The Trade War Investment Hypothesis

These algo-driven markets are becoming untradable. So below I will discuss some strategies I am using to deal with the face ripping volatility.

I've learned a lot over the past two decades of trading and one lesson I've learned the hard way is to always take profits when you have profits even if it goes against your long term hypothesis. It's the critical skill of scaling into and out of positions, which is even more critical today in these crazy markets. I will always take some profit off the table even if I believe the position is still going in my direction. Why? Because these algo driven markets are constantly reversing trend in order to trap over-zealous speculators who make one way bets in markets and stay with those bets until they run out of capital. Another important tip is to never use stop losses on ETFs, because stop losses become market orders when they are executed at the morning open. This was a huge problem during the August 2015 Yuan devaluation, because a flood of market orders hit the market at the Monday open.

Here we see the equal weight S&P ETF with a couple of notable things on this chart. First to the left we see the Yuan deval and the ETF flash crash that affected many ETFs at the time. Many traders had their positions sold out at the BOTTOM of that flash crash. And on the right we see today's massive volume, beyond anything we've seen before. Panic buying at Trump's behest. Now put the two together, a potential Yuan deval on even greater volume. That's what I think is coming.

As we see in the chart above, there is nothing "normal" about these unhinged markets. We are witnessing record volumes on both exchanges and ETFs and record daily moves in both directions. It's all highly reminiscent of the March 2020 market crash, but on an even greater magnitude. Another way I am managing risk is by making sure that all of my options positions go out two or more weeks. Why? Because I believe this market is about to become untradable, so if I get "stuck" in a position, I can just wait it out a few hours or days until the market/broker/ETF comes back online. I noticed on Monday that the UVXY 1.5x VIX ETF went offline for :15 minutes likely because its circuit breaker was triggered. During today's melt-up my options screen had no bids on TLT for about half an hour, only huge asking prices. It's that kind of thing and far worse that's coming.

Based upon the events to date I believe that System Crash is now imminent as markets are following a similar volatility pattern that occurred during the pandemic, as indicated below:

The blue circle(s) on the left was a massive three day short covering rally that directly preceded the big crash during the pandemic. Short covering of the magnitude we saw today is a necessary and sufficient event prior to system meltdown.

Following is a trade war recap following my last blog post:

Trump came out this morning and said everyone should be buying stocks. That was the first warning that something was about to happen. Most traders were already on guard for his inevitable trade war escalation after China's escalation yesterday - and he did escalate. But along with escalating China tariffs to a ludicrous 125%, he also paused negotiations with every other country with respect to his "reciprocal tariffs". Now think about it - he has the entire world ex-China willing to take their own tariffs down to ZERO which would be a huge coup for his presidency, but instead of agreeing to eliminate all tariffs, instead he says "no deal", at least for now. In other words he has no interest in taking U.S. tariffs to zero because he wants the tariff revenue for his tax cut.

Meanwhile, he then raises tariffs on China to a level that would have been considered apocalyptic just a week ago. And it's that chain of events that caused a massive short covering rally.

In addition to extreme volumes and extreme volatility, this trade war is now sucking liquidity out of markets at an unprecedented rate. The U.S. Treasury market has now become the epicenter of the trade war and the Fed's hands are tied until something breaks, at which point they will need a time machine in order to fix it.

"This is up there with GFC and COVID level of volatility... Markets are now concerned about China and other countries (could)'dump' U.S. Treasuries as a retaliation tool"

If you read the article, many reasons are given for why long term Treasuries are selling off. One of the many reasons given is that fund managers keep long term Treasuries in their portfolios so they can quickly go to cash, but when they all "dash for cash" at the same time then it pressures the market. Then there are the higher inflation expectations due to higher tariffs etc. In other words, it's a perfect storm of liquidity collapsing events coming at a time when the Fed is sidelined by tariff inflation.

As we see below, today the TLT ETF saw record volumes but the price barely moved and it was down most of the day. Not a good sign for what is coming.

In summary, Trump just cleared the decks of all negotiations so he can focus solely on imploding China.

That's the good news.