upside; we will monitor. In the long run, selling rallies above 152 yen remains effective.

GBP/USD remains short. After dipping below the initial target of 1.3150 and rebounding, a rebound is possible. If this breaks, the pair could fall further to 1.3025, but given the rebound, it may be wise to take partial profits. In the longer term, short positions remain favored until 1.3775 is clearly surpassed.

AUD/JPY remains long. The uptrend continues and a new high around 90.00 is likely if 88.80 yen is surpassed. The base is long, and as long as 86.00 yen holds in the medium term, the trend is considered upward.

AUD/USD is being watched. The pair is turning down. It appears the downside pressure is strong as it cannot break above $0.79. If it breaks below $0.78, the decline could accelerate. We will look for confirmation before considering shorts. In the long term, we would prefer not to hold longs until it clearly breaks above $0.79.

ZAR/JPY remains short. The price has halted at 8.25 and reversed, suggesting a near-term low may have formed. The trend remains downward, and shorts should be maintained until above 8.35 yen. In the long term, selling rallies remains favorable until clearly above 8.5 yen.

【USD/JPY: 2017 Projection Range】

Bull case: 115.25–129.85 (year-end 128.35) / Bear case: 103.60–118.75 (year-end 104.70)

【USD/JPY: October Projection Range】

Bull case: 123.05–127.85 / Bear case: 103.74–109.25

【EUR/JPY: 2017 Projection Range】

Bull case: 119.80–134.85 (year-end 133.70) / Bear case: 107.95–124.75 (year-end 109.65)

【EUR/JPY: October Projection Range】

Bull case: 122.85–127.90 / Bear case: 108.65–116.75

【EUR/USD: 2017 Projection Range】

Bull case: 1.0270–1.1700 (year-end 1.1550) / Bear case: 0.9480–1.0695 (year-end 0.9730)

【EUR/USD: October Projection Range】

Bull case: 1.0980–1.1415 / Bear case: 0.9585–1.0130

【GBP/JPY: 2017 Projection Range】

Bull case: 140.50–156.25 (year-end 154.20) / Bear case: 125.65–146.85 (year-end 127.05)

【GBP/JPY: October Projection Range】

Bull case: 143.60–150.00 / Bear case: 127.60–137.50

【GBP/USD: 2017 Projection Range】

Bull case: 1.2080–1.3710 (year-end 1.3535) / Bear case: 1.1230–1.2510 (year-end 1.1435)

【GBP/USD: October Projection Range】

Bull case: 1.2910–1.3450 / Bear case: 1.1255–1.1895

【AUD/JPY: 2017 Projection Range】

Bull case: 83.20–96.10 (year-end 94.80) / Bear case: 74.45–87.00 (year-end 77.70)

【AUD/JPY: October Projection Range】

Bull case: 89.05–94.30 / Bear case: 74.45–81.70

【AUD/USD: 2017 Projection Range】

Bull case: 0.7070–0.8200 (year-end 0.8080) / Bear case: 0.6480–0.7355 (year-end 0.6625)

【AUD/USD: October Projection Range】

Bull case: 0.7630–0.8065 / Bear case: 0.6535–0.6970

〔COMMODITY MARKET〕“Gold falls, oil rebounds”

【Precious Metals Market Commentary & Analysis】

Gold is moving lower. With the Senate’s approval of the budget resolution opening a path to tax cuts, U.S. stocks and U.S. interest rates rose, and the dollar strengthened, contributing to gold selling. The Senate approved the budget resolution on the 19th by a vote of 51–49. This clears the path for up to $1.5 trillion in tax cuts over the next ten years. Markets view fiscal stimulus as supportive of a stronger U.S. economy, and see this as dollar-positive. There was also chatter about the next Fed chair, with Trump cited as leaning toward Powell, but reports vary daily and the market will be whipsawed until an official decision is made. Recently, Trump is said to favor the five named candidates; the decision is expected before November’s Asia trip. The most recent reports suggest that Trump may prefer a hawkish figure like Stanford’s John Taylor, but he has also praised Yellen as a governor who steered the monetary policy during a long period of low rates, suggesting that if he reappoints her, policy direction may stay the same but the pace of hikes could slow, which would be supportive for gold. Regardless, the ECB’s meeting on the 26th is expected to cut asset purchases starting January, lowering euro-support and potentially supporting gold as a safe asset in a risk-off scenario. In any case, bargain buying remains strong, with a clear resistance above 1310 dollars; a break above that level would bolster a further rise.

