Trader: “Admitting Not Having A Clue Is The Best Strategy”

Authored by Richard Breslow via Bloomberg,

After some-start-of-session dramatics, markets have settled down to mostly quiet and mildly cautious price action. And this befits the situation. Traders are finally willing to accept that no one really has a clue in which way, and on what time schedule, this virus will continue to dominate events in the real world and in the financial markets. Admitting that fact is an important step in helping traders deal with it.

There is nothing that will stop algorithms and day traders from reacting to headlines. It’s what they do. But we are certainly not at the stage where it’s anything but folly to think that what we learn from them will settle the issue of where things, and markets, are heading. Certainly on a lasting basis. Alternating between progress and set-backs is the nature of events such as these. And even if they were at the height of their powers, central banks can keep the financial plumbing functioning, but they can’t solve the underlying problem.

While it makes perfect sense for the PBOC to react as they have and settle down their domestic markets, it isn’t at all clear that some broad brush coordinated global monetary policy response will do a whole lot of good. Something far more targeted needs to be tried. But that may be wishful thinking.

If you look at the overall level of the major equity indexes, it’s easy to be surprised at how well they have held up. And how quickly traders were willing to buy the dip. But this continues to be a market with big winners and big losers. Until we get more evidence on whether the affect on the economy will be lasting, preemptive cuts will only exacerbate the situation. If you are exposed to China, you’ll under-perform. If you are a big, defensive stock it will be off to the races. It’s unclear how that really helps matters.

On the other hand, anything that keeps supply chains open would be unambiguously helpful. This isn’t the time to inflame trade wars. Nor the time to play good cop/bad cop with speeches. It’s not a situation where trickle-down strategies will do a lot of good. And if the concern is for the fragility of the entire financial system and its ability to withstand a recession, encouraging more risk-taking in credit-challenged companies and other pro-risk expressions isn’t going to make the financial, let alone real, world safer.

It appears, however, that many analysts can’t resist still having their base cases for how this all plays out. And for the most part, they tend toward some version of it ending with a global economic recovery. “V” or “U,” take your pick. I guess they can afford to be optimistic. It’s probably a better idea to see some evidence first.

I’m not sure any of the immediate economic data will be conclusive. Too much of it may have been rendered old. But by the end of the month, data will start coming in. Watch for any and all numbers having to do with trade. Especially those coming from Asia. In the interim, there will be news, like today’s, about a Foxconn plant being given permission to resume some production, that markets will react to.

Copper has been an important bellwether of market sentiment. It’s bouncing a bit today and trying to see if it can build a base from last Monday’s low. Well worth watching closely. The Bloomberg Commodity Index, despite a somewhat similar looking chart, looks less convinced. And convincing. But, it’s trying. Last week’s low matters because if it doesn’t hold, technical analysts will begin talking about the 2016 extreme. At least we have some good levels to key off of.

Ten-year Treasury yields are holding below the mid-point of their recent range. They really do need to bounce or we could be destined to take another look at the 1.50% level. Which is big. I really do want to hear from Fed Chair Jerome Powell and will be listening for any mention of the words, “yield curve control.” There may be other powerful forces at work here.