This is a Trader`s Market

EconMatters's picture

By EconMatters  


Market Themes


The one that has really characterized financial markets over the last couple of years, and by financial markets I mean everything from Forex and Natural Gas to Bonds and Equities, is that sure buy and holding works in certain asset classes given the bull market in equities, but even in regards to equities trading around the market had been the most profitable strategy by a large amount. Many markets like bonds which are currently dominated by Yield Chasers trade in tight ranges, and it is so much more profitable to just swing trade the range because bonds really haven`t gone anywhere for months. Any Bond Bull who didn`t take profits on positions when the 10-year yield was 2.40% is regretting that decision today, and this goes for many markets with ever contracting volatility. 


Contracting Volatility


The other trend in markets is that with contracting volatility and so many trading strategies revolving around spread trading and yield carry arbitrage trades prices move a lot less on a 23 hour basis, it boils down to fewer opportunities than before regarding the Asian markets, whereas just 4 years ago it made sense from a volatility standpoint to trade the futures markets overnight for some robust moves, it really isn`t worth one`s time these days. Basically, prices move at the European open and the US Pre-market and open, the European close, Gold and Oil close, and are dead until the equities close unless there is a big Fed day. 


Risk Aversion Strategies: Better to make less money, but have perceived lower volatility strategy on Street – becomes self-reinforcing for Industry Trend


Markets have been characterized in the low volatility environment by bot trading, i.e., the machine algos trading back and forth with each other in very, very tight price ranges. This past Wednesday and Jobs day offer some of the best trading opportunities and glimpses of what markets used to be like to trade before the Central Banks started mucking things up with five years of near zero percent liquidity, and the fact that modern finance just loves risk-free arb strategies that are facilitated if they are able to keep volatility in a tight range at low levels.


Central Banks & Market Intervention: Markets became Instruments for Social & Monetary Policy


Once Central Banks get out of markets, and I know some critics think that once they get in they are here to stay, healthy volatility and actual price discovery should come back to asset classes. Oil has been characterized by a trader`s market; one outperformed the buy and holding strategy as no real trends have emerged by and large for the last five years, just sell tops and buy bottoms of the five year trading range between $80 and $110, of course the key is to pay attention to when this trend changes and to use healthy stops, because oil can always make a 2007 run if all the stars align in the market.

Learn to argue both sides of an issue


But the broader theme of this article is just to say that prices move around a lot in many asset classes but don`t really go anywhere in the overall big picture, and savvy traders have taken full advantage of this state of affairs to outperform the market. Don`t ever fall in love with any view, position or asset class because chances are traders will be taking the low hanging fruit, and moving to greener pastures. In short, this is a trader`s market.


Don`t Fall in Love with Positions


And even when the inevitable selling begins and the market declines don`t just position your portfolio with market blinders! For example, there were always powerful snapback rallies during the Financial Crisis and subsequent Market Crash in equities like Citigroup and Bank of America, so don`t fall in love with your shorts, get in get out, and outperform the broader market.



AUM versus Performance


Of course that is easier said than done as so many hedgefunds underperform the broader market, but as we have noted before there are a lot of incompetent people managing money these days, and I blame a lot of this on the pension funds and institutional money like endowments who seek diversification just for diversification`s sake, and a bunch of hedge funds and fund of funds have sprung up to take advantage of this trend that couldn`t analyze or trade their way out of a paper bag.




But they get paid for raising money, and shoot it isn`t their money, and as long as pension funds and endowments are this enabling, the game continues to be played by these rules. Wall Street is an AUM game, not one which attracts the best minds in the world from other fields like technology and science, they try to outsource these minds, but they usually are of the lower echelon, and relegate these types to support functions like programming. 


Punctuation & Grammar Police


Just as an aside as I love that our readers point out the predictable mistakes in our articles, keep up the good work as this keeps us from falling too far in the modern finance cliché, “that if one spends too much time on editing emails, analysis and write-ups, then one isn`t really doing anything substantial in the business.” 




There can be many effective investing strategies and they all have their merits, but if you`re frustrated that your position keeps bouncing back and forth, giving up large profit chunks and seemingly going nowhere you might want to develop a trader`s mindset!


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lasvegaspersona's picture

Central Banks can't get out of the markets. They are now forced to micromanage every detail with much precision or the entire edifice will fall. Gold can't go up or it will take everything else up with it in a commodity crack up boom. It can't go down or the little people of India and Chine will buy up the last few ounces of physical and expose the sham that is the gold market. Interet rates can't be allowed to go up or the governments of the world will have to print into hyperinflation. If they keep rates low it will also require hyperininflationary printing. Stocks can creep up and will probably continue to do so though slowly. If liquidity is withdrawn we'll crash due to that.

Central banks have inserted themselves into the markets and have no way to get out unless they just give up and let the big one happen. They can't do that of course because then we'd know they are useless. I suspect the adults in the  monetary world are just about ready to hit the reset button. Maybe they just need a good excuse....or some one to blame.

The market may still yield some profit but as a system of financing productive activity and coordinating the savings of those who seek to pay now to live well later ....that has been over for a while.

Jack Sheet's picture

The CBs are "dug in like an Alabama tick"

forexyi's picture

up to the right point- to develop a trader's mindset!!!!

Fuh Querada's picture

trading with the algobotz

Fuh Querada's picture

Jeez, after reading these profound insights I'm set to make a shitload of moaney with my starting capital of 10000 Yellenbux.