【Precious Metals Trading Strategy】【Precious Metals Trading Strategy】

Gold, silver, platinum, and palladium remain long. The basic approach remains unchanged. The metals market is robust. Dips tend to be bought immediately. There is strong underlying demand at the lower levels, with little fear of a deep pullback. However, there is no need to overanalyze; holding gold as a hedge is essential. The best strategy is to hold gold as part of a diversified portfolio to prepare for potential crises. The belief is that long-term holding will help manage risk. Gold should be held as a hedge rather than as a speculative investment. The long-term view is that the dollar will weaken, so holding precious metals as a hedge remains prudent. The strategy is to hold gold and other precious metals as a core component of risk management. They should be included in a diversified portfolio, with attention to holdings that have strong liquidity and storage considerations. The goal is a long-term hedge rather than trying to time the market. The overall approach is to maintain holdings, not chase short-term price spikes.Gold, silver, platinum, and palladium remain long. The basic policy remains unchanged. They are robust and resilient. Dips are quickly bought. The market is in a sustained uptrend. There is demand at the lower levels, so deep pullbacks are unlikely. There is no need to guess or read too much into every move. It is essential to hold gold in any case as risk management. The practice of owning gold as a hedge against stock market risk forms the core of the investment approach. Do not view gold as a mere trading instrument; treat it as a preservation of wealth. The core belief is that you should always hold gold. Holding gold reduces risk and is part of the fundamental investment thesis. The goal is to have a balanced portfolio where gold remains a constant presence to guard against downside risk. Gold is not used as a market timing tool. Precious metals are an asset to hold through 2020 and beyond. The favorable market environment for gold is expected to persist through 2019 and beyond, driven by a continued low-interest-rate environment. The outcome will be a market where equities rise and gold rises too. For now, the approach is to prepare for the long term rather than focus on short-term fluctuations. Investors in emerging markets are also seeking gold as a hedge. Central banks and investors alike intend to preserve assets by maintaining gold holdings. Swiss private banks advise their wealthy clients to hold at least 5% of assets in gold; some say 10% is acceptable. The long-term gold investment policy remains stable. The key is to keep gold on hand as a hedge against crises. The cost of holding should be minimized by buying on dips rather than trying to time the market. The core idea is to accumulate gold and other precious metals during downturns and hold them as a safeguard, not as a speculative instrument.

Over the long term, the dollar's weakness is unlikely to reverse, so precious metals should be bought when they are inexpensive. Rising prices should not be a reason to sell; instead, maintain holdings and add on dips. This is the investment philosophy. Gold is a hedge, not a speculative asset. Hold both stocks and gold as a core approach. Market dynamics are not connected to any one asset class; a balanced mix remains crucial. The idea is to view gold as a protective asset rather than a pure trading vehicle. It is essential to recognize the role of gold as a preservation of wealth across market cycles. Gold remains a core component of risk management and diversification. The emphasis is on holding gold to guard against systemic risk and inflation. In summary, do not abandon gold; keep it as a long-term hedge.

In the long run, the gold bull market is expected to persist through 2020, with a favorable environment for precious metals continuing. The macro backdrop supports continued strength in gold, and the price level around 1275 dollars shows a robust support. Market focus remains on the possible nomination of Yellen as Fed chair by February, as Trump has completed interviews with the candidates and will announce before his Asia trip. Recent reports suggest a hawkish Taylor is favored, but Yellen is appreciated as a leader who managed low-rate policy. If she stays, policy direction may remain stable with a slower pace of rate increases, which would support gold as a hedge. The ECB’s January plan to reduce asset purchases could also boost the euro and weigh on the dollar, a positive dynamic for gold. Either way, there is strong desire to buy dips at lower levels, and if gold reclaims the current high above 1310, the upside could accelerate.

In the long term, the dollar’s weakness remains intact. Therefore, precious metals should be bought when prices are low. Whether gold rises or falls, you should not sell. This conviction should guide investment decisions. The goal is to accumulate and hold, not chase a temporary rally. Gold is a hedge, not a speculative asset. The fundamental approach is to own gold alongside stocks. The market sentiment is not the only driver of price; the underlying risk management framework matters most. The idea is to regard gold as a necessary asset for crisis protection. Gold is not a tool for market timing. The precious metals sector should be retained through 2020 and beyond, with continued favorable conditions into 2019 and beyond. The low-interest-rate environment suggests a favorable market for gold for years to come. The result will be a market with “rising stock prices and rising gold prices.” For now, we are in the process of a long-term bull market through 2019, with a target to maintain cheap long positions through 2020. The long-term outlook remains robust, and short-term moves are risky to chase. The crucial strategy is to stay committed to long positions and build positions on dips.

