Market is treating the Trade War like a hot war

We are near one year into our Trade War with China.  Last year when the fracas erupted we got the Volpacalypse and the destruction of XIV and SVXY.  This Trade War actually reminds me of the conditions in Gulf War 1 and Gulf War 2 just prior to the ground and air assaults.  I was just a newbie trader in Gulf War 1 but I recall seeing the DJIA trade 2300 6 months prior to our invasion.  By 1993 were off to the end of 1999 and new all-time highs for the Dow in the Dot Com boom.  I am not saying we are going to do that, the conditions seem familiar.

Big Lack of Liquidity

The first condition is a lack of liquidity.  I learned early on that lack of equity liquidity is a sign of a bear market.  No one wants to play anymore. The punch of the elections, middling Tech earnings and G20 debt made everyone look over their shoulder at $QQQ 193 and say whoa this stuff ain’t cheap.  I am sitting this one out for a while.

Higher but Orbiting Volatility

The second condition is higher volatility, there was no $VIX back then, but not really a conviction selloff.  Since nobody knew when the G1 war or G2 war would start, players flung stock around in low liquidity causing larger absolute moves in $SPY but not the big gaps and crushing rallies of a crash.  We have annoying, lingering volatility with new lower lows just like back then.

Charts from Tradier by TradeHawk  

No real end in site short term

Take a look at $SPY and $VIX.  $SPY is making new lows but $VIX is not setting new highs.  This is not crash trading.  The upside is leaving the equation for $SPY. It is wait and see trading how the Trade War works out.  The initial market shock in February proved correct.  The escalation is causing the Chinese, and us, some problems.  The calculus being this will start to hurt and some changes will come down from the Chinese.  The casualty with this war is equity prices as a squeeze on China could bring some of the big debt issues into play.  This, like all wars, we don’t know how it will work out.  90 days is the current window for the latest round of talks.

I think hedged iron condors could work right now but you would have to manage the delta.  VIX makes a good hedge for the dollars.  Wait for the FOMC before one sells upside $SPY just in case.

Disclosure: Positions in $SPY, $QQQ, $VIX

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