Episode 21

Things Over Paper

By:

Chief Strategist at Interactive Brokers

Samantha LaDuc, founder of LaDucTrading.com, joins Steve Sosnick, Interactive Brokers’ Chief Strategist, to discuss why she favors commodities over stocks and bonds in the current monetary environment.

Summary – Traders’ Insight Radio Ep. 21: Things Over Paper

The following is a summary of a live audio recording and may contain errors in spelling or grammar.  Although IBKR has edited for clarity no material changes have been made.

Steve Sosnick

Hi everybody, welcome to Interactive Brokers Traders’ Insight radio. My name is Steve Sosnick. I’m the chief strategist here at Interactive Brokers and my guest today is Samantha LaDuc, founder of LaDuc Trading.com (https://laductrading.com).

This is the first time I’m really meeting Samantha.  Some of these other interviews I’ve done it with people I’ve known for well … too long, but Samantha, she and I have been sort of copacetic on Twitter. It’s actually kind of fun meeting a Twitter friend and in something close to real life. We’re not in the same place, but we’re in at least … zoom, well, Teams calling and why don’t we start off by –Samantha, you introduce yourself, please.

Samantha LaDuc

Well, first of all, thank you so much for the invite. I mean it really is the proverbial water cooler, right? This Twitter, this Fintwit community and it makes us all you know, richer in intelligence, but also network and better traders I think because of this sharing.

So thank you very much for the opportunity to talk with you live.

Steve Sosnick

Now, one of the things that I think where you and I are in a similar mindset, is — I’m going to say I think neither of us were big Kool-Aid drinkers through a lot of 2021. I think we recognized that it was a great environment for investing, but may not have been sustainable, especially, and that it was very Fed dependent. It was very dependent on the monetary and fiscal stimulus, and I think you were very early in recognizing either the change in trend or the unsustainability of the prior trend given the changing environment, please elaborate on that. ‘Cause I really admire that insight that you had.

Samantha LaDuc

Thank you so much. Well, I call myself a macro to micro analyst, so I educate, I trade, I support clients to do the same. So, my business is very much on making predictions. I am a market timing caller in a nutshell, so by kind of laying on that particular hat of “I’m gonna have to identify what’s going to move markets when volatility is going to come in.” It has basically allowed me to kind of go in and test, test, test the themes of macro and whether or not they kind of pass the smell test.

I mean, some of it is very much kind of farm girl sense, where inflation was early theme of mind and then translating that or operationalizing the data into a context of what’s tradeable. What are durable tradeable themes for my clients that I can set up across all asset classes? And then again, this macro backdrop of “Yes, we have tons of fed liquidity pouring in.” It’s very market bullish, but it’s also very much inflation bullish and yield bullish and dollar bullish.

So, staying on those macro themes and then spying a top in the bond trade, which was very, very important, because that forms the whole basis of what comes next. Bonds lead equities and usually by about a year, so when they topped out in August of 2020, I said bonds are done going up which means yields are done going down. So that kind of formed this basis for everything else, whether it be commodities, things over paper, energy, oil as an inflation hedge, and basically yes, that bond short that just has kept giving and giving and giving and now equities smell it. Now we’ve found the market already indicated a while ago and the equities are now catching down, so it’s all coming to plan.

Steve Sosnick

It’s been quite amazing, the ferocity of the move in the bond market. Now some of it was a bit of the exogenous factor from Ukraine accelerating things. But I I think the move that we saw in the two year is— If there is a precedent then it goes back 150 years or so. What made you kind of sniff that out?

Samantha LaDuc

Oil, but well, absolutely this theme of things over paper is basically that the bond proxies — the duration trades of tech — would come to a point that I would start to see it. You know, from my intermarket and my technical read, zooming out on larger timeframes, it would start to indicate it was done and in early 2020 it wasn’t the case.

