One of the hard lessons in trading markets is overthinking. Last week delivered a message to those in cash - buy the dip. Old wisdom of reading the tape provided day traders means to read volume and momentum to get out of the way, writes Bob Savage, CEO of Track Research.

Lessons from last week have led to a weekend of contemplation. The mood swing from bear to bull across markets was staggering.

We are days away from a bigger change from Winter to Spring, and yet we know we have another storm or two until the weather matches the new mood. Markets shifted from fear that rates going up will kill the rally to faith that slow wage growth provides cover for ongoing easy money conditions.

There were three key parts to support this logic:

First, the threat of Trump tariffs was real but didn’t lead to an immediate trade war.

Second, the U.S. jobs report was robust with jobs but not inflation as wages increased just 0.1% m/m.

And third, the Trump-Kim talk in May plans tantalized those looking for a peaceful solution to nuclear threats that have plagued the world for decades.

The path to risk-on was followed and the return of Goldilocks thinking blossomed even amidst the cold reality of an ECB shifting its easing bias and a BOJ still talking about exit plan discussion terms. Those who benefited from last week were not macro thinkers but simple tape readers.

One of the hard lessons in trading markets is overthinking. Last week delivered a simple message to those in cash - buy the dip. The old wisdom of reading the tape provided day traders means to read volume and momentum to get out of the way of big changes. Today, such styles require constant monitoring of cash, futures and options pushing such exercises to computers rather than people.


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Can algos overthink the market? Can people beat machines? These questions remain central to understanding 2018 and why its different than 2017.

The risks that can derail the easy money returns in the week ahead revolve around inflation – U.S. CPI/PPI and retail sales set the stage for how hawkish the FOMC hikes in March and whether the market moves from its safe 3 hike call towards the 4 or more story.

Last time around, tariffs induced inflation globally. Some fairy tales are filled with more fear than greed, and so, the return of the bears to markets will need darker stories about growth and more doubt about policy.

In order for the markets to extend the rally to new highs in March we will need a number of new factors:

1) Proof that higher rates don’t matter to the world (i.e. Conviction that the asset inflation of the last 10 years induced by easy money won’t reverse when its gone);

2) Evidence that geopolitical risks like U.S. tariffs, Brexit, North Korea or Russia or the Middle East just don’t matter to the global growth rate (i.e. the ability for the world not to react and retaliate to U.S. trade actions);

3) Further evidence of stellar growth everywhere – from Europe to the U.S. to China. (i.e. China data in the week ahead on industrial production, retail sales, fixed investment – all prove the balanced approached to reform/finance don’t slow growth and risk EM disappointments.)

The evidence of fact over fiction last week makes the next week more difficult – as overthinking will surely follow – as U.S. growth and European growth indicators clearly showed moderation.

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