Will The Central Bank Party Continue? One Trader Notes "It's Always Flow, Not Stock, That Matters"

Tyler Durden's picture

Last week, former fund manager Rich Breslow made it clear that "the only thing standing between this being full-blown panic versus the frenetic gyrations we’re seeing is the central bank put." He is, of course, correct. One glimpse at the following chart tells you all you need to know about 'trading' in these 'markets'.

However, as Breslow explains today, it's not what central banks have done that matters... but what they're about to do - and that may change the discussion dramatically...

Via Bloomberg,

I was reading a note warning traders to avoid focusing on what policy makers should do and concentrate their efforts on sussing out what they will do. Both are interesting questions, deserving of discussion. And they also share the trait of being equally unhelpful when trying to make money. The only reliable way to have a consistently high Sharpe ratio is to figure out what the important (read “big”) players will be up to--and then get in front of them. Get that right and what happens down the road becomes largely irrelevant.

It’s unfortunate that we’ve all come to accept the notion that it’s better to be lucky than smart. It comes from thinking that trading is largely betting on the coin flip of a number or a decision and then subjecting yourself to the vagaries of how markets will react. The real and most delectable juice is squeezed out of the market before any of those results are scheduled.

 

Will the ECB go big, small or nothing at all as they contemplate tapering and the like? The answer didn’t have to be known to drive the last three months of opportunities. We could sit around jawboning what they should do. We can wrangle over what they might do. Or you could have ridden the wave from about 1.13 to the dollar up to 1.20 when it became pretty clear that the market had the bit between its teeth and the discussion turned to reserve reallocation rather than the next inflation print.

 

It’s a lot easier to remain focused on the big picture when your P/L has a nice cushion and you aren’t constantly living hand to mouth. It’s why I’ve never cared for CFTC data. Crowded trades are perilous if your company is an amalgam of marginal players. A crowd becomes a party when you’re mixing with central banks.

 

The best proprietary trader I ever worked with used to run enormous positions up to an event and then be largely hedged going into the actual announcement. She figured, it works best over the long run if you keep ringing the cash register by playing the emotions of anticipation and then take a pass on the part you have no control over. I think of it as the compound interest approach to building up a big bankroll.

 

How many times have you been transfixed by being told that X out of the last Y Septembers, we’ve seen some asset do the following? And then been unduly influenced by that not very bankable information. Yet for years there’s been this buy the dip pattern in equities that one commentator after another is sure is being done as a direct personal affront to them. It’s true that one day it won’t work. But if you’ve cashed in on the previous one-hundred times it happened you can afford it. Thomas Bayes told you so--as would most street urchins.

 

It’s been a good strategy not because of some P/E ratio nonsense but because sovereign wealth fund, QE and buyback flows have consistently been deployed to contain things. And because they have a time-horizon that bears no resemblance to that of the vast majority of market participants. Should the market go down? Will the next time be different? Successful traders don’t think of it in those terms.

Breslow concludes, try this one on: sovereign bonds and equities aren’t in a trend. If you think they are, you need to justify the reasons for it to continue.

The only thing you need to debate is whether the resolute buyers, who just happen to be bigger than the private market, will keep on doing what they seem to like doing.

It’s always flow, not stock, that should guide you on your next trip.

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DinduNuffin's picture

obi one trader -- use the force you can feel it

Hammer823's picture

There is a direct relationship between increases in wealth and increases in consumption and business investment, which represent the economic engine. The stock market and housing markets are American wealth. So they have to keep going up in value for the economy to grow. Regardless of fundamentals, or economic data, or earnings… stock prices will rise….simply because they HAVE to. The Central Banks and Institutions will make it so. 

grasha87's picture

I have devised a free market currency/scrip to help alleviate recesions and unemployment that the Federal Reserve System has caused:

https://bunky1787.wordpress.com/2017/09/06/the-wallark-neo-scrip/

Erek's picture

Smart is a major component of "luck".

Osmium's picture

The "markets" will continue higher until CB's run out of 1's and 0's

Batman11's picture

Artificially inflated asset prices are not a store of real wealth.

Lesson one – Tulip Mania

Central Banker’s today are creating a “wealth effect” in global asset prices through QE and very easy monetary policy.

What happens when the liquidity dries up?

Perhaps we will learn something this time.

Batman11's picture

“Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929. 

That’s not real wealth you half-wit.

 

TradingTroll's picture

"better to be lucky than smart"

 

Is this a lottery ticket retailer?

grasha87's picture

I have devised a free market currency/scrip to help alleviate recesions and unemployment that the Federal Reserve System has caused:

https://bunky1787.wordpress.com/2017/09/06/the-wallark-neo-scrip/

Rebelrebel7's picture

I Disagree with this statement:

"the only thing standing between this being full-blown panic versus the frenetic gyrations we’re seeing is the central bank put." 

Based on the evidence, the only thing that has prevented full blown panic is the heroin,  opioid, alcoholism, and psychiatric pharmaceutical epidemic!

Welcome to the zombie apocalypse 2.0!

Most of us have been panicking since the nineties!

CPL's picture

DOW 36000!  Bullish!

Livermore Legend's picture

It is indeed "Unfortunate".

For all those who believe so will soon find that being "Smart" will be the only means by which to overcome the unfolding Yield Compression.

You See, Yield Compression will Destroy the Utility of "Nominal" both Practically and Literally.

That hasn´t even begun to be registered, much less sink in.

We have had a Vicious Bear Market in Real Talent, which is Bottoming.

In fact, I will Bet you $ 100 Million Richard that "Smart" will beat "Luck" Going Forward.

And by the way, anyone who believes that what the "Big Players" are "up to" has any relevance to "Position" hasn´t even "beg[u]n to learn" how Markets really work.

"Smith" has No Fiduciary Duties.

The Small Player is Equal to the Big Player:

They share the Delusion that any Individual or Group of Individuals are above the "Instrument".

Markets are Not Manipulated, the Participants are.

This is most especially true of those who believe they are doing the "Manipulating".

Stay Tuned.

gdpetti's picture

Yes, the spice has to flow or everything stops.