Talking Points:
- It can be difficult to distinguish whether a market is performing due to confidence or merely through complacency
- While there are differences between a 'market' and individual view, we can use the diligence with the former on the latter
- What would we assess when we don't clearly define our risks, trade for the wrong reason or are no longer expecting return?
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In such a large and diverse financial system, there will inevitably be different views of market value. Yet, what matters is that we establish a belief of value that is based upon quantitative and qualitative evidence that can enforce our conviction of the market's we intend to navigate. Perhaps one of the most important discussions in trading currently is the level of confidence behind the exceptional exposure the speculative rank currently has in the global financial system. In other words, are record highs for the likes of the S&P 500 and unprecedented leverage (both thematic and notional) justified by confidence and a stable outlook or are they founded through sheer complacency? In the former scenario, traders should look for opportunity and value return over the possibility of risks. For the latter, safety is paramount and circumspection should be a constant.
To debate quality in a crowd - and for that matter even to establish it for ourselves - we have to agree to the general metrics. What are we measuring confidence, conviction and complacency against in the markets? True confirmation doesn't come until after the fact, but that doesn't offer anything to the person looking to take advantage of an opportunity. In real time, the state of the markets surrounding our objective offers the most comprehensive assessment of circumstance. Yet, even in that big picture capacity, the arguments over importance and direction run deep. Is global growth stalling? Will global monetary policy upend the reach for risk? Is globalization or protectionism the more threatening outlook for the financial system? It is easy to imagine the debates that can arise from these important qualifiers. But, perhaps putting the evaluation into our own, personal context can help distill the evaluation into a more objective picture.
Often, when we evaluate ourselves - versus the abstract market - we make more decisive evaluations about our trades and trading. We can ask the more pointed questions we pose to ourselves to the markets at large as well. When we ask ourselves whether we have clearly defined our risks in an exposure, we can avoid a poorly balanced trade. That is the same for the entire system. Establishing when we have put on a trade for the wrong reason, expecting it to play out in our favor reads more like the low probability venture that it is. And, situations where we simply are making a reasonable return is arguably the most black and white assessment of a poor situation that can be imagined. All risks should be met with a balanced return potential otherwise we are a punching bag for uncertainty. Yet, where does that balance lay for the entire market today? Are the masses account for risks properly? Are they entering the market now for meaningful opportunity or FOMO (fear of missing out)? What is the baseline and specific rate of return for the market? While we may not agree on the measures and outcomes, it is important to come to a well-reasoned evaluation of the market's footing. We discuss this confidence in today's Strategy Video.
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