Know the Macro Before you Attack the Micro

There is just so much information to understand as we journey through our investment/trading adventure.  One of my chief macro concerns is the Fed and where policy stands.  Geopolitical issues must always be considered and nothing is more important right now than how Russia/Ukraine are effecting sentiment.  Nobody really knows how this is going to play out, so that unknown outcome raises doubt and suspicion in markets – especially at/near all time highs.How is the bond market reacting to the news and Fed policy?  Clearly there is still robust demand for treasuries as the Fed continues their taper (good news for them if demand stays strong so they may unload their bonds over time).  That would generally be a negative for the stock market but with rates so low as they are it may not be such a bad effect.
See the chart below for a bump up in foreign demand for treasuries.Other issues constantly pop up that may swing markets back n’ forth, and we must have a good handle on these and how they effect our trading.  Earnings season is upon us, by and large most companies are beating expectations but are providing a more guarded outlook.  Like us as investors/traders, companies must also consider the macro environment and carefully craft their forecasts to include uncertainties and obstacles that may directly hurt their businesses.

On a more personal level, perhaps you are doing some heavy traveling and cannot monitor trades at all times.  Then you had better lighten up and stay nimble until such time that you can focus and concentrate.

But it is nearly impossible to trade the macro.  I will build a thesis (flexible one) that supports a particular trading style and will use that approach unless the situation changes.  Trading and investing these days is like firing at a moving target – we need to adjust and move our feet accordingly.  You gotta have a plan.  Understand what is out there and what can effect your trading mantra and style, be nimble.

As for the micro, my job is to find the best charts/technicals under specific time frames and make trades accordingly – provided the conditions set by the macro analysis support the style.  We are and have been in a favorable environment for stocks – low interest rates, moderate growth without inflation, a very supportive Fed policy and global recoveries (though China may be slowing down more than imagined).

With that in mind, I take to the charts to find stock and option trading ideas.  I’m a stock picker, so finding the ideas that will show strength, power, momentum and flow vs the market is my goal.  We are still in a stock picker’s market, see the correlation index below.  The lower the index number the less correlated stocks are with the index.  Further, sentiment indicates a rather complacent attitude toward risk, and while that can be a warning sign it can also signal continued moves in the market’s direction.




bl foreign bond purchases

Today, this market is certainly acting like it did in 2013, and behavior has certainly changed.  Oh, we continue to run up to near new highs, but our tactics need to adjust.  Leadership is sparse, dip buyers are not comfortable getting involved, the market is still under distribution and institutional players are seeing signs of market fatigue.  With the indices at/near all time highs that could mean trouble.  Under the hood, there are stocks (high beta for one group) that have been hit rather hard.  We have trades on still but will put them on a very tight leash and move aside or play the bear trades more aggressively if the currenlty favorable conditions should change.