Rev's Forum: The Obvious Trade Isn't So Obvious After All

 | Jan 12, 2017 | 7:16 AM EST
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"Strategy is about outthinking your competition. It's about vision first and planning second."

--Max Mckeown

The "sell the Trump news conference" trade didn't work as expected on Wednesday, but the bears are back again, looking for the Trump rally to unwind. Weakness in the dollar is the main driving force this morning, as it weighs on the yen and drives gold over the $1200 level.

The potential for a selloff on Donald Trump's news conference yesterday was quite high, but it may have been too obvious as a catalyst. The computers were programed to buy the dip and squeeze the bears who pressed too hard, and that is exactly what they did. The indices ramped all afternoon and went out at the highs.

The action was a good example of how it isn't just simple fundamentals or technical patterns that drive the market. It is a game in which traders are constantly trying to anticipate what the other side will do, but it goes many levels deep. It isn't just "sell the news", because such simplistic thinking doesn't create any edge for the computers that are working to anticipate the anticipation.

In the longer run, the bigger trends will eventually emerge, but in the short term the trading games greatly complicate the timing. If you are going to make a big market timing call, you better be prepared for some counter-trend moves like we had yesterday afternoon. The obvious "fade trade" on Trump was also an obvious buy trade from a different perspective.

The next obvious trade will be to sell the inauguration. Everyone knows this already, so the question is whether traders will try to anticipate it and start selling at an earlier point. That is what we are dealing with this morning. Of course, anticipating the inaugural selloff is also obvious, and in there lies the opportunity for the algorithms to go to work once again.

Rather than trying to figure out the exact moment the market might make a major turn, I am focusing on my individual positions and letting them determine the extent of market exposure. The recent rotational action, weakness in small caps, lack of clear leadership and basic instability have left me with a fairly high level of cash. It is bearishness by default, rather than by design.

Early indications are weak, the dollar is down, oil is steady, precious metals are rallying and biotechnology is weak. We have some Fed speakers on the calendar, weekly unemployment, and earnings season starts tomorrow with reports from some big banks.

It isn't a very upbeat morning, but the computers are jerking us around and the potential for another squeeze and a DJIA run over the 20,000 level is quite high.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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