I was very, very focused on growth to value rotations, saw the energy move higher, and definitely said that that was going to be leading in 2021 over tech. Tech actually topped and then started to soften under the surface much, much stronger than NASDAQ itself, because I could see the selling underneath the surface last year in that June timeframe, but the whole while it had to be that yields would continue to stay firm, that the dollar would not collapse and that oil would be that inflation hedge.

So being an early inflationista and putting pretty much all my eggs in one basket, we were going to stay very, very sticky. Inflation is sticky. Things over paper were going to be picking up more attention, meaning hard assets. Commodities were in multi decade lows and yields were getting extremely strong. The rate of change in the yield spikes that have taken place since summer of 2020 has not abated.

I’m still bullish yields. I’m still bullish dollar and I’m still bullish oil. None of my themes have broken down yet, so that’s basically what’s held my attention. For them coming into this year very early, back in November, December, I said 2022 is going to be the year of NASDAQ underperformance. We’ve had 13 years of solid outperformance in NASDAQ.

It’s time for a pause. It wasn’t the unlucky 13, you know, whatever.

Steve Sosnick

Yeah, of course not.

Samantha LaDuc

It was just its time. And that obviously has continued and now it’s picking up speed, so you know, equity markets they don’t crash from overbought territory, they crash from oversold territory, and bonds had already led the way.

So that’s basically how I’ve stuck with this theme of falling yields. Because as bonds continue to sell off with equities, it makes the whole structure much more fragile.

Steve Sosnick

It’s fascinating that you mentioned the underperformance and the outperformance. I recently did some work running SGX versus SVX, the S&P 500 growth sub-index versus the value sub-index.  We all were familiar with the humongous outperformance of growth over value, and I was early in in thinking that growth would catch up, but it’s very interesting in the fact that they have caught up as of early May.

When we’re taping this, I normalized them to March 23rd of 2020, which was the absolute low. Normalized to that date, the return on both is about 75% in total. It’s like uncanny, they’re almost exact, so then I said “Well, you know, OK that’s you know those are big caps. Let me let me run small caps. Let me run NASDAQ.” So, I extended it to the S&P in general, the which of course would be about the same, because of the two sub-indexes are the same. Of course, the main indexes would be the Russell 2000, NASDAQ, even to throw in the Dow, they’re all up about the exact same amount as in early May, it’s unbelievable, so that’s why I called that–

Samantha LaDuc

Now you’re talking my language, because this is the intermarket analysis where we have to compare and contrast, right? So, you know NASDAQ leads, but it’s pure devastation under the surface with the midcap growth and the unprofitable growth, and the tech wreck, all that has been talked about. But the point is in my intermarket analysis, if you do the same thing with RSP for example to SPY, which is equal weighted, you’ll see a head and shoulders very clearly on the SPY and an inverse head and shoulders in the ratio, which is basically saying that you have this growth to value rotation.

I also do the same thing with other growth to value intermarket analysis. Which is what I have used also to confirm this thesis, which was basically September of 2020.  I had the 1st spike down in my growth to value rotation, which basically said OK, this is where value is going to get ahead and then it triggered again in November of 2021. Both times there was something very important that happened with tech.

The first time it went sideways, you could see the Amazon, the Google, all the rest, they just went sideways in very wide volatility swaths but basically the selling was taking place quietly under the surface ’cause it was a distributive top, but it allowed value to come up, cyclicals, commodities.

The most recent kind of pullback in value is very much related to currency volatility, so it’s a little bit different. Its more China related. It’s the devaluation of the Yen and the Yuan, so there’s very much this carry trade in currency that is now — And the lockdown in China that is very much a headwind for the current commodities cyclical trade, but I still firmly believe that value will outperform growth for 2022. I still see the things will outperform paper this year.

Steve Sosnick

Well, the other thing that I take away from the value growth comparison that I just referred to is that value has been very boring. I mean essentially value has gone nowhere for the last six to nine months. All things considered, that’s great because like I said, you’re in the same place. As far as I’m concerned, if you could tell me two things would have the same ultimate return and one would have much less volatility–

Samantha LaDuc
Yes bingo, outperformance.

