The Rule of 3
This is a simple little rule that could also be called the “by the time your mother knows it” rule. It certainly isn’t an exact science, but it seems to work.
The premise is that by the time everyone “knows” something will happen, it doesn’t. That the first time something happens, relatively few people are aware of it, or position themselves in expectation of the event. The second time the “something” happens, more people are prepared, but not everyone believes something so simple can work. By the third time, everyone is so into the trade that it fails.
This often applies to simple things like “the market rallies whenever Europe closes” or “we reverse the futures move on the open” or “we always rally from 3:30 into the close”. It also seems to work on bigger issues, like “we always rally after a bad NFP”, etc.
It certainly isn’t a hard and fast trading rule, but I don’t think it should be ignored. Now in the case of QE3, it is hard to fight against $85 billion of monthly purchases, but there really aren’t many people left who don’t know that.
As I wrote in yesterday’s lengthy Heart, Head, Gut report, I come out cautious. I don’t think you need to rush to buy financial assets. That trade, while not over, has largely run its course. The next most likely positive catalyst is EU turning from talking about a plan to Europe implementing one. The ECB not following through would be negative, but in near term I’m more focused about what is going on in treasuries. It is a calm start today, but that market has my close attention. China could swing the market either way. I don’t think U.S. economic or company specific data does much over the next week or two since everything will be “pre QE” and deemed less relevant.
Risk assets are off a little this morning across the globe but the moves are very small, but at least for now confirms that we may have seen the peak of the rush to buy.