Why Stocks are on Fire and Answers to Other Big Questions


3 QUESTIONS - What a fascinating twist on Wednesday. In the end, we are left with three questions. 1) Why did the market get it so wrong? 2) What signs were there that we should have paid more attention to? and 3) Why are stocks on fire? First things first, I broke a cardinal rule and I need to discuss it so as to remind myself to avoid making this mistake again and to remind you all to also steer clear of making this mistake. So I will discuss the rule I broke and then get into answering the 3 questions above.

 

RULE BREAK - So what rule did I break? Well, Wednesday was a spectacular day for my book. I traded well and managed to book a large profit on my SPX500 short. I exited at the right time and also hit some other trades with the net result yielding a total profit of about 6.5%! That is a big day! And after doing so, I stepped aside and didn't really look on with much interest until much later in the day. But as the day progressed, something happened which came completely out of left field, the was shocking. We saw a massive rally in stocks despite Trump's victory. 

PROTECTION - I will get more into that later on. But the point here is that stocks rallied back and the rally got me very excited. So much so, that I broke my own rules. I have spent many years setting up rules that protect me from making mistakes and I didn't listen on Wednesday and when I saw stocks rally sharply, I decided to sell back in. Now, it's important to remember that this has been my strategy all along. Selling was not the problem. The problem is that I didn't sell when my model was telling me to. I disregarded the things I wait for and just jumped in. 

SILLY MISTAKE - I continued to take shots earlier today but have since taken a loss and stepped back on the sidelines. In the end, I went from being +6.5% this month to +4.5%. I lost 2% on a silly mistake. Of course, if you're going to make a mistake and learn a lesson, it's good to do it when you're giving back profit and not netting a loss, and I'm grateful for that. Nevertheless, I will make sure to avoid making that mistake again. Just because you're up a lot, doesn't mean you can go ahead and break your rules. Hopefully we can all learn from this. So I will happily sell again today, but not until it's there for me based on my rules. 

NO HASSLE - Ok, so now back to the 3 initial questions. 1) Why did the market get it so wrong? The answer to this is that with politics and especially politics today, we rely on polls that in the end aren't going to accurately reflect sentiment. You see, while many out there were delighted with Brexit and delighted with the US election result, they didn't want to be hassled with the stress of having to constantly defend themselves in public. To be pro Brexit or pro Trump was perceived to be a 'Bad' thing by many and this is something many didn't want to have to deal with. So naturally, it would always seem like Remain and Clinton would be the favored outcome. There will be a lot of work that needs to be done in this field going forward. 

BETTING HOUSES - On to the next question...2) What signs were there that we should have paid more attention to? With this one, the answer is amazing. In both the EU referendum on Brexit and the US election, the betting houses had the money on Remain and Clinton and yet the majority of the bets were for Brexit and Trump. Just to make this point clear, while with betting, where the money is at is the important variable, in voting, it means nothing as each vote is equal and the same. So if there were more bets for Brexit and Trump, this should have been the best poll of all. 

HEAD SCRATCHER - Finally the last question....3) Why are stocks on fire? For this one, I have no good explanation. I have been scratching my head for hours and can't come up with anything that makes any good sense. With FX, it all makes sense. The Fed should still stay on course to hike rates and so the US Dollar should be bid up. But stocks back to record highs? C'mon man! Once again, monetary policy is exhausted and the global economy is still on the ropes.

Just because you're up a lot, doesn't mean you can go ahead and break your rules. Via @joelkruger

DON'T BE FOOLED - With nothing left to stimulate investors and with the Fed on the way to raising rates some more, this should not be good for stocks. So I am going to chalk up this price action to a market that might be feeling better about Trump on conciliatory comments on the economy and trade and a market that has squared up hedged positions into the election. As the hedges are unwound, it opens natural upside in stocks. But my view is that give it another day or week or so and then wait for it all to come crumbling back down. 




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