Review: Is This The Calm Before The Storm?

Our previous Stock Exchange asked the question: Is this the Calm Before the Storm? We noted that when the market is slow and conditions are not attractive, patiently NOT trading can be an attractive strategy. However, forcing trades when conditions are not attractive by taking on more risk can be a big mistake, especially when slow markets are interrupted with a new batch of volatility. It’s important to know your style, what works for you considering risk tolerance and goals, but that doesn’t mean sticking your head in the sand and never learning anything new.

This Week: Caught Leaning Into A Trade? Now What?

Here is a look at a sector and asset class ETF chart from Blue Harbinger, and it seems many market participants have been leaning heavily against the China “trade war” trade this year (see (ASHR)).

The data is through the end of day yesterday, and as we can see, China had been performing absolutely terribly this year, but showed signs of life yesterday. What happened? The market seems to have been favoring the US strongly as the two countries exchanged tariffs and more tariff threats. But just yesterday we received news that the two sides had made plans to talk, and that was enough to sharply reverse the direction of China stocks in a relatively strong one day move. Further still, it shows a lot of people may have been “caught leaning” into the China trade. So now what?

There is a lot of negative sentiment built into the current market. We have opined that any solid and credible news about improvements on trade would be worth 4%, and 10% if a real trade war is avoided. Yesterday’s rally is a big reaction to a hint of news (China and the US made only tentative plans to talk). It suggests that much of the fast money is “leaning the wrong way.”

So what do you do when you get caught leaning – or even offsides? It is especially challenging because your initial lean reflects an opinion. Alternatively, it can be very useful to discover situations where most others are leaning. Investopedia’s Alan Farely covers the latter in his…

One of the salient points from Farley’s article is that if you’re too in love with a trade, “you give way to flawed decision-making. It’s your job to capitalize on inefficiency, making money while everyone else is leaning the wrong way.”

“RevShark” takes on the former. We don’t necessarily endorse any of the bear trap, rigged market rhetoric, but nonetheless it is an interesting read about leaning the wrong way.

The point is that the market can often lean too far in the wrong direction on a trade, and as a trader you can either lean too far (i.e. get caught “offsides”) or you can look for the opportunity to exploit the market inefficiency. Obviously easier said than done, but staying alert and disciplined in your trades can help.