"I'm Wrestling With Four Questions" One Trader Reflects On Investors' Feverish Optimism

Former fund manager Richard Breslow summed things up rather succinctly, noting that it would be quite interesting if it wasn’t so insipid.

Yesterday, markets felt really bad, but didn’t necessarily look like it in some of the obvious places. This isn’t risk-off, one news reader scoffingly insisted. Of course he may or may not have been aware that China was on holiday.

Shanghai Composite crashed back below 3,000 to its lowest since June 2016 on huge volume...

As Bloomberg reports, in a stock market where investors are used to being disappointed, Tuesday’s plunge still shocked.

China’s benchmark equity gauge sank almost 5 percent at one point and by the close, the escalating tensions with the U.S. had sent 1,023 stocks down by the daily 10 percent limit -- or more than one in four. Greasing the losses was the Shanghai Composite Index’s slide below 3,000, a level previously breached during market crashes in 2015 and 2016.

SHCOMP lows of the day were perfectly at 19.95% from its highs in January - just avoiding the bear market narrative.

Today, the optics are horrendous, the news leaving little to feel at all chuffed about and yet I’ve spoken with quite a few people who are feverishly looking for reasons to be optimistic.

So Day 1 of the real trade war: S&P -1%, SHCOMP -4%.

This ping-pong ball approach to trading isn’t human nature but it certainly is conditioning, and Breslow asks "should we be blase and look to fade bad news ahead of the expected central-bank reaction or be more systemically concerned?"

Which may be quite prudent, but carries “got you again” risk.

Via Bloomberg,

To that question, I’m wrestling with four questions. And, it may be early, but so far the answers are more mixed than I would have expected. On the other hand, reality isn’t something investors get too hung up on, so you have to keep the flavor of any particular day in mind.

The first thing I revisited is whether risk appetite can decouple between assets. Ordinarily, we tend to think not. This time around, I wouldn’t be so sure. There have been periodic episodes where plain vanilla U.S. assets, even equities, have become safe havens. Liquid and simple has its advantages. They look happy but are masking underlying distress. If this does happen, it can offer great opportunities, but doesn’t last long without help. Use something else to measure mood.

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