Over the next couple weeks, we expect whipsaw action in the US stock market with no large trending moves. We will have to be nimble and take profits as they come. Focus should be on risk intelligence with stop-loss orders and appropriate position size. At Hedge Fund Z, we do not trade based on headlines but they are commonly attached by the media as causes for the market’s big moves.
First, we expect pressure from North Korea and China, which will leverage the US presidential elections against the Trump administration to obtain sanction relief and other perks. They know the last thing the current administration wants going into November is a volatile Asia on the cusp of an armed or trade conflict. Secondly, the next Covid wave is expected in the fall will cause big money to hedge, reduce, or pull out of the market altogether. They sell well in advance so expect August and early September to be a challenging month for US stocks. Thirdly, we have the election cycle to contend with. Republican and Democratic conventions are schedule for the end of August. Normally, a month prior there will be whispers regarding VP running mates as well as other key positions. If the Biden campaign were to insert a strong VP candidate, increasing their chances come November, the market would react with weakness. Even worse for the market, if the Democrats end up having a brokered convention and someone like Hillary Clinton or any stronger perceived candidate than Joe Biden were inserted into the ticket, stocks would be heavily sold.
The media hates Trump, but the big money crowd quietly loves Trump’s easy money policy. The institutional money will hear whispers before the mainstream so the markets will lead the news cycle. Although we do not trade on the news cycle, outlier events do happen. Ultimately, our trades and forecasts are determined by our proprietary system which is independent of news. Many people thought we were stepping in front of a moving locomotive in late March 2020 when we went long with leverage in the Nasdaq. Nothing but doom and gloom were forecast. Many big name pundits and analysts were calling for the Great Depression and a low into late April of Dow 15,000. How did that work out? Contrary to the headlines the exact opposite happened. So when our system pinpoints August and October as danger months for the US markets we can certainly match some potential news headlines to the expected volatility.
Trending trades will be difficult to find but we have three of them in our trading queue in different asset classes, ready to be executed over the coming weeks.
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