Here’s an excerpt from Brett Steenbarger‘s article at TraderFeed discussing the "tricky" trading environment.
Financial Markets: Harder, Faster, Not Necessarily Better or Stronger
Excerpt: "It’s been a tricky environment for sector relationships since the July bottom. The U.S. dollar has turned sharply higher, particularly against European currencies; commodities have fallen significantly; U.S. stocks have bounced; and the shares of emerging markets have lagged. You couldn’t ask for a more thorough unwinding of themes from earlier in the year. Just in the last few days, we’ve seen housing stocks break out to multiweek highs, while energy shares languish near their lows (top chart).
Once these themes unwind, they go further than one would expect from a normal correction, shaking out large numbers of participants. Conversely, those who catch the turn in themes can make significant money in a relatively short period. While in London, I read an interesting piece in a financial publication that noted that the sharp down move in gold was initiated and sustained almost entirely in the futures markets by large participants who were trading an algorithmic relationship vis a vis the U.S. dollar. Gold may be classified as a commodity, but it trades as a currency when these algorithms dominate.
All of this makes it difficult to be a classic trend follower or a fundamental, longer-term participant waiting for relatively undervalued assets to return to (or overshoot) their fair value. The normal way of trading those approaches is to wait for markets to confirm your views and then gradually add to positions as the markets move your way. When themes unwind, however, such a money management scheme almost ensures that a trader will be running the greatest risk just as markets reverse.
I’m not sure there’s an easy answer to this dilemma"…. Full article here.