Steve Sosnick

From a long-term investing point of view, if you could get the same — The Holy Grail is to get the return without volatility, so it’s been a good —

Samantha LaDuc

Correct.

Steve Sosnick

I will argue it’s the better trade. It didn’t look that way for the for a while, but it but it it’s now resolved itself.

Samantha LaDuc

Absolutely, but we also had all this Fed liquidity, and quantitative easing is, by definition, suppression of volatility. Quantitative tightening is, by definition, triggering volatility. So now that we have liquidity coming back out of the market, where is it going to, first and foremost, drop out of? This very, very high valuation, high P/E trade in Tech that is rotating into low P/E value cyclicals and the rest. So, the thing is even this current pullback that we’ve had to 4,000 in SPX doesn’t even price in recession. So, we still have room to go to the downside. All we’ve done is we’ve kind of taken some of the bubble gases out right of the balloon. It’s not even recession priced in. I don’t know how else to put it so there’s still risk.

Steve Sosnick

Sorry I mean the I didn’t mean to step on that. The fact that we’re all in the same place means OK, yes, now the gas has been taken out of the balloon. Now we have to figure out what happens next.

Samantha LaDuc

Now what it’s worth, what are they going to step — When and who and what are they going to buy? Buyers have definitely stepped away.

This is a really big part of my theme of why I thought this was going to be more trouble; actually, more risk than the reward… is that I study breadth very closely.  Like you and I are talking about, intermarket analysis, relationship contrast, divergences, all of that which is fabulous and much easier to show in a chart than talk about.

Steve Sosnick

Yes, of course.

But actual selling is going on under the surface strongly since June of 2021. This is a “sold to you market.”

Samantha LaDuc

I know. I’ve kind of trademark that you’ve seen on Twitter, right?

Steve Sosnick

I know.  That’s good.

Samantha LaDuc

Right? There’s no question about it.

I have my euphemisms, but “Sold to you” is absolutely in place since June of 2021, and we topped out in November. So, my breath and my volume and all of my, you know, secret sauce has been warning, warning, warning, this is going to fall slowly and then all at once.

So, bonds did that, right?  We saw that now bonds. I still don’t think they’re done. I know that’s shocking.  I think they’ll be back and fill, which is very bullish but I don’t think this is the bottom for equities or bonds.

Steve Sosnick

Wow, because that’s one of the issue questions I get all the time is “How do we know when the bottom is in?” and you only really know that in hindsight, but the problem I’m finding is people continue to probe for that bottom and the sharp rallies you get like on the Wednesday afternoon after the Fed meeting.

Which I referred to as a pump fake worthy of Kobe Bryant because that was, you know, sort of a giant fake to the market. But people are still so afraid of missing that bottom and the problem you have is there’s only one true bottom, right?  You only bottom once, there are tradeable opportunities, but the bottom is — Bottoming as a process.

Samantha LaDuc

So, I disagree on one thing, that last phrase that “bottoming is a process.”  I think it is much easier to, for me anyway, to time a top. So, one of the things that I do is in addition to the intermarket analysis and spine divergences in addition to studying breath very, very closely to see really, are they buying or selling? Are they stepping up or stepping aside?

Is this whole concept of tops are in fact a process, bottoms are an event, so I really, really firmly believe that we can see the selling in a top and then the only time you can really point to significant bottoms is Fed intervention and we don’t have that right now.

Steve Sosnick

Fair enough.

Samantha LaDuc

So, Fed intervention has left the building right gone, and unless there is something drastic like wages are spiraling out of control — Germany just came out and said it’s a real risk. — But the point is, until then, they’re going to keep tightening and then maybe yield curve control. You know, kind of dampens it, but that’s still a way away, so there’s still — Unless we get some coordinated central bank aggressive rate hikes coming down the pike, I still see this bottom further out in time. We will still have higher oil, yields, and dollar until there is Fed intervention, and the only Fed intervention that I can see is their utterance and or actions around yield curve control. Until then, there is no bottom.

