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Don’t Risk Big Losses: Looking At Broad Market Sentiment For Risk Management
Benzinga
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9/30/2024
Tim Quast, Founder/CEO of ModernIR and Market Structure EDGE joined Benzinga's Premarket Prep team to discuss what he is seeing in broad market sentiment in order to manage risk.
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00:00
Here's what I look at. Right at the top of the screen is this thing we call broad market sentiment.
00:05
And I wrote about this to Edge users today. If there's a horse and a cart in the market,
00:11
which is the horse and which is the cart? Because you don't want to put the cart ahead of the horse.
00:17
And the horse is the engine. And the engine of the market is, frankly, BlackRock, Vanguard,
00:23
State Street, Fidelity, Geode Capital, UBS Credit Suites, JP Morgan, Morgan Stanley.
00:30
You look at those guys, they're $45 trillion of assets under management. And how they deploy that
00:35
money is a big deal. So that will manifest in broad market sentiment. And it's a seven.
00:42
So if I tally the data from January, whatever the first trading day of 2021 was, call it January
00:51
3rd, all the way to present, that's almost 940 trading days. And only 10% of the time has the
01:00
market over that span been at broad market sentiment of seven or higher. And if you add
01:08
it all up, what are the market returns for that 10% of the time? Negative 4%. So I look at that
01:15
data and say, well, all the probability is that the market declines. Because if I back up to the
01:20
last time here, end of August, where broad market sentiment was at that level, what happened? Well,
01:26
the market declined. I back up to the time before that, July. Basically, right after options
01:31
expirations in July, broad market sentiment was 7-3. What happened to the market? It plunged.
01:37
Now, again, I'm not saying that's going to happen. There's a pattern. I don't know if it's
01:41
trend. But I look at that. And I look at the supply side. So this is short volume, not short
01:49
interest. It's the Reg SHO Rule 201 data set. Only been around since 2011. It's a very contemporary
01:56
data set. And what has lifted the market since it bottomed, notice this. Here's where the market
02:02
bottomed, right about 6th, 7th of September. And supply was very high. You have falling demand,
02:09
high supply. Then they reverse. In fact, this was the Fed effect. Demand hadn't even bottomed,
02:16
and the market took off because people bought derivatives. Derivatives are implied rights to
02:23
buy or sell. They may not be an obligation. But the market took off from there, and supply came
02:29
down, and it took a big dip on Friday. Now, if that is all, but here's the question.
02:36
If the market is at 7, and it got its last little gasp from covering, what happens next? I don't
02:43
know. But I'll tell you what I probably do. I'm looking to short it again. That doesn't mean I'm
02:49
going to do that. And I'm very careful, traders. I don't just go out there and push a bunch of
02:54
money in on Red 34. I push half of it in on Red 34, and half of it on the opposite trade. And
03:03
then I have a 50 basis point range in which I will wait to see which way it's going to go.
03:09
And then I'll pull one. But I'm not risking losses. There was a great article in the Wall
03:16
Street Journal about Millennium Hedge Fund, the earliest consumer of our data,
03:22
the pod at Millennium. And they don't take any chances. They don't take risks, but they produce
03:27
enormous returns by doing that. So you have to take a lesson from Millennium. Don't risk big
03:35
losses. But you look at the data. You stack the probabilities in your favor. And if you looked
03:40
at this, you'd say, well, there's a high probability that the early October may not be great.
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