Brief Summary
This episode of Markets Unscripted discusses the market's reaction to Middle East tensions, the importance of price over personal opinions, and the benefits of focusing on relative strength in trading. It also covers market bottoms forming during periods of negative news, the necessity of following a systematic process over personal biases, and the impact of positioning and put buying on market stability. Additionally, the resilience of Bitcoin, macro risks associated with 30-year bonds, and the critical role of position sizing in trading success are examined. The episode teases an upcoming interview with market wizard Tom Basso to discuss systematic trading.
- Markets often rally despite geopolitical fears due to over-hedging and lopsided positioning.
- Price action and relative strength are more reliable indicators than expert opinions or news headlines.
- Market bottoms typically form when news sentiment is at its worst.
- A systematic trading process is essential for long-term success.
- Proper position sizing is crucial to manage emotions and avoid significant losses.
Why markets rallied despite Middle East fear
The markets are trading higher despite ongoing tensions in the Middle East. This is primarily because many investors had hedged their positions in anticipation of market weakness over the weekend. The lack of further escalation led to buyers entering the market on Monday. The experts' opinions on oil supply have shifted dramatically in a short period, from predicting a surplus to fearing scarcity, highlighting the unreliability of expert views.
Why price matters more than your opinion
It's important to recognize that any data or situation can be interpreted to support a pre-existing conclusion. People tend to align their market views with their personal biases, such as political affiliations. Instead of trying to predict the future, traders should focus on making informed bets based on market confirmation. The market price reflects all available information, including supply destruction, and traders should avoid getting fixated on a single narrative.
The better trade: focus on relative strength
When facing high news-driven environments, it's better to focus on stocks that have shown resilience rather than getting caught up in the news. Identify stocks that have been strong during market weakness, as they are likely to perform even better when the market stabilizes. Examples include NBIS, which benefited from Nvidia's investment, and optic stocks like Sienna, which didn't break down during market downturns. MU (Micron Technology) is another example of a stock demonstrating significant relative strength, reaching new all-time highs despite market volatility.
Why market bottoms form when news looks worst
Market tops often occur when the news is most bullish, and bottoms form when the news is most bearish. This is because, at market tops, everyone is already long, leaving no one left to buy, while at market bottoms, excessive bearishness creates an opportunity for a reversal. It's essential to be mentally prepared to buy when things still look bad, as waiting for positive news often means missing the initial move.
Following process over personal bias
Making money in the market is not easy, and a systematic process is crucial. Even discretionary traders should have a structured approach with consistent indicators and logic. Personal biases can be detrimental to trading decisions. One should follow their process and data, regardless of personal feelings. Even with a bearish outlook, it's important to cover shorts if the data indicates, as demonstrated by Jason's experience.
Positioning, put buying, and why the market didn’t break
The market didn't break down due to excessive put buying and short selling, which created a contrarian setup. Record put buying and high short interest can prevent markets from unraveling quickly. The AI sentiment survey indicated a high number of bears despite the market not breaking down, suggesting that the strength of the AI revolution is offsetting negative factors. New trends can build up beneath the surface while attention is focused on other news.
Bitcoin resilience and what it may be signaling
Bitcoin has shown resilience, trading much better in recent weeks despite market weakness. This divergence suggests underlying strength in Bitcoin, potentially signaling broader market trends. Dan Nathan's recent short positions on Bitcoin, despite never having traded it before, may indicate a contrarian signal.
30-year bonds, liquidity, and macro risk
The 30-year bond market is showing signs of weakness, with bonds performing poorly since the start of the war. Commercials are buying into this weakness, which is a cause for concern. The fundamental bearish story revolves around liquidity, and declining bond prices suggest potential macro risks. High yield bonds (JNK ETF) are also weakening, indicating broader credit concerns.
The real reason most traders fail: position sizing
Most traders fail because they don't get position sizing right. Emotions are tied to position sizing, and feeling like you're on an emotional roller coaster indicates you're trading too heavily. It's better to undersize and undertrade, focusing on the long-term game rather than trying to get rich quickly.
Tom Basso preview and final takeaway
Next week's episode will feature Tom Basso, a systematic trader, who will discuss his process and current market views. Tom Basso emphasizes position sizing to manage risk and maintain a calm approach to trading. The key takeaway is to focus on making money over time rather than seeking excitement, and to build a systematic process that works for you.
