But what if the markets are wrong: lets fish in troubled waters

10. März 2020

The start of the week plunged many into a state of deepest stupor. Over the past six months we have already devoted dozens of reviews preparing our readers for the onset of global problems and the collapse of bubbles in risky asset markets.

The most wrong thing a trader can do in such a situation is to lose an adequate perception of reality and rush into the pursuit of the market. We urge our readers to remain calm and analyze the situation as openly as possible.

Let’s take as example the oil market. Yes, here and now the situation looks completely hopeless. But by and large, all this we already seen in 2014. Situations, of course, are not identical, but in many ways they are similar. So, we can try to draw historical parallels and predict the future development of events and market prices. What happened when the last time oil prices went below $ 30 (WTI)? By the will of the key oil market participants, the current reality at that time was changed (meaning the signing of the first OPEC + agreement).

Actually, here and now everything can be repeated. It is not so difficult to imagine the situation of the OPEC + emergency meeting already at the end of this or next week, at which Russia agrees to cut the production and the situation will turn upside down. Given how dependent the Russian economy is on hydrocarbons, this is the only reasonable option for a country if it does not want to become a second Venezuela.

That is, banal logic suggests that selling oil at current prices is a very risky thing. But purchases, on the contrary, are promising.

Similar thoughts can be presented for the US dollar. Beating of USD in the FOREX, given the current form of the US economy and other countries is undeserved. Yes, the Fed has already lowered the rate, and the ECB has not yet, respectively, the rate differential has narrowed, but it is still in favor of the United States.

At the same time, new historical lows on the yield of US treasury bonds indicate that demand for dollars is not falling, but, on the contrary, is growing. That is another logical contradiction that makes us think that the markets are wrong.

The experience of the year 2008 shows that the insanity into which markets plunge headlong is a relatively short-term phenomenon. And ultimately, common sense returns. We have no particular doubts about this. The only doubt is timing. That is, when everything returns to norm.

Of course, go against the market without stops, trying to impose your will, is potentially a margin call. But at the same time, following your line without fanaticism and with reasonable stops will make it possible in the end not only to catch a local correction, but to be at the origins of a big movement.

That is why today we will continue to follow our basic plan: sell EURUSD, buy USDJPY with simultaneous purchases of gold (all positions with hard and rather short stops), sell in the US stock market, and sell the Russian ruble as well.