Many of you know that the key to jumping on long trends is to correctly identify major macro narratives. The fundamental shifts that take place across the macro landscape shape financial markets. If the Fed suddenly said that it would be cutting interest rates at its next rate meeting stocks would almost certainly rally on expectations of easier financial conditions ahead.

The problem with trading a narrative

Often, the problem is that narratives have an alternative view. For example, right now the Fed has stated via its dot plot that it will not be hiking interest rates this year.

At its March meeting, the Fed thinks that the recent bank fears will fade. So, on the face of what the Fed is saying we have fairly tight conditions for a while until the Fed is confident it is winning the inflation battle. The Fed played down the recent banking crisis as being under control. That is the Fed’s view. The issue here is that markets don’t believe the Fed. The markets think the Fed will cut rates this year, twice!

So, which narrative is right? Coming rate cuts or no rate cuts? In hindsight, the path will be clear but right now with so many different macro stories it is not. So, how can you manage this?

Major tech to manage risk

One of the simplest ways to manage this is by trading the narratives and using major tech levels to keep risk minimised. So, for instance, let’s say you think that the market is right and the Fed is going to cut rates twice this year, it will manage a soft landing, and banking fears will all fade. If this is the case you would expect the trend line market below to be supportive for price. So, you might say, I will stay long as long as the price stays above 3950 on the S&P500. That way you have limited your risk. If the narrative is correct you would expect that level to hold. If you are wrong and you are stopped out you can reassess and wait for the next major level of tech to limit your risk against.

Summary

There will always be competing narratives and risks in the market. Your job as a trader/investor is not always to be right, but to manage your risk and take opportunities as they present themselves. By using major tech levels you can be wrong on your narratives, but still manage risk in a way that is calculable from the point of execution. Never trade a narrative, no matter how strong you think it is, without keeping an eye on what your risk is, should your assessment of the key narrative be wrong or wrongly timed.