Steve Sosnick

Interesting ’cause someone asked me the question earlier today and I said, you know, “When is the bottom in?” and I said, “When you get the sense that the Fed has turned.” You’re using yield curve control as that signal.

Samantha LaDuc

Maybe another pivot would appear that I don’t see, but that’s The strongest one.

Steve Sosnick

I think we’re in general—As I find often, we’re in general agreement. We differ very slightly on the specifics, but what it means is we don’t see this forming a real bottom until or unless the Fed changes from this… changes back to at least a neutral stance from this if not an accommodative stance.

Samantha LaDuc

Correct, and we can have some vicious short covering rallies like you had just mentioned on Fed Day right. Where there was relief that now the expectations were met on FOMC date, but obviously it’s still not going to fix the problem, which is very much you know, war is inflationary, supply chain disruptions are inflationary, the fiscal [stimulus] that’s already in the system is inflationary, wage increases are inflationary, so there isn’t really going to be a big move in inflation expectations is basically my point.

So, the interesting thing also about the market, and I’m not really so crazy about sentiment as I tell, but I do like outliers. I like it in extremes. So we had last year – and you would know better since [you’re at] the biggest brokerage firm — retail came in en masse, and so I’ve read it was like 50% of all new accounts that opened up, whatever. So now they had this fabulous climb up the mountain right for 2020 and 21 and now we are dancing down. We have the dance up the mountain, now we’re dancing down and this– they’re leaving a little bit, but they’re still kind of trying, but they’re not really understanding that you buy on the way up and you sell on the way down.

Steve Sosnick

It’s fascinating you say that ’cause I’m privy to some numbers, I’m not privy to all the brokerage firm numbers, but one of the things I look at pretty closely is the top 25 names at the firm on a 5-day rolling basis. This is a report I do get, and I scrutinize. As of early May, 25 out of 25 saw net buying.

And you know, it’s – [Samantha gasps] There’s a visual that you couldn’t see and that was literally like Samantha face dropping.

Samantha LaDuc

So, we are still in the bubble. It still is … As long as retail is buying, as long as Tesla is up here now, crypto is going to be a thing, but we’ve already had a flash crash in crypto this past week. I know this taping is going to be airing a few weeks out, but the point is Bitcoin has been correlated to NASDAQ 82%. So as long as crypto is up here, Tesla is up here. Retail traders are still buying up here, we’re still in a bubble.

Steve Sosnick

Yeah, and so that’s my point. I did a forum with one of the exchanges and [they asked] “What’s your advice?” and it was that don’t buy the dips reflexively. Yeah, there’s trading opportunities where we’re traders. There are times you cover shorts, there’s times you go long, some of the best, some of the best rallies occur in in bear markets.

My aphorism game is not as strong as yours, but I will say that bear markets are sharp, short, and ferocious. I’m sorry, bear market rallies are sharp, short, and ferocious, and so you don’t — But the idea of that every decline is a buying opportunity, to me, you got to wipe that out of your mind and, but I see our clients resolutely doing it.

Samantha LaDuc

I try.

Steve Sosnick

And I will be fair among two of those 23 were UVXY and SQQQ. So, but that’s two out of 23. There was a lot more buying in TQQQ than there was an SQQQ.

Samantha LaDuc

Yeah, and speaking of that I was going to say maybe those are hedges, but the thing that I noticed most is that they aren’t, aren’t meaning large– This is my view, my view my sole opinion, it is slightly based on data but not really which is since the top, this November, December, January timeframe, I don’t see large portfolios hedging. I just see them selling.

Steve Sosnick

I’m with you. I’m with you ’cause somebody asked me — Another question I get a lot is “Why isn’t VIX higher?” And as we’re as we’re taping, VIX is sort of steadily in that low 30s, low to mid 30s range. And my answer is twofold on that one, and I’d like your opinion on this.

