In my earlier article Attention Attention! I explained how the doom and crash commentators are really just looking for clicks and attention.
But all market participants are to some degree or at some occasions trying to work out whether (risk) markets are primed for a fall and what information can predict this. And this topic allows me to explore another angle to the extensive analysis we read on social media and mainstream media.
What will predict the next crash?
One thing that I have noticed is that each specialist analyst believes that his or her specialty will provide the crucial evidence, information or reason for a big market move.
Gamma accounts tell us that option dealer positioning will drive big market moves so we should listen to them.
Volatility accounts believe the VIX and/or SKEW Index contains the information we need.
Yield curve experts tell us that the yield curve contains the crucial information.
Monetary policy experts tell us analysing Central Bank decisions will provide the information we need.
And so on…
Talking their book
Once again what we see is that these accounts are just trying to persuade us to follow their niche; they are talking their book.
So which one is right?
None of them.
As traders and investors we need to be across a range of information. Sometimes option dealer positioning may affect markets, sometimes it won’t. But option dealer positioning will only affect a market after it has already moved. The VIX and SKEW Indices are notoriously unreliable predictors of future volatility.
And of course, any true ‘black swan’ event is unlikely to have had any forewarning.
If you focus too much on one piece of data you potentially create blindspots to others. This in itself can be dangerous and I see it constantly from the specialist accounts.
The best tool for monitoring the market environment is a thorough watchlist and we should monitor how a range of markets are moving including in relation to each other.
Don’t overweight one piece of data or information even if it was useful in the past. Be open minded about what you see.
Reflexive nature of markets
One vital point vital to understand is that the positioning of participants is crucial. Markets are more vulnerable when the majority of participants are positioned incorrectly (perhaps after some news). So learn to work out what is being priced in. This is all part of understanding the reflexive nature of markets. (I explain this further in my book An End to the Bull).
We should also understand that sometimes, there will be no warning.
Don’t look for indicators – this is a rabbit hole that can take up significant amounts of your time. There are lots of people trying to sell you indicators such as the ones noted above. Some will add no value to you while others may be helpful but only as part of a wider collection of information.
In summary there are:
- No shortcuts
- No magic or special indicators
- No one piece of data which is more important than another
- Always new data and information to learn and use
- Changing dynamics to markets and positioning that make previous ‘indicators’ or information less reliable in different conditions
- Lots of firms trying to sell their indicators
- Always more areas for us to learn and new markets to educate ourselves on