The authors emphasize the importance of holding gold as a core holding to preserve wealth and reduce risk. The central bank policy is expected to remain accommodative for the foreseeable future, supporting gold sentiment. The long-term macro backdrop supports gold as a hedge in a world of uncertain policy shifts. The main strategy is to maintain a significant gold exposure to protect against potential market shocks.

【Dollar-denominated Gold Price: 2017 Projection Range】

Bull case: $1,117.65–$1,373.40 (year-end $1,329.50) / Bear case: $1,036.65–$1,187.20 (year-end $1,059.00)

【Dollar-denominated Gold Price: October Projection Range】

Bull case: $1,229–$1,332 / Bear case: $1,047–$1,124

【Yen-denominated Gold Price: 2017 Projection Range】

Bull case: ¥4,204–¥5,022 (year-end ¥4,892) / Bear case: ¥3,733–¥4,511 (year-end ¥3,864)

【Yen-denominated Gold Price: October Projection Range】

Bull case: ¥4,487–¥4,753 / Bear case: ¥3,775–¥4,217

【Base Metals Market Commentary & Analysis】

Base metals are mixed. LME inventories show nickel up by 1,524 tons, while others declined. Aluminum eased, but copper held firm. A period of consolidation after recent gains is expected for a while, which would benefit long-term uptrends. Nickel remains modestly lower, but its downside is contained. Zinc has declined but remains supported at $3,080. Lead is down but held above key levels. Overall, base metals stay resilient.

【Base Metals Trading Strategy】

Aluminum, copper, nickel, zinc, and lead remain long. The fundamental approach remains unchanged. Movements may be subdued for a while, but that is likely conducive to future upside. There’s no need to worry; if markets weaken during a recent rally, it could affect base metals, but such effects are usually transitory. Prices will likely rise in cycles, with demand and supply tightening supporting a historic uptrend in base metals. The key is to maintain a long-term view and to accumulate on dips when there is a potential for upside. The nonferrous market is entering a long-term upcycle. Commodity prices are expected to rally through 2020. In particular, nonferrous metals show clear supply-demand dynamics with expected shortages in three years. Development delays and limited supply growth will support demand. Prices are likely to rise, and nonferrous metal markets will become increasingly energetic. The long-term outlook remains highly favorable. Buy dips to build positions as much as possible through 2019. The nonferrous market carries significant long-term potential. The long-term view is essential. Be prepared to accumulate on dips, aiming to build positions gradually. The long-term confidence in nonferrous markets remains very strong. The key rule is to buy on dips and accumulate positions gradually through 2019.

【Copper Price: 2017 Projection Range】

Bull case: $5,266–$7,704 (year-end $7,522) / Bear case: $4,520–$5,812 (year-end $4,672)

【Copper Price: October Projection Range】

Bull case: $6,566–$7,333 / Bear case: $4,608–$5,070

【Energy Market Commentary & Analysis】

Oil rebounded. There were moments of sharp declines, but a large-scale drop was avoided, and potential strength began to emerge. Tensions in northern Iraq’s Kurdistan region contributed to a sharp drop in oil exports, providing support. Meanwhile, U.S. crude rig counts fell for the third week in a row, highlighting a trend of reduced drilling activity over the last two months. Market reaction to this slowdown has been relatively muted. Kurdistan crude exports via the Turkish port of Ceyhan fell from around 600,000 barrels per day to roughly 216,000 barrels per day. The Iraqi central government’s oil ministry says two major fields in Kirkuk are expected to resume operations on the 22nd. Reports indicate OPEC is working toward extending production cuts into next year, with a tentative plan to extend into late 2018. Inventory overhang remains, and oil producers intend to discuss extending cuts at the next meeting on November 30. Saudi Arabia’s Falih and Russia’s Novak are engaging other producers to reach a broader consensus before that meeting. OPEC and non-OPEC members are pursuing a strategy to raise oil prices; market response to this historic effort remains mixed at best.

