Anemic volatility causing a lack of big opportunities but sentiment has clearly changed
We’re still in the “summer doldrums” period where liquidity is thin and we are left with choppy, ranging markets. This is a good thing and a bad thing. The bad thing is we haven’t seen any big macro trade opportunities yet, even though a few imbalances have developed. When we spot an imbalance plus a sentiment shift, a macro trade opportunity presents itself and price will usually break out of its range to venture on to new territory. Price has been reacting to news and other market stimuli, but its follow-through has been limited.
The good thing is that ranging markets can also be profitable. Often what happens is that economic data releases or official speeches will drive markets to different points in its range, but since the market is made up of human beings, price likes to hang on to certain anchors. This lends to opportunities for “reversion to mean” trades whereby one trades near the upper/lower end of the range toward an anchor level (a level that price has been at several times because the market sees it as a reference level). Now, it’s not as simple as doing that to make money. You must also ensure that price and sentiment are moving in your direction, and that you weigh the risk factors to the upside or downside and make sure those are in your favor as well. These factors collectively form an edge.
Don’t despair- the summer doldrums should soon be over, especially after the labor day weekend when things pick up again. Make sure to get out of your range trades if/when that happens. Usually an explosive move occurs as traders start putting on big positions again. In the mean time, sentiment has turned toward the negative side again, as once more, traders have realized the “green shoots” perceptions of the economy were overdone. Currencies such as the AUD have not been reacting as favorably to news on the upside, yet have sold off on disappointments such as cautions by RBA’s Stevens that the market may have been overly optimistic of rate hike anticipations and furthermore, disappointing Australian mining deals with China.
