Risk Aversion, Central Banks: Its A Trader’s Market

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This is a Trader’s Market by EconMatters

Market Themes

The one that has really characterized financial markets over the last couple of years, and by financial markets I mean everything from Forex and Natural Gas to Bonds and Equities, is that sure buy and holding works in certain asset classes given the bull market in equities, but even in regards to equities trading around the market had been the most profitable strategy by a large amount. Many markets like bonds which are currently dominated by Yield Chasers trade in tight ranges, and it is so much more profitable to just swing trade the range because bonds really haven`t gone anywhere for months. Any Bond Bull who didn’t take profits on positions when the 10-year yield was 2.40% is regretting that decision today, and this goes for many markets with ever contracting volatility.

Contracting Volatility

The other trend in markets is that with contracting volatility and so many trading strategies revolving around spread trading and yield carry arbitrage trades prices move a lot less on a 23 hour basis, it boils down to fewer opportunities than before regarding the Asian markets, whereas just 4 years ago it made sense from a volatility standpoint to trade the futures markets overnight for some robust moves, it really isn`t worth one`s time these days. Basically, prices move at the European open and the US Pre-market and open, the European close, Gold and Oil close, and are dead until the equities close unless there is a big Fed day.

Risk Aversion Strategies: Better to make less money, but have perceived lower volatility strategy on Street – becomes self-reinforcing for Industry Trend

Markets have been characterized in the low volatility environment by bot trading, i.e., the machine algos trading back and forth with each other in very, very tight price ranges. This past Wednesday and Jobs day offer some of the best trading opportunities and glimpses of what markets used to be like to trade before the Central Banks started mucking things up with five years of near zero percent liquidity, and the fact that modern finance just loves risk-free arb strategies that are facilitated if they are able to keep volatility in a tight range at low levels.

Central Banks & Market Intervention: Markets became Instruments for Social & Monetary Policy

Once Central Banks get out of markets, and I know some critics think that once they get in they are here to stay, healthy volatility and actual price discovery should come back to asset classes. Oil has been characterized by a trader`s market; one outperformed the buy and holding strategy as no real trends have emerged by and large for the last five years, just sell tops and buy bottoms of the five year trading range between $80 and $110, of course the key is to pay attention to when this trend changes and to use healthy stops, because oil can always make a 2007 run if all the stars align in the market.

Learn to argue both sides of an issue

But the broader theme of this article is just to say that prices move around a lot in many asset classes but don’t really go anywhere in the overall big picture, and savvy traders have taken full advantage of this state of affairs to outperform the market. Don’t ever fall in love with any view, position or asset class because chances are traders will be taking the low hanging fruit, and moving to greener pastures. In short, this is a trader`s market.

Don`t Fall in Love with Positions

And even when the inevitable selling begins and the market declines don`t just position your portfolio with market blinders! For example, there were always powerful snapback rallies during the Financial Crisis and subsequent Market Crash in equities like Citigroup and Bank of America, so don`t fall in love with your shorts, get in get out, and outperform the broader market.

AUM versus Performance

Of course that is easier said than done as so many hedge funds underperform the broader market, but as we have noted before there are a lot of incompetent people managing money these days, and I blame a lot of this on the pension funds and institutional money like endowments who seek diversification just for diversification`s sake, and a bunch of hedge funds and fund of funds have sprung up to take advantage of this trend that couldn’t analyze or trade their way out of a paper bag.

But they get paid for raising money, and shoot it isn`t their money, and as long as pension funds and endowments are this enabling, the game continues to be played by these rules. Wall Street is an AUM game, not one which attracts the best minds in the world from other fields like technology and science, they try to outsource these minds, but they usually are of the lower echelon, and relegate these types to support functions like programming.

Punctuation & Grammar Police

Just as an aside as I love that our readers point out the predictable mistakes in our articles, keep up the good work as this keeps us from falling too far in the modern finance cliché, “that if one spends too much time on editing emails, analysis and write-ups, then one isn’t really doing anything substantial in the business”!


There can be many effective investing strategies and they all have their merits, but if you`re frustrated that your position keeps bouncing back and forth, giving up large profit chunks and seemingly going nowhere you might want to develop a trader’s mindset!

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