Number one: We’re not– Yes, the VIX futures curve is in backwardation, but it’s like a linear backwardation, not a parabolic one. And when you’re in backwardation, backwardation means that there’s a short-term shortage of the commodity in question. In the case of VIX, the commodity in question is volatility protection.

And so yes, there’s a shortage, but you’re not at that parabolic level where parabolas mean pain, and you’re not seeing that. The other thing is, quite frankly we’re moving around 2% a day. So where should VIX be? It should be in the 30s.

Samantha LaDuc

It should be in the 30s but 36 is key because 36 is actually that level where statistically you got like a 94% chance of it falling. So, they sell the bejesus out of it, and it works until it doesn’t. So, 36 is still kind of the line in the sand as it relates to volatility selling strategies, which, by the way most firms are kind of like lightening up on that right? Because it’s not so useful anymore and they were taking out body bags based back in the COVID days.

Steve Sosnick

Spectacularly unprofitable and a spectacular great way to lose money, but yeah.

Samantha LaDuc

So, I don’t have — In fact I wrote about this a while ago trying to find, and this is actually a really big concern of mine is “sell all at market” is kind of like the Sam[antha]market euphemism of late that I’ve been using because volatility as a hedge is not working.

So on the way up, why bother hedging? It just costs money. On the way down, why bother hedging? They’re just selling. So, it’s very tough actually, especially in this sector rotation where we’ve had beautiful growth to value rotation and then recently because of the dollar, Yuan you know the CNY being devalued, this was a big hit to the reflation trade, so even energy came under some profit taking of size.

I still am very bullish. Energy is alpha, you know oil is going higher. I’ve got a very large oil call on for 160 in crude this summer and 260 within a year. But the point is it comes under headwinds because volatility enters. And that’s in lieu of sector rotation. You will have volatility and volatility reprices everything. So where is it safe? Guess what? Cash.  Everybody can see the dollar is gaining tremendously, especially relative to you know FX in Asia. So, this is going to be a theme that I feel will digest and then move higher with yields with oil and right now we’re in the digestion phase.

Steve Sosnick

Yeah, I mean on a real bit, this is one of the things that people have a tough time getting their mind around because yes, the return on cash is still quite low, but I will argue that the real rate of return on cash, which is negative, is a whole lot better than the real rate of return on essentially anything else we’ve discussed today with the exception of various commodities. But other than that, financial assets, they’re all down more than your cash is. For the crypto people who say, “Oh, fiat is dead.” Your fiat is outperforming your crypto by huge margins, 50% depending on what it is. So–

Samantha LaDuc

And bonds are not safety.

Steve Sosnick

Bonds are not, no.

Samantha LaDuc

You know Bitcoin is as far as I’m concerned, trades like a commodity or any speculative growth domain. So there really is just shorting or selling positions to kind of step aside. Basically, this whole theme of guess what is going up? Oil, yields and dollars so I’m actually pretty bullish fast.

Steve Sosnick

Now you know that I don’t root against you, but I will root against you on the oil call.

That would be, that would be, that would be chaos to a certain extent, but…

Samantha LaDuc

So, you know what? This is where you and I are aligned where we don’t need to follow the crowd and consensus, but we actually do realize that the consensus view has really a lot of strong, valid fundamental points like are where are we going to be as an economy and as a market when or if my $260 crude oil hits? Or my $110 you know DXY hits? Or my 4.5% in the 10 year hits this year, what would happen?

So, I know that this is not conventional. I’m not saying it for shock value, I had these calls for a year and a half, and you know that because this is not new.

Steve Sosnick

That’s why you’re here.  You’ve been consistent and early.

Samantha LaDuc

Consistent, yeah and so far, I’ve also been right. So, I will change if my context of the data changes and so far, nothing in the macro environment, — It’s only picked up with the geopolitical risk …China and Russia. Nothing in my intermarket analysis has changed. There’s no policy coming out of the White House, that’s really going to move oil down given the green policy and ESG initiatives getting pushed. There just isn’t anything that I can see right now that even though they’re trying to crush demand with higher yields, it’s not fast enough.

