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Trading Education Posted by Team Topstep December 1, 2020

Listen to the Markets

As political, social, and economic stability remain in the United States and the ongoing and once again increasing global health pandemic, as traders, we continue to pay attention to these items as we consider how respected markets might be responding.

A relevant lesson that I have learned over the years is to keep a watchful eye on the markets and listen to the music behind the words the markets speak. In other words, I might ask, how does the body language of the markets inform us right now?

The Election Sigh of Relief

It is now more than a week since election day. While the situation is unconventional and unprecedented, it appears the markets see lower risk potential at this point. Both chambers of the legislative branch appear to be minimally affected. Meanwhile, the markets seem to be taking for granted that Biden will be inaugurated in January.

Since the close on election day, the dollar index (DXY) is mostly unchanged, gold futures are marginally lower, and equity futures are considerably higher. What this means is that the markets have had a “risk-on” tone.

The political landscape might turn the markets into a “risk-off” posture if Trump’s challenges somehow pick up legal momentum. For now, the markets seem to be discarding this, therefore, should there suddenly seem to be a legitimate legal battle, I expect the markets to react.

Furthermore, it is well attested that the left-leaning factions of the Democratic Party are trying to persuade Biden from governing from the left, rather than the center. It’s yet to be determined precisely which policies Biden will prioritize or how much favor he will give to those further on the left. Should reports become available to credibly highlight his intentions of early policies, particularly that of executive orders or cabinet appointments leaning to the far left, then it’s possible that markets could go “risk-off,” at least temporarily.

Will A Second Stimulus Ever Be Passed?

Following election day, we thought that both parties would once again continue to work on the next round of COVID19 stimulus. However, since, in some aspects, the election will be ongoing for the undetermined future, the prospects of a stimulus passing become problematic. Furthermore, there is uncertainty about what the President will or will not support in terms of a relief bill. Should somehow congress pass further rounds of stimulus, signed off by the White House, then this would lead to at least a temporary lift to risk assets.

COVID19 & Vaccine

My belief is that the most prominent uncertainty has to do with the COVID19. Sure, markets digested this during the last year and demonstrated the resilience of risk assets as they in turn climbed higher. However, like crude oil, other assets never received much of a lift as demand concerns continue to prevail. Likewise, gold, a risk indicator, has ranged the last few months within breathing room of all-time highs.

For much of the last six months, people have grown more familiar with, and less concerned by COVID19. However, it seems that with the number of cases on the rise, fear is once again elevating as we head toward the peak of the flu season.

Economic indicators are becoming very telling, including weekly jobless claims and analysis coming from the Federal Reserve. Should the economy begin to show signs of a further slowdown, I expect to see risk-off moves for at least a time.

Pfizer recently announced it was nearing the availability of a vaccination. The equity markets stormed higher on low volume; however, this move was faded as the markets digested the news. I believe there will be many more similar moves and knee-jerk reactions through the remainder of this year.

The markets can seem to change moods quickly, but it is vital to listen and watch what the markets do. Otherwise, if you are trading purely on theory or conviction in matters about the election, stimulus, and COVID19, eventually, you will get caught on the wrong side because markets can and will be irrational. You’ve probably heard the saying that “the markets will do what screws the most people,” so in short, pay attention!

Trade Well!