There isn't a person on Earth who has experience in this type of market. It doesn't matter if your great great grandfather is 120 years old, having traded RCA and Standard Oil during the 1929 crash. It makes zero difference if you've binged on 72 hour runs of trading Dollar/Yen through JGB interventions until you passed out onto a desk with cocaine residue, empty Red Bull cans and five Quotreks. This market is brand new for all of us. None of us truly know how to deal with it. All we can do is to adapt as best as possible.
Here is a portion of what I sent to my subscribers and investors this weekend as we prepare for continued Twitter driven financial market pandemonium in the week ahead:
How does an investor mitigate this newfound reality of trading in 2019 where one single Tweet can, without any warning, completely change the investment equation over the short-term?
While the conditions may seem less than optimal given the unpredictability of the players involved, there are always adjustments that can be made:
- Expectations for what constitutes acceptable amounts of volatility must be increased
- Position sizing must be reduced
- Diversification in one form or another must be employed
- Dry powder must be kept in order to capitalize on sudden dislocations
- News events must be ignored as everyone is reacting to the same bits of information in the same way
If the market has demonstrated anything in 2019 with some consistency it's that the initial reaction it has to trade related dilemmas isn't necessarily the right reaction. The markets have become caught in a vicious cycle of initial emotional reaction to a tweet or a press conference, followed by intelligent dissection of how the overall macro picture is shaping up with the initial emotional reaction seeming a lot less relevant upon careful consideration.
This has caused huge moves down to get reversed in a too fast, too furious fashion to borrow a term from the President who happened to borrow that quote from a movie title. Nevertheless, it's an accurate way to describe the reversals that investors have witnessed in 2019.
Meanwhile, each time one of these fast & furious moves take place in the market, negative sentiment gets ratcheted up significantly. This isn't short-term negative sentiment either. The increased volatility in the markets is creating an entire army of bearish investors who are concretely resolved to remain in the bearish camp indefinitely.
This type of short-term, news driven volatility, equaling long-term bearishness dynamic is an extremely bullish underpinning for the markets. It creates the necessary wall of worry that the markets conveniently climb while your average investor scratches his or her head wondering why and how the markets can be going up in the face of such bad news
The only time the fundamental foundation of contrarian price action is compromised is when the news cycle gets significantly more bearish with new tangible pieces of negative data that the market has not yet factored into the equation.
Increased tariffs, at this juncture of the news cycle, do not constitute new tangible pieces of negative data. Not much about the trade war would constitute a new tangible piece of negative data, in fact. For this reason, the negative reaction we saw on Friday to an escalation of the trade war is set to be reversed in the week ahead as an abundant amount of bearish sentiment is set to support the markets moving forward.
Take all of the emotion out this for a moment and what we are left with is something extraordinarily simple: We are in the midst of a reshaping of the global economic order, while the U.S. markets are not too far off of all-time highs, with interest rates increasingly providing about as accommodating an environment as one could ever want.
All the meanwhile, everyone and I mean EVERYONE is completely blindsided by the noise, whether it be trade related, recession related, yield inversion related, earnings related, geopolitical chaos related, hating the President related. All of it is creating a bubbling bearish sentiment picture that will not only support the market moving forward, but propel the market much higher into year end.
These Tweet induced dances with chaos have proven to be a buying opportunity since Q4 of last year. This buying opportunity equation on the dips isn't going to change in the near-term one bit. The only thing that is going to change is the negative news flow, which finds innovative ways to get investors to think that this time the markets really are going to tank. This time, China and the U.S. are going to come to such blows that the entire global economy is going to collapse.
If you believe this, then you are the consensus. While consensus isn't always wrong, generally speaking, you don't want to be in sitting in their camp as an investor. With all of the aforementioned positive factors working in the favor of U.S. equities, this continues to be an opportunity to buck the consensus, searching for opportunistic points to increase exposure to U.S. equities.
Get your heads out of your respective asses.
Shut off the noise.
Look at the big picture.
Bid em......
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