The Times They Are A-Changin

“Come writers and critics who prophesize with your pen, and keep your eyes wide, the chance won’t come again. And don’t speak too soon for the wheel’s still in spin, and there’s no telling who that it’s namin’.”

Bob Dylan

We know we are living in a new world. We know that the political framework in many countries around the world is changing. These changes have created an initial knee-jerk reaction that is now being more quickly digested by investors and traders.

Consider the following: on June 23, the United Kingdom voted on a referendum as to whether or not they would withdraw from the European Union. Pollsters, as well as market analysts, were firm in their commitment that such a vote could never pass. The pollsters got it wrong and the referendum passed.

Immediately following the referendum vote, we saw the equities markets globally sell-off dramatically. This sell-off continued for approximately three days. Then, something remarkable happened. Market sentiment globally shifted from bearish to bullish and we began an equities rally that would result in US equities moving to all-time highs.

Last month, immediately following our presidential election, the Dow Jones Industrial Average sold off by 800 points, and gold traded roughly $50 higher. However, by the following morning (approximately eight hours later), these trends would make a 180° turn as US equities began to rally and gold began to sell-off.

Last night, an Italian referendum resulted in a resounding no, dismissing the Prime Minister’s plans for constitutional reform. Once again, markets reacted quickly with a knee-jerk reaction that took the Eurodollar to a 20-month low against the US dollar and gold back to a 10-month low. Again, market analysts and pollsters got it wrong.

However, what is noteworthy is the timeframe in which the market absorbed recent news, quickly and decisively changing direction. Within hours of the initial reaction, we saw gold aggressively trade off of its lows and the Eurodollar actually close sharply higher in trading.

Pollsters and market analysts have, over these last three votes, got it wrong. At the same time, investors and traders have become more agile in their reaction time. The Brexit vote sent equities into a tailspin for three days before recovering. The recent presidential election sent equities into a tailspin for eight hours before recovering. And last night’s Italian referendum sent markets in a tailspin for about an hour before recovering.

The trend is clear. While the pollsters, market technicians and analysts have difficulty in this new environment, traders and investors have learned to pivot quickly from the knee-jerk reaction, and take advantage of these market swings. In these last three votes, we have seen the “sell the rumor, buy the fact” scenario, play out in a more responsive manner, taking minutes rather than days to pivot. 

It seems quite clear that traders and investors have come to realize that, “the times they are a-changin,” and to continue to be successful, they must change as well.

Wishing you as always, good trading,