I don’t take for granted the luxury of living in this great country. I’ve been in markets for 25 years and through every crisis along the way. There is one commonality in market crises. Traders tend to make outsized profits. None of us feel good about profiting while others are suffering. As market makers on the floor, we had a fiduciary responsibility to show up and provide liquidity. It was just the job. So I want to be clear that anything I say about markets, during a crisis, is secondary to humanitarian grief. The trading part is just a job.

With that out of the way.

All last week from Florida, and on Monday on our State of the Market show with Mark, I said This is a trader’s market. This is not a time for huge conviction, it’s time to be nimble, stay small, pick your spots. 

Let me show you what I mean.

Millennium Management lost about $1.5 billion last week. Citadel’s Wellington fund dropped two percent. Balyasny down 3.5 percent. Point72 down 1.1 percent. Coatue lost 3.8 percent. These funds have returns like bonds. These losses are equivalent to the S&P 500 dropping 6-10% in a week. (Bloomberg) These aren’t amateurs. These are some of the best portfolio managers on earth running the most sophisticated models money can buy.

But there is a key distinction. These are Portfolio Managers, not Traders.

They got hosed because the market was operating in a way that punishes size and conviction regardless of how smart you are. Their biggest advantage became their Achilles heel. They were carrying huge positions into this event. When you’re in a 100 percent correlated headline-driven war market, it’s like bringing a thesis paper to a knife fight. You can’t maneuver those positions fast enough.

That’s not a knock. It’s just what this market is. Being nimble as a trader is your advantage right now. Sitting in big positions that aren’t working is going to leave a dent. I’ve been recommending Option Pit services because this is a trading community. That’s what we do. NMS, Game Plan, or Weekly Profit Cycles, and others. Those services are working. So get after it.

It’s taking an extreme amount of discipline not to hop in the market and actively trade. But I have a process, and it’s not fully built yet. As much as it pains me, I’m sitting most of this out. I’m not worried about it. This will pass and new opportunities will come along like they always do. 

The Oil Trade Is Getting Tired

Here’s my next prediction. This news cycle that’s been running every asset on earth as one trade is starting to exhaust itself.

Look at what happened today. Energy Secretary Wright posted on social media that the Navy had escorted an oil tanker through the Strait of Hormuz. Every major market on earth moved simultaneously led by liquidation of oil positions. Stocks ripped. The dollar fell. Then the post got deleted. Turns out the Department of Energy said it was incorrectly captioned by staff. The White House confirmed no escort had occurred. Everything reversed. But oil still dropped more than 17 percent on the day. (CNBC)

The whole episode took about 30 minutes.

That’s your tell. A news headline that wouldn’t have amounted to more than a photo op, and participants are that quick to puke their oil hedges. That’s sentiment exhaustion.

The Iranian establishment is digging in and wants everyone to think this war is far from over. The headline knee-jerks won’t end overnight. But my call is that the 100 percent correlation game has put in a top. The jury is still out on the top in oil, but it looks likely as well. 

What This Means For Traders

Right now, oil has been the only trade. If you are long stocks, whether you like it or not, you are short oil. Stocks, Bonds, Currencies, other Commodities, everything moves together on the same headline. However, as the market starts to figure this out, we’re going to see a divergence where new narratives take hold and assets start trading on their own fundamentals again. When volatility stays elevated but the one-way tape starts to relax, that’s when traders still print money.

So, stay smaller a little longer. Keep watching the oil headlines and notice how the 1:1 correlation trade starts to break down as products begin to reprice on their own story.

That’s exactly the environment where something like Andrew’s Option Fingerprints (which should be released next week) becomes interesting. When the blanket correlation lifts and individual names start moving on their own signal again, a system designed to read product-level behavior has its best shot. I’ll let him explain the details next week.

Trust the process.

Tim