There is so much information to absorb and interpret as we journey through our investment and trading adventure. One of my chief (macro) concerns is the Fed and where its policy stands. Geopolitical issues – another macro concern – must always be considered as well; our focus right now is how the situation between Russia and the Ukraine is affecting sentiment. Nobody really knows how this is going to play out, so that unknown outcome raises doubt and suspicion in markets – especially with the markets at/near all time highs.
How is the bond market reacting to the geopolitical news and Fed policy? Clearly there is still robust demand for treasuries as the Fed continues their taper (good news for them – if demand stays strong, they may unload their bonds over time). This would generally be a negative for the stock market, but those low rates counteract any negative effect. Take a look at the chart below, and you’ll see a bump up in foreign demand for treasuries.
Other issues constantly pop up that may swing markets back and forth, and we must have a good handle on these and how they effect our trading. Earnings season is upon us, and by and large, most companies are beating expectations while providing a more guarded outlook. Like us investors/traders, companies must also consider the macro environment, and they will carefully craft their forecasts to include uncertainties and obstacles that may directly hurt their businesses.
It is nearly impossible to trade the macro, but I will build a thesis (a flexible one) that supports a particular trading style, and I will use that approach unless the situation changes. Trading and investing these days is like firing at a moving target – we must have a plan, understand what is out there and how it can affect your trading style, and be nimble.
When it comes to micro concerns, my job is to find the best charts/technicals under specific time frames and make trades accordingly – provided the conditions set by the macro analysis support the style. We are (and have been) in a favorable environment for stocks – low interest rates, moderate growth without inflation, a very supportive Fed policy and global recoveries (though China may be slowing down more than imagined).
With that in mind, I take to the charts to find stock and option trading ideas. I’m a stock picker, so my goal is to find the ideas that will show strength, power, momentum and flow vs the market. We are still in a stock picker’s market – see the correlation index below. The lower the index number, the less correlated stocks are compared to the index. Further, sentiment indicates a rather complacent attitude toward risk, and while that can be a warning sign, it can also signal continued moves in the market’s direction.
Today, this market is certainly acting like it did in 2013, but behavior has certainly changed. Oh, we continue to run up near new highs, but our tactics need to adjust: Leadership is sparse, dip buyers are not comfortable getting involved, the market is still under distribution and institutional players are seeing signs of market fatigue. With the indices at/near all time highs, that could mean trouble. Under the hood, there are stocks (high beta for one group) that have been hit rather hard. We still have active trades, but we will put them on a very tight leash and move aside or play the bear trades more aggressively if the currently favorable conditions should change.