Interpreting News, Events and Politics

Despite writing about this in the past, with the current "politically motivated" market I wanted to write a short piece for my records on how I am using news and events to plan for trades.

recap

 I like to view markets in one of two states.

1. uncertainty - in this state risk is perceived as unlimited;  causing falls.
2. stabilised uncertainty - in this state most fears are allayed; causing rises.

Each state is caused by a catalyst.

1. a negative catalyst - gives birth / creates "uncertainty".
2. a positive catalyst -  gives birth / creates "stabilised uncertainty".

When dealing with political change it's easy to get personally involved. I can't say "don't" because it's human nature to do so. What I can say is: as a trader you are trying to be a wolf and to be a wolf you need to understand what scares the sheep. If you can figure out what scares and soothes the herd then you can better plan how you're going to eat them.

The things to focus on are the catalysts/events and the run up to them. In the markets, there is always an element of uncertainty but will the upcoming event calm or agitate nerves?

Below I cover the two states and catalysts in more detail with examples.

the negative catalyst (event)

Is an event that threatens the status quo. They can occur at any time.  If they happen to coincide with an uptrend they often mark the top of a market, although the lead up to the catalyst may well mark the extreme.

One might first think Brexit but they would only be half right. Brexit was a complete surprise and the FTSE and GBP fell, but they didn't really fall on "Brexit". Instead, the fall was caused due to the lack of information in regards to how the UK government would deal with it. The only rhetoric from the government prior to Brexit was negative. As such this lack of planning and "project fear" caused the uncertainty and the ensuing drop.

uncertainty (state)

A "catalyst" (event) which the market is finding hard to quantify will cause it to drop. A negative catalyst is the birth of uncertainty. The market will then remain in this "uncertainty" state until a positive catalyst changes how markets perceive risk. 

positive catalyst (event)

a stable base to start again from

Is an event that changes how the market perceives uncertainty. They can occur at any time.  If they happen to coincide with a downtrend they often mark the bottom of a market, although the lead up to the catalyst may well mark the extreme.

Shortly before A50 was invoked, Theresa May set out how the Tory government was planning to deal with Brexit. This in itself did much to allay market fears in regards to Brexit and was a positive catalyst. A50 itself was not a catalyst but the rhetoric coming from both May and EU leaders post A50 were. Both signalled how they were planning to deal with the situation. The thing to remember here is the catalyst doesn't need to be particularly upbeat it just needs to be clear and definable so markets can digest it and adjust risk.

stabilised uncertainty (state)

Any "catalyst" (event) which helps the market quantify risk will cause it to rise. A positive catalyst is the birth of stabilised uncertainty. The market will then remain in this "stabilised uncertainty" state until a negative catalyst changes how markets perceive risk.

note on Trump

Trump was seen by many as deeply risky but markets rose on his win and inauguration, why? The fact is he was quantifiable. Before he won he had clearly stated what he was going to do: cut taxes, start fiscal spending and negotiate better trade deals. So on his win markets rallied because the event was quantifiable. His win was in effect a positive catalyst. An interesting note here is that had Clinton won, her's may have been a negative catalyst. She had a schizophrenic relationship and views on Wall Street and her policies were unclear.