April interim thoughts

This will be a very brief piece on April thus far. What started out as a continuation of the March malaise has now morphed into something different with the announcement of the two week ceasefire yesterday night.

Risk assets have rallied strongly with the main indices up over 2% since yesterday’s close, WTI and Brent down over 16% as war risk premium evaporates, bonds up over 1%, the USD down 1%, and gold up almost 3%.

I’m assuming that these moves are being driven by positioning unwind as bearish positioning stretched too far.

I follow a few macro analysts on substack and regularly read the comments, and want to make a few general comments about what I am doing today in response to last night’s announcement. The comments sections are always fun to read, you get a real feel for what folks are thinking about and how they may be positioned. A lot of commenters seem very interested in what this or that whale are doing or have said, or what this research source or macro manager is doing. I just read and keep my mouth shut.

What I’m doing today:

My S&P500 mean reversion system had two signals last night, one exit and one entry: exit DOC as RSI 2 > 85, and enter KMB as RSI 2 < 15.

My Moving Average Channel system had one signal last night: buy FFIV.

That’s it: nothing else to do. Market orders are in for this morning’s open.

Of all my systems today, the worst system will likely be Trend Pilot, as it exited most of its February positions during March and holds a few energy names which will get hit today. The system is currently more than 50% cash and if this bounce holds, I’m assuming new signals will start appearing.

The reason I am writing about this is because I want to impart just how calming this process is. I am not scrambling to undo or correct bad trades when the market goes against me: on the contrary, there is almost a zen like path. Run the systems, put the orders in, rinse and repeat. Evaluate once a month.

I do have one interesting anecdote about last week: just after the first bounce (I think it was last Wednesday or Thursday?) my S&P500 mean reversion system, which uses a 15 SMA index filter generated 11 fresh signals. I ran my code and was surprised that the system produced 11 new signals all on the same day. And then I looked at the code and realized that new buys are allowed if SPX > 15 SMA and lo and behold, SPX closed > it’s 15 SMA on the day of the first significant bounce last week, which allowed the system to open up slots again. I put all 11 orders in at night and then in the morning, I woke up nervous because I was thinking about the war, and I cancelled all of the orders. I overrode the system.

I then went to the gym, worked out and thought about my actions and reasoned that I should not be using discretion to override the system: after all, this system was built to buy weakness and the backtest includes many market states. So I went back into my IB account and entered all the trades again and stuck with the system. And it was the correct path, not because those 11 trades are all working (most of them will today), but because I stuck with the system despite my mind trying to convince me to do something else.

In any case, perhaps the worst of the market malaise from February/March is behind us, or maybe there is another leg (or three) to this current market regime, only time will tell.