Trader Laments "More And More Of The Old Rules Don't Apply"

In the ongoing effort to identify trading tweaks that might be helpful in navigating these confusing times, Bloomberg's Richard Breslow suggests major changes to two old memes...

I’m modifying “buy the rumor, sell the news” to “go with the rumor and get out before the news”.

 

The other change is assuming that “bad news is good news” no longer applies. Bad news is bad.

As Breslow notes, we used to say that when this happened it would mean the world was normalizing. A lot of people have been looking at the uptick in global growth and inflation and are arguing that that’s in fact what’s happening. Others have concluded that there’s just a great deal of bad news out there that monetary policy can’t cure.

Given the uncertainty over the long-term outlook, there’s been an increase in short-term positioning, looking to catch the mood of the moment. But also ready to cut and run without a lot of provocation. This has led to what seems like everyone serially being caught on the same side of things.

 

 

Anyone who’s playing, has it, looking for the same thing. The marginal buyer quickly becomes nowhere to be seen. And on the news, you get what looks like a violent reaction in the opposite direction. But at the end of the day, the reaction signifies little other than what it takes to clear the market. A situation not helped by every algorithm in the world understanding this is prime front-running fodder.

Yesterday, Breslow explains, it was clear that the bet was to hope for the Fed to do the right thing, and point a spotlight on March. They didn’t. Analysts were able to maintain that the “as expected” statement doesn’t shift their odds of a hike. And that’s a reasonable stance to take. To the short-term leveraged trader it felt like a knee to the solar plexus.

Suddenly, no one was talking March -- until they could get square.

 

The risk-reward just wasn’t there to stick around for a maybe that was priced as a probably.

 

The most interesting immediate reaction to the dovish result came from equities.

 

They gave up their tidy gain on the day. Didn’t collapse, but the animal spirits evaporated.  

 

 

Their initial take wasn’t “oh goody, lower for longer”, but “given everything they’ve said and the numbers we’ve seen, what do they know that we don’t?”

Simply put, Breslow concludes "more and more of the old rules don't apply" - trade accordingly.