Special Macro analysis for Q2 2019


Earlier in the week, we sent a special analysis for our premium users that discuss recent global macro events, and what we think it means you should do as a trader.

Since many users ask us about this, and we’re seeing many pundits calling ‘top’ we wish to share it with you in our blog as well. This analysis will take a more bird’s eye view on the market, rather than a specific look at sectors/equities due to the special situation we’re in:
On one hand, the S&P500 is about 1.2% from all-time high (a very bullish sign), on the other, the bond market shows very bearish signs, especially the reversal of the equity curve that happened for few days. Because of that – we wish to take time to talk about how we should look at trading on a macro level, rather than micro.

While the 1st quarter was very positive for the equities market (especially in the US) and almost regained the losses from Q4-2018, the bond market showed a very pessimistic stance – 1.6 Trillion USD poured into bonds in March alone, and the 10 year yield dipped below the 3 month yield (meaning the interest investors receive for ‘locking’ their money for the longer term is LOWER than ‘locking’ it for the shorter term).
Early April the bond investors got a confirmation for their fear as the FED and the EU central bank took a U-turn from their previous stance and froze the planned interest hikes. The EU even resumed its plan’s for cheap loans for banks – effectively decreasing rates. Before that, the IMF lowered the projected global economic growth rate and Citigroup’s’ ‘surprise index’ is negative for the longest term since 2008 (The indicator measures the number of positive surprises in economic indicators vs the negative surprises on a global scale).
The most significant bearish indicator was the yield curve reversal late March to early April. This indicator is considered pretty reliable when trying to predict economic downturns. However, we are in a very unusual interest rate regime (IR never been so low for so long) so there are some good arguments for those who think it won’t correctly predict a recession.

A logical investor could say – that with the accumulation of negative signs, and the market is at an all-time high, it might be a good time to take profits off the table. A trader might consider going short. We think there is a better way:
It is important to note that most analysts and economist’s don’t see a recession in the future, just slower growth. Also, most agree that the US economy shows strength with the lowest levels of unemployment and inflation within the Fed range. The market can also stay illogical longer than we can stay solvent, so it is a bad idea to go against the market.
As options traders, we usually sell premium and keep our delta positive when the trend is bullish. We are still doing this, but we’re now opening smaller positions, and we buy put spreads to hedge against unexpected downturn that will let us adjust our positions.
We think that we shouldn’t try to guess when the market will turn (as the probability is against us) and just try to hedge our portfolio.
For longer-term traders – we think it will be a good idea to implement a kind of a stop-loss mechanism (temporarily) so for example – if the S&P drops below its 10-month moving average, exit to cash (or market funds) until it rises above it again.

To summarize, we will use our advantage of being small and the ability to change our position relatively quick, to stay bullish until the market tells us to be bearish, but we’ll still hedge our position from a strong downturn.

If you’re looking for specific hedge ideas, you can use our scanner to find OTM bear call spreads (that have a high probability of profit) or OTM bear put spreads (that have a lower probability of profit but explosive profit ratio if you’re right). Click the button to start:

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