THE IMPORTANCE OF MARKET POSITIONING

Market positioning can become the most important determining
factor in achieving trading success. As already discussed, in
any market a continual run of positive fundamental news can
end up producing a situation where absolutely everyone who
wants to buy in that market has done so. In effect, there is no
one left to buy. So when the next piece of news comes out—even
if it is better than the market expected—no fresh buying can
occur. There are, however, plenty of longs (that is, buyers) looking
to take profit at some point. The longs then become, in fact,
potential sellers or, in market parlance, shorts. This desire to
consolidate profit can mean that the market will fall and even
accelerate to the downside after more good news. This process is
discussed in greater detail in the next section, and what will
become obvious is that the way market participants are positioned
is a factor not to be ignored. Although market positioning
is perhaps more of an art than a science, it is an art well worth
mastering.

WHEN GOOD NEWS IS WIDELY EXPECTED,
THE MARKET IS VULNERABLE TO A FALL
In any market, at any time, there are buyers and sellers. Some
need to act at particular times regardless of events; however,
most, such as business participants and speculative traders with
varying time horizons, can wait for what they believe will be the
best moment for them to buy or sell. If the media and market
research papers are awash with expectations and forecasts that a

particular stock is going to have an excellent profit result, what
are these business participants and traders most likely to do?

The following sections look at the effects of the expectation and
release of positive news, based on the market positioning of different
market participants.

The Buyers Looking for Stock
Clearly, those who need or want to buy will be fearful of not
being able to buy at the current price levels. At the same time,
these buyers will be excited by the riches they envisage they will
make after they buy and the profit result comes out. This is a
powerful combination of emotional forces. Fear is driving traders
away from any notion of delay. Excitement and greed is propelling
the trader to invest as much as possible. Traders are only
aware of the perfect “logic” of their decision to buy. After all, the
company is about to release a great profit result, meaning it’s
obviously a good decision to invest in this enterprise. The end
result is that those who were considering buying do so quickly,
and frequently in greater volume than they had originally
planned or need to.

The Sellers Holding Stock
On the other side of the fence sit the sellers for business and
speculation. How does their world look? Unlike the buyers, the
sellers believe they have it made. They are under no time pressures,
as they believe the expectation that the market will rally
handsomely after the profit result comes in to be perfectly logical.
They plan to just wait to see how high the market goes
before taking any action, and they are starting to think they will
make even more money than they had originally calculated.
Straightforward logic dictates that, for the duration of the
period that starts when the market first hears that a good profit

result is likely, buyers in the particular stock are going to be
aggressive and most sellers passive. The market price will tend
to rise in this environment, and to all participants the price
action merely confirms their expectations, so the belief in their
perfect logic intensifies. The process of buyers being aggressive
and sellers passive gains even greater momentum and becomes
self-reinforcing.

The Profit Result
By the time the result actually comes out, everyone who has
wanted to buy this stock, and even those who were planning to
buy after the profit release, has already done so. At this point,
every single buyer would claim it would be foolish not to already
be in the market. At the same time, absolutely every market participant
who wants or needs to sell but can delay doing so has
delayed. This leads to the situation where, in a complete reversal
of common market belief, on the morning the profit release
is due there are only waiting sellers in the market. The buyers
have already dealt their hand.

Assuming the good news does unfold, what happens next is
that everyone—the longs and sellers both—watch their screens
in barely contained excitement. Both are expecting to do extremely
well. Everything is going according to plan. Often, they
watch for a while and nothing happens. There may be a small
price rise but usually not a lot of volume in actual trading. They
all continue to watch.

Who do you think is going to act first? The sellers, of course,
because they have yet to do what they have or want to do for
business or speculation. Now here is the key twist—the sellers
are, in fact, everyone. The buyers have become sellers, almost
without noticing, and there remain only sellers in the entire
market. Of course, many of the buyers are there for the long

haul, or so they suppose. Still, there are several buyers who were
looking to make a quick buck in the hours or days after the
profit result was released. Now, after some time has passed,
these longs begin to wonder if perhaps that old adage “Buy the
rumor, sell the fact” is perhaps what they should be doing.
At this point, those who need to sell begin to execute their
orders. Next in line, the short-term speculative longs start to follow
suit. The stock collapses as more and more people try to lock
in the highest profit possible. Business reports on the evening
news are aghast at the carnage and at the fact that investors who
at the outset had been so obviously right end up losing money in
a bizarre market movement.