【Energy Trading Strategy】

Long WTI and Brent. WTI’s downside is gradually firming, but it remains pressured above $50. The floor around $52 must be held; only then can prices move higher. U.S. rig counts continue to decline, a factor not fully priced in by the market. In terms of fair value, oil remains substantially undervalued. The likely trajectory is a gradual return toward fair value. OPEC’s production cuts are almost assured to extend. The oil market cannot sustain long-term fiscal deficits if major producers continue to rely on oil revenues. This is a characteristic of commodity markets. Although there is skepticism about the sustainability of U.S. shale output, the global oil balance is improving steadily. U.S. crude stocks will adjust through exports and other channels. The current WTI price remains relatively cheap. Commodities show value, and speculative traders who sell below intrinsic value will lose; such price declines are likely to reverse, making this a historically underpriced scenario. Oil remains heavily undervalued. Extension of OPEC cuts will contribute to supply-demand balance. U.S. shale production is rising, but costs are increasing, and per-rig efficiency has peaked. If prices remain low for an extended period, sustained production would be difficult. In the end, a tightening of global oil supply and demand dynamics will drive prices higher. This is a rational perspective that should be maintained. The price outlook for WTI remains robust. The current price remains undervalued, and the trend toward higher prices should resume toward the 65–75 dollar range as a floor. The upside could return toward historical norms around 64 dollars, following a typical rally from a broader downturn, which is consistent with past behavior. It is important to understand these dynamics as part of the longer-term view.

【WTI Crude Oil Price: 2017 Projection Range】

Bull case: $50–$74 (year-end $70) / Bear case: $35–$58 (year-end $38)

【WTI Crude Oil Price: October Projection Range】

Bull case: $63.43–$74.08 / Bear case: $43.95–$52.05

◇ Global Macro Strategy

The investment strategy featured in this newsletter falls under the “global macro strategy” category in the hedge fund industry.

This is the quintessential approach widely practiced by global hedge funds—the “royal road” of hedge fund management.

This strategy looks across all markets, seeking investment opportunities and aiming to generate profits across asset classes.

Regardless of market direction, when price movements are anticipated, bets are placed accordingly.

Volatility amplifies returns, so opportunities are pursued aggressively when available.

In a world of increasing geopolitical uncertainty, price movements in major markets—foreign exchange, equities, interest rates, and commodities—are becoming more volatile.

As such, forecasting across markets is becoming more challenging.

In such market conditions, a macro approach that spans a wider range of markets offers an advantage. This is the essence of a global macro strategy.

Of course, to be effective at the micro level in individual markets, we will also outline specific trading timings.

Let’s pursue the “global macro strategy,” the royal road of hedge fund strategies, and compete in the market together.

◆ Announcements

We publish a newsletter on Nikkei 225 option trading strategies.

It is titled “Tetsu Emori's Nikkei 225 Options Real Trading.”

If you’re interested, please subscribe.

https://fx-on.com/email/detail/?id=8592

＊ Seminar Schedule

October 25 (Wed) Trader's Securities Seminar (Web)

http://min-fx.jp/seminar/fxseminar/20171025/

October 31 (Tue) Sanword Trading Seminar (Tokyo)

http://www.sunward-t.co.jp/seminar/2017/10/31/

November 3 (Fri, holiday) Monex Securities & U.S. Jobs Data Seminar (Web)

https://info.monex.co.jp/news/2017/20170502_01.html

November 10 (Fri) JPX/TOCOM jointly hosted Options Seminar (Tokyo)

http://cfes.jp/option/

November 22 (Thu) NTAA Seminar (Tokyo)

November 30 (Thu) Sanword Trading & Options Seminar (Tokyo)

(We also conduct private seminars outside the above. If you are interested, please contact us.)

＊ TV Appearances

October 26 (Thu) 13:30–13:45 Stock Voice TV “Tokyo Market Wide” (TV Tokyo, MX)

http://www.stockvoice.jp/

November 9 (Thu) 13:30–13:45 Stock Voice TV “Tokyo Market Wide” (TV Tokyo, MX)

http://www.stockvoice.jp/

November 30 (Thu) 13:30–13:45 Stock Voice TV “Tokyo Market Wide” (TV Tokyo, MX)

http://www.stockvoice.jp/

＊ Radio Appearances

October 27 (Fri) 16:00–16:20 Radio Nikkei “GO! GO! Jungle Market” (GogoJyan provided)

http://blog.radionikkei.jp/trend/

November 24 (Fri) 16:00–16:20 Radio Nikkei “GO! GO! Jungle Market” (GogoJyan provided)

http://blog.radionikkei.jp/trend/

＊ Regular Contribution Schedule

“Toyo Keizai Online” (irregular)

http://toyokeizai.net/

“Monex Mail” (1st, 3rd, and 5th Fridays)

http://lounge.monex.co.jp/pro/special1/

“Monex Securities Monex Gold Report” (every Monday)