It was early Friday morning.
I’d just seen my wife off to work and booted up my trading computer.
The newsflow was coming in fast. A massive earthquake had just hit Japan, causing a tsunami.
It was the fourth most powerful earthquake ever recorded, going back to 1900.
The disaster got worse as the Fukushima nuclear plant failed. No one knew how bad it was going to get.
I put on another pot of coffee, ready for the adrenaline rush of trading a crash. I already had experience from trading the 2008 meltdown and the 2010 flash crash, and the market had just had a liquidity break the month prior.
I was ready for the action.
Would radiation move across the Pacific, disrupting global trade? Would it change the power imbalance in the Asian region if Japan could no longer be a deterrent to Chinese expansion?
These kinds of questions were racing through my head.
Looking back on it now, I can’t help but chuckle.
Here’s what happened to EWJ, an ETF that tracks Japan that day:
And here’s what the S&P 500 looked like during the same timeframe:
Japan’s chart clearly shows the disaster.
But it wasn’t even a blip in the U.S. markets. It was a nothing burger.
Here’s the takeaway: The market is driven by institutional order flow. That’s it.
If the “smart money” doesn’t respond to a news event, then price is simply not going to move. It wasn’t until we hit the “fiscal cliff” news that money flew out of equities and into the safety of the treasury market.
For the rest of this year, you’re going to be flooded with political news. The near assassination of Trump is no exception. We were a literal inch away from entering a new chapter in American history.
But if you want to see success in the financial markets, you have to focus on what actually drives the markets.
The primary market driver isn’t who will be in the White House next year, or even what the Fed will do next.
It’s that institutional liquidity is increasingly crowded and leveraged into a handful of megacap stocks, short volatility positioning, and leveraged U.S. Treasury exposure.
That’s the trade that could start unwinding soon.
And given how breadth has been improving in the markets, don’t be shocked if cash starts coming out of the Magnificent Seven to look for better setups in the market.
Just be prepared. Tune out the noise, and focus on what matters.
If you’d like to see exactly how we home in on institutional money flows to find high-probability trades without taking on exorbitant risk, click here.
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