This post will summarize what is happening across financial markets and economies--what is sometimes called the "macro" picture--and explain how that understanding can help our short-term trading.
I've begun work with new portfolio management (PM) teams at hedge funds, and I have been impressed by the unique research undertaken by each team. One thing that makes these teams distinctive is that they first seek to understand what in the world is going on and only then do they explore trades that might provide them with good reward relative to risk to exploit this understanding. Because they are driven by intellectual curiosity and the desire to understand, they are not following every tick in the market and they are not going on tilt, trading on FOMO, and experiencing all the common problems we hear about. When PM teams meet with someone like me, it's to expand their understanding, improve their teamwork, and translate conviction about what's happening in the world into portfolios of trades that best leverage their distinctive strengths.
In my upcoming book, Positive Trading Psychology, I explain how a knowledge of short-term trading can help active investors achieve better reward relative to risk for their trades. I also explain how an understanding of macroeconomic fundamentals can help short-term traders identify unique areas of opportunity and align their trades with bigger picture trends. It is when we blend the tactical identification of opportunity (our fast-thinking, pattern recognition skills) with the deeper, strategic thinking that provides us with an understanding of market trends and patterns that we achieve the positive mindset that accompanies a sense of mastery. Optimal trading psychology comes from understanding, and understanding comes from preparation. Notice how the relationship among preparation, mastery, and mindset occurs in every performance field, from sports to chess to professional dance.
OK, so what is going on in the world? Here are a few observations from macro markets, with a shoutout to Barchart.com, which provides a wealth of data (found in the following links) regarding performance across asset classes and regions of the world:
1) The US Dollar is outperforming other currencies: Note the uptrend in DXY since early October. During that same period, note the relative weakness of the Japanese Yen, the Canadian Dollar, and the Australian Dollar, and the relative strength of the US Dollar to the Chinese Yuan.
2) The yield curve has been steepening: Remember how, not so long ago, we were talking about inverted yield curves and forecasts of recession? No longer. Since September, long-term fixed income prices have fallen more than medium-term fixed income prices and both have fallen more than short-term fixed income prices. That means that interest rates are rising as we go out on the curve. Note that high-yield bonds have performed relatively well. We don't seem to be anticipating defaults in the fixed income world.
3) Many commodities have weakened: The commodity index is down since early October, with notable weakness in metals and mining, agribusiness, and the shares of raw materials companies.
4) US stocks have outperformed overseas averages: Note the relative underperformance of European shares since late September and, indeed, in the relative underperformance of non-US stocks in general. Shares in China have held up better than shares in Australia, South Korea, and Brazil.
5) Performance among US stock sectors has been very mixed: We've seen relative strength in NASDAQ shares and Consumer Discretionary stocks. Growth shares have outperformed value stocks lately and small cap shares have recently underperformed the overall market. Note the particular weakness in interest-rate sensitive sectors, such as real estate and utilities, as well as raw materials and healthcare. We hit a peak in stocks making fresh new annual highs on November 6th and, since December 10th, the number of stocks making fresh one month lows have exceeded the number of monthly highs every single day and the number of shares registering three month lows have exceeded the number of three month highs almost every day. Only 6.45% of real estate stocks are trading above their 20-day moving averages as of this past Friday and only 7.14% of raw materials shares. By comparison, despite the recent correction, over 30% of technology stocks are above their 20-day averages.
Conclusion: The bottom line is that performance in financial markets has become narrower and narrower. Rising long-term rates in the US, falling commodities, and weak overseas equity markets speak to the potential impacts of economic policies that seek to place America first. The prospect of broader trade wars and diminished trade due to possible retaliatory tariffs weigh on many segments of equity markets. Trading success has hinged on identifying the relative winners and losers in the emerging financial landscape. Short-term traders should be alert to the patterns of relative strength and weakness.
So far, in the big picture, strength is relatively concentrated in the US (US dollar; US stocks) and, within the US, strength is relatively concentrated in growth segments of the market. A Goldman Sachs report observes that concentration of value among US stocks is at historic highs. They observe that we have only seen similar levels of concentration prior to the Great Depression, at the peak of the dot-com bubble, and during the early 1970s. Right now, themes of relative strength and weakness dominate the macro investing landscape. It will be important to watch the segments of greatest strength to see if this period also turns out to be a bubble that bursts, perhaps as the stagflationary result of tariff wars fueling inflation and restraining growth.
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