What’s been driving the strong “Risk On” market psychology since late September?
Successful trading means positioning for what you think will happen...not for what you hope will happen. When it comes to analyzing the market impact of political developments we therefore focus on what we think will happen rather than on what we wish would happen.
Equity markets were driven sharply higher this summer and the US Dollar
was driven to 2 year lows by waves of self-reinforcing “risk on” market
psychology…but that changed Big Time at the beginning of September.
Massive stimulus from governments and Central Banks created a powerful “risk on” market psychology that drove equities and commodities higher and the USD lower over the past few months. We think this “risk on” market psychology in the process of reversing and we’ve been trading accordingly.
The big drivers of market psychology year-to-date have been, 1) the virus (and its anticipated knock on effects) followed by, 2) massive stimulus from Central Banks and governments. The virus psychology drove equities and commodities down hard...while driving bonds and the USD higher...whereas the stimulus has had the reverse effect on equities, commodities and the USD.
Since the February All Time Highs we’ve had the shortest bear market ever...followed by the fastest recovery to a new record high in over 80 years. We're very lightly positioned at the end of the week...thinking that September may bring some serious reversals across markets. Don't be short volatility!
The news that “Buffet Buys Barrick Shares” spurred gold to rally more than $70 from last week’s close to Tuesday’s highs...the US Dollar Index falling to new 2 year lows also buoyed gold. We shorted gold on that rally and bought the US Dollar against the Euro currency.
Question: How many times have we seen markets get “silly” during the “dog days” of August...only to get hit with “reality” immediately after the Labor Day weekend?
On June 20, 2020 we wrote, “Markets currently seem to be highly correlated into a simple “risk on / risk off” dichotomy...with the emini S+P futures leading the way while other markets follow.” Some people refer to it as, “All One Market,” and from a macro perspective it’s been a “risk on” market since mid-June as:<