Approach the Week (ATW)

July 14, 2024

As is customary in previous unfortunate episodes, I will be changing the title of this week’s ATW to something else, given the events of the weekend. The hallmarks of a more violent and divided world are becoming clearer and should not be dismissed. Outside of the increase in conflicts, everyday violence also seems to be on the way up. I don’t know about you, but things are seemingly tense. I can sense it when I commute around town or take on the streets of London in my car. Hopefully, tonight’s football score will relieve everyone out there emotionally. May the best team win.

With emotions running hot, I feel a sense of fear. Fear, as good old Yoda commented, leads to anger and suffering. So much of this is true. I recently consulted my trading journals from the past. I undusted my December 2008 calendar, where I had daily comments about markets and about the state of my mind at that time. It’s a great reminder of how you managed your own emotions during that stressful time.

On December 10th, for example, I wrote:

“2 weeks until Christmas. No idea how we are going to get there. The world is falling apart. Have we seen the end of this torture yet? I feel fearful, but my positions make money. Why? Do I know what I’m doing? Maybe I fear for my job and the future of this industry. Can the Fed stimulate more? They should. Keep a tight ship. Remember, this is not life, so stay relaxed and keep yourself away from too much negative thinking. We fight another day.”

As I have opined before, emotional risk management is an area in which people clearly invest too little time. Not only are we taking on Mr. Market, but most importantly, we battle against ourselves and our inner voices. Fear is pointless but deeply engrained in our DNA and cognitive functioning. Fear never leads to anything. Ask yourself when fear has ever worked out for you. It certainly won’t work in markets, not in the long term.

Read my piece below for more details.

That’s why I also don’t take people too seriously who talk trades on their platforms without showing any skin in the game. If you have no skin in the game, you have no emotional skin in the game, so whatever trades you are seemingly running have no weight, zero; they are just fictional numbers which don’t mean anything as they are not real. So beware of the “furus” and geniuses out there who selectively pick a trade that is miraculously working. Everyone and their dog will pick winning trades. The key is, however, whether you can consistently print alfa, not only for a week, month, quarter or even a year. That’s why I am showing my models where you can visually see for yourself how the systematic process would have performed across 250+ different assets over time. Of course, it doesn’t always work, but it does more often than not, and that’s enough to cement a long-lasting process.

Rolling back into markets, I would summarise the current play as a continuing slowdown with the fourth consecutive CPI decline and the first negative sequential print since 2020. Both inflation and growth measures are now painting the same picture. December Fed contracts now imply 482 bps – vs the current target band 525-550 bps. Equities and credit gained modestly, while Treasury bonds gained emphatically, especially across shorter maturities.

Let’s now see what Macro D’s thoughts are as we go into the second half of July before we explore what data points we should focus on during this week’s calendar and what chart patterns currently stand out from a tactical perspective.

Let’s go!