Stock-market activity is now dominated by passive strategies like ETFs, as well as by quant strategies and products such as risk-parity portfolios, volatility-trending trading, etc. Active management (especially hedge funds) seems like it’s going the way of the dodo bird.
Struggling hedge funds like Bill Ackman’s Pershing Square are becoming more the rule than the exception. And in a lower-return market, the trend from active to passive management will likely only continue, if not accelerate.
We’re in a new regime — but one that we can profit from if we’re smart about it.
Consider what happened Monday night and into Tuesday as Chinese President Xi gave a key economic speech at home just as President Trump was ratcheting up tough trade talk aimed at Beijing.
The machines and algos read the headlines from Xi’s speech and interpreted them bullishly. So, algos and other price-momentum buyers quickly bid up futures and leveraged ETFs on Monday night, with the buying spilling into Tuesday’s regular trading session as well.
However, I felt the algos had misinterpreted Xi’s remarks and didn’t thoughtfully analyze or process his statement. So, I aggressively shorted the SPDR S&P 500 ETF (SPY).
As I wrote at the time:
I got aggressively short the SPDR S&P 500 ETF (SPY) on the latest ramp to new intraday highs.
The proximate reason for the additional short is that, as Citigroup remarks, Xi’s comments may have been nothing more than a token statement and not a change in course of policy. Indeed, China’s comments from January’s Davos meeting may have simply been recycled — reiterating old commitments and not making any concessions to the United States …
I like the downside risk in the spiders relative to the upside at current prices ($265.65).”
— Doug’s Daily Diary, Has The Market Misinterpreted XI’s Speech on Trade Policy?, April 10, 2018
The bottom line — get used to this new regime and trade opportunistically on it. And unlike the algos, actually read through and analyze the news of the day.
(A longer version of this column originally appeared at 8:30 a.m. ET on Real Money Pro, our premium site for Wall Street professionals. Click here to get great columns like this even earlier in the trading day.)