So the macro is still set up and the intermarket is still firm and technically by the way they’re still working so all my price targets have been hit, so I had to literally find new ones. So I’m still bullish, at least something.

Steve Sosnick

Yeah, well, that’s it. So let’s change gears just a little bit. Now you’re a proprietary trader who then has subscribers to whom you tell what you’re trading. Can you go about your day? Just so people understand what a professional proprietary trader, not a firm trader like I spent most of my career, somebody doing it for herself and how you do it.  A little shameless plug here I do know that you’re a customer of ours as well, but tell us a little bit about how you go about your day and how other people might use your methodology.  Not your secret sauce, but your thinking and your mindset and your discipline. How others might learn from that.

Samantha LaDuc

OK, well the secret sauce I share with clients and my clients can get all of my analysis live. I do a live trading room.  I also post all of my research analysis, trade setups for clients. I have three kinds of clients, beginning, intermediate and advanced, so basically, I have a new product that’s launched last year which is Discord to allow more of the newbie traders, momentum traders, young traders to come in and hopefully understand a little bit more about the market mechanics.

So I feed in my market thoughts and my chases. Then I have what’s called my fishing club product, which is very much for… it was geared toward kind of professional retail traders. I wanted to be able to talk like this and be understood. So I attracted more of the more experienced let’s just call it “retail trader” and then small institutional trader that was managing a book and wanted to benefit from my market timing calls because I do share this, you know, I hope succinctness of market views.

I am very, very much focused on volatility. I’m an event trader. I want to find out when volatility is going to come in and expand that price in a particular direction, bullish or bearish. And I also want to know when sector rotation is done and we’re going to have volatility reprice everything for obvious reasons of timing the market.

So that is then of course that engagement of I study all asset classes, all of it.  I want to because they’re all related. You know, currency volatility is going to seep into equity volatility. Bond volatility is going to seep into equity volatility and so on and so forth. So across all assets that happen to appeal to institutional investors.

So I basically then started an edge product, institutional edge and brought in a macro advisor to work with me and kind of sit with them on Bloomberg and translate and help them kind of “OK, this is what Samantha is seeing” ’cause I’m moving a little bit fast.

So, what I do is I literally am looking on the time frame of chases, which are short duration trades. I’m also setting up again, think momentum—Everyone’s on a 5-minute chart — I’m not, but still the point is I’m setting up what’s moving and then the swing traders that have a little bit more time, right? They’re not sitting in front of their computer. And then the trend traders, which is the durable themes right? My things over paper. Profitable because those were durable, durable trends and they have just followed that kind of macro backdrop and 3 timeframes, 3 different types of traders, 3 primarily different products but it’s all me in the macro kind of sizing up and then I have a trading desk of seven.

So I actually have a dedicated oil trader and a hedge fund manager and a futures trader and advanced options and momentum and gamma. So this is this is basically my version of a trading desk so they can benefit from everything we have to offer.

Steve Sosnick

That’s awesome. Now, by the way, you said “your version of a trade desk.”  That is a trading desk. It’s not a version of one, it is one.

Now we could go on for ages. I didn’t even realize it, but my producer is sort of waving me in the background going we’re about– Yeah, I’m getting the time check thing which means that we’ll have to pick this up at some time in the future.

Samantha LaDuc

Aww, thank you so much.

Steve Sosnick

And so let me just, you know, I’m going to wrap it up here and I want to say thank you one more time to our guest, Samantha LaDuc of LaDuctrading.com. I’m Steve Sosnick, Chief Strategist at Interactive Brokers. You could find this on Traders’ Insight Radio or on your favorite podcast platforms.

And once again, thank you so much for joining me, Samantha, and I look forward to continuing to discuss markets with you as we go forward.

Samantha LaDuc

Thank you so much.

Steve Sosnick

Take care everybody.  Bye-Bye.

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