rosalinda.blog

Having traded purely on technicals during one of my learning phases, I understand why even serious retail traders prefer not to look at fundamentals — apart from keeping track of major news releases to avoid trading around them due to prop firm rules. I do feel this is rather myopic though and removes some of the beautiful complexity of the markets. After all, decision-making in the markets is an elegant composite of fundamental catalysts, market positioning, as well as price levels or supply and demand levels.

A strong grounding in fundamental analysis can fortify a trader’s confidence to hold positions longer than they might based purely on technicals, or build a position more aggressively on an intraday chart than they normally would. It is those heavy multi-month trending moves driven by major positioning changes and bets by the big guys that allow for sophisticated participation.

But of course, access to such fluency is not always easily available to retail traders who may have no training whatsoever in topics such as macroeconomics and financial markets. If available, it also takes years of experience to appreciate and interpret the nuances embedded in the otherwise complex and overwhelming news flow that tends to influence market sentiment.

And so, this is my little cheat sheet that I used in 2021. There is a bit more information on this than I would like, but the idea is that at any point in time, it is worth paying attention to headlines that relate to these three “big picture drivers”, which tend to have the most bearing on market sentiment. Anything outside of these main themes of 1) growth 2) central banks 3) geopolitics, while potentially exciting, may not necessarily fall onto the market’s radar or get meaningfully digested.

Over the years, I keep going back to these three themes when sifting through the news flow to identify the most market-moving developments.

For instance, in 2019, day-to-day market sentiment was mainly influenced by headlines relating to global growth concerns, talk on Fed policy normalisation, and particularly for that year, trade war news (which included Trump’s tweets). In fact, US-China trade tensions were culpable for some of the most aggressive risk-off episodes in 2019.

I even made a log then to keep track of the trade war headlines:

Trade war news didn’t always trump the other themes however.

In mid-August 2019, a classic recession indicator fell on the market’s radar, this being the “2s10s curve” (difference between the 2-year and 10-year US Treasury bond yield) which inverted (turned negative) for the first time since 2007. This development in the bond market followed dismal top-tier macroeconomic data releases from countries like China and Germany. Sentiment immediately reversed — markets had just been cheery on positive trade headlines the day before. Now, the market’s focus had switched to the other dominant theme that year, which was a global growth slowdown.

Of course, when it came to growth topics the following year, COVID-19 crash landed onto the market’s attention and morphed so suddenly into a full-fledged, multi-pronged crisis that many probably forget we were already concerned about a global growth de-rating the year prior. Jumpy markets were so sensitive to news relating to lockdowns, confirmed case counts, fatalities etc. Here is a diagram I made during the lockdown to deal with the deluge of news relating to the virus then.

COVID-19 was beginning to expand in definition from a health crisis to an economic one (driven primarily by forced shutdowns in activity) as well as a financial one (this gets a bit esoteric but there was an acute dollar shortage episode then). And then in late March 2020, the Fed stepped in and broke the glass with emergency support measures. As we know now, this was the start of the dip that most newly-minted are acquainted with. It was that dip.

As for geopolitics, continued developments on the US-China trade front or major idiosyncratic events with spillover potential such as the US Presidential Elections and Brexit asserted themselves more toward the end of 2020. There were other major happenings in 2020 e.g. Black Lives Matter movement, as well as large scale protests and civic unrest, but these were never particularly market-moving.

In 2022, I find myself still able to use this simplifying framework when dealing with heavy news flow and trying to figure out the implications for sentiment. As we know, the markets have had a wild ride this year. We basically have a perfect storm of macro cross-currents all conspiring to set the stage for higher rates. These include post-COVID shifts such as pent-up demand, deglobalisation and supply chain disruptions, ramifications of the Russian invasion of Ukraine exacerbating inflation concerns, along with a major shift in central bank posture away from an era of policy support, as they start to recognise the threat posed by inflation and prepare to raise rates to quell price pressures.

This year I can still organise the headlines that influence day-to-day market mood accordingly:

(1) Headlines related to growth, or more accurately, the recession and its scope and severity. Day-to-day event risk includes major data releases, stock market earnings especially high profile names that act as bellwethers, and even market commentators on their expectations for the global economy e.g. Jamie Dimon, Michael Burry and his calls for a white collar led recession, etc.

(2) Policy: I would argue that if there was any year to start reading up on central banks it would be this year (if not 2020, or right after the 2008 financial crisis). This is a massive topic that is defies easy summary. The essence of what is going on is that central banks were late to the party in identifying inflation as a problem, which and are now staring down a recession to quell price pressures. Examples of things to look out for are rhetoric from the Fed, along with high frequency macroeconomic indicators – in particular, data such as core PCE inflation, monthly jobs report that feed into their reaction function. This is where one might have come across commentary such as “good news is bad news” whenever a data release is poor but markets rally.

(3) On the geopolitics front, developments relating to the ongoing Russia-Ukraine war, and more recently we have seen country-specific events such as the recent turmoil in the UK Gilts market which had potential for spillover. This is slightly more straightforward in terms of translating headlines to impact on risk sentiment. Most of the time if it hits the news wires, it’s not for good reason.

All in all, I won’t deny that an overemphasis on fundamental analysis may not be the most efficient way to go about trading. The best application of fundamental analysis involves understanding the difference between news reaction and news response – and sometimes the resources to help with that are just not readily available to the retail trader.

At the same time, there were moments I did feel that merely a basic understanding of what was driving “flow” was helpful. After all, it can’t hurt for a small fish to be aware of how the big whales are positioning themselves so they can ride the tide rather than fight against the current.

At the end of the day, I suppose it also depends on whether a trader enjoys keeping up with market events. Personally, I never used to keep up with the news very well until I got acquainted with the markets. I mean, I couldn’t even keep up with school gossip. But suddenly with the markets I began to witness how news headlines were getting digested into changes in values and translated to movement on the charts – it was and always will be fascinating.