Last Updated on 27 January 2021 by F.R.Costa

Trading the current market is like playing Tetris at level 100. It’s seems impossible to make anything out of this, as algos keep insanely driving the market up and down while Trump twits the direction.

Traders trying to make sense of the current equity markets are finding it difficult as key stock indexes seem to be driven more by noise than by real data. Last week, for example, markets were battered down by very weak ISM manufacturing data in the U.S., just to later recover. As soon as the sluggish ISM numbers were reported the Dow went downhill to lose almost 400 points from around 26,150 to almost 25,750. But then the loss was reverted, as investors had second thoughts on what that kind of negative data could mean in terms of interest rate cuts. Additionally noise added by Trump on his twitter account (@realDonaldTrump) also helped lift the Dow after a slump of more than 1,000 points in less than two days.

Across the last few weeks it has been really difficult to trade stock indexes and currencies because of unusual high noise interfering with day trends. At one point the market may be declining due to disappointing data, just to at another point start rising on some Trump’s twit claiming the US and China are making good progress on the trade deal. Unfortunately, most of the written success regarding the trade deal, ends being reverted at some later point, giving the idea that most of these twits are aimed at keeping the markets on rails.

In my opinion, most equity indexes around the world are trading at very high values. The Dow, for example, is now trading around the 26,600 mark which is just 700 – 800 points below its record high. But, with manufacturing activity and job creation already declining at very fast paces, these values seem just too high. It’s true investors are expecting some interest rate action from the FED, but with interest rates now below 2% already, the margin is worryingly tiny.

Taking both the high noise and the declining economic conditions into consideration, I prefer to be on the sell side of the market but increasing the trading time-frame a bit to avoid being caught by daily noise. Downward risks are high, in particular when the rate cut is already priced in. I feel that Jay Powell will disappoint the market at some point, as there is a rising controversy among central bankers on how low should central banks go on interest rates.

About F.R.Costa

Filipe has more than 20 years experience with financial markets. He holds a degree in Economics with a specialisation in Finance and he's currently finishing a PhD in Finance. He used to work as financial consultant and research associate but then decided to return to academia five years ago. Since that, he has been an Invited Lecturer, teaching courses on Investments, Financial Markets, and Monetary Economics. He is also a regular contributor writer at The Master Investor Magazine.

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