A risk management approach to Markets right now

on October 11, 2019

Morning Folks – I had this little section in my Morning Note to paid Subscribers yesterday and given the news Thursday on Trade and the talks in Washington at the moment I thought I would share it with a broader audience. 

Remember for non-subscribers, If you want to have a trial of the daily subscriber service to get this and the 3000 odd words I write – and lots and lots of chart – on markets each day you can sign up here for a trial

Here the section verbatim from yesterday’s morning note:

Here is the big risk if we get a surprise deal…stock calls, bond puts? 

Trading and investing is about making money, it’s about taking calculated risk adjusted bets and running them. But in many ways trading is also mainly about risk management – where you put your stop, how you figure out you are wrong, what you do if you are wrong, when you take profit and so on. Setting these proper protocols – which are usually different for each trader – is the key to your payoff (absent leverage which also has to be managed).

I start this section in that way because if I was running a diversified portfolio right now my long term views on bonds wouldn’t change, my risk thoughts about stocks would be the same too. But I would certainly own stock calls and bond puts.

The reason for that is best summarised in the money flow data.

Reuters reported Wednesday “investors retreated from the U.S. stock market by unloading nearly $11.8 billion from mutual funds and exchange traded funds that hold domestic equities last week”. And Scutty shared this tweet in my evening last night.

Source: Twitter

So, as I editorialised on Twitter when I retweeted it, “Ouch – wouldn’t a trade deal upset that Apple cart…Unlikely as that may be right now”.  

So, even though my bet right now is that a trade deal is a low probability the risk management approach would be to own low delta out of the money stock calls and bond puts because if those flows even partly reverse there is going to be some decent moves in each of those markets. 

It actually looks like I might be wrong and some sort of deal might pop up – think Steve Mnuchin, Top Hat and Rabbit – either way this is a good way to cover your contingencies. Even at these levels because a trade deal would really turn sentiment for a while – even it is ultimately ephemeral. 

Have a great day


Greg MckennaA risk management approach to Markets right now