Read More: THE IMPORTANCE OF MARKET POSITIONING

A Contrarian Position on the Euro

When the euro was first formed out of the constituent currencies
of Europe, it was truly remarkable just how one-eyed and
confident market consensus was that it would be strong. I traveled
through Europe visiting clients in the months before its
float. So intense was the view from absolutely everyone I met
with that the euro would go up once it had floated that only one
conclusion could be reached. It was clear to me that the euro
would fall dramatically in its first 12 months. In this case, it was
the consensus view that totally determined my market view, due
to the sheer intensity and confidence of the market.

When everyone is that confident of their beliefs and talking so openly
about them, you can be sure of one thing: They have already
bought. If everyone has already bought (sorry to put it so
bluntly), how can it go any higher? In effect, everyone had
already bought euros by buying the deutsche mark and French
franc, the most liquid currencies that would be automatically
converted to euros on the first day of the new currency. Some of
these buyers would become sellers to square their positions, and
then there were the real sellers—the importers and people
investing overseas from Europe. What were they doing? Waiting
for the euro to rally so they could sell at a better level.

My forecast was for the euro to rally for one to three days and
then collapse for the next 12 months, predominantly because
all the buying for the next 12 months that European exporters
would normally do had been done in advance and because currency
traders had also already bought into the euro. Such was
the conviction of the consensus view. Again, forecasting the way
I had meant that it was a challenging time for me. This time,
working for a European investment bank, I was warned that
my forecast could cost me my job. Fortunately for me but not
for the bank—which was positioned, like everyone else, long

the euro—the currency did go up for three days and then collapsed
for the following 12 months.
Read More: A Contrarian Position on the Euro

A Contrarian Position on the Australian Dollar

When the Australian dollar collapsed in the late 1990s, I was
perhaps the most aggressive forecaster of its decline. The
Australian dollar had been trading at 80¢ and looked to be on its
way to 82¢ and then 85¢—and, indeed, this was my initial forecast.
Then I realized that the true fundamentals, as opposed to
the consensus fundamentals, painted an entirely different picture.

Because of continuing high trade and current account
deficits and the significant moderation in interest rate levels, it
was highly likely the Australian dollar was about to move into a
major long-term price decline. Generally, high interest rates relative
to other countries lead to an inflow of (albeit short-term)
overseas investment. This offsets the trade deficit and produces
an appreciating currency—even while the otherwise fundamental
vulnerability of the currency due to the worsening trade
performance continues to grow. Once interest rates moderate,
the currency is left highly exposed. This process is frequently
repeated in currency markets and has been one of the main
drivers in the fall of the once mighty U.S. dollar in recent years.


Back in the late 1990s, while I did not immediately change my
forecast for the Australian dollar, I did send out an advance
warning to clients that there was an alternative perspective to
the still-favored bullish outlook. By studying long-term price
behavior and patterns, I thought that should the Australian dollar
move below 78¢, it could signal that it was about to collapse.

When the dollar fell, against consensus expectations, through
78¢ I already knew what this could mean and how far the currency
could decline. At this point I began to practically scream
from the rooftops that the Australian dollar was on its way to 68¢
or even 65¢. This was considered a wild call, and even clients
who usually followed my advice to the letter began to doubt my
ability. As the dollar tumbled lower—to a lack of reaction, or
stunned inaction, from most market participants—it became
obvious that my first forecasts were actually too conservative.

The dollar would be going even lower. I was the first to predict
a level of below 60¢ for the Australian dollar, and then to finally
forecast a 48¢ low with risk to 45¢. While the 45¢ prediction got
more publicity, the central target of 48¢ turned out to be quite
accurate.

When I first started predicting that the Australian dollar
would fall to 60¢ and eventually the 48¢ low, my forecasts were
front-page news, especially in the business sections of major Australian papers.

Yet the view was so contrarian that the managing director of the international
investment bank I then worked for sat on my desk with a copy of the newspaper in
which my predictions were quoted and simply said, “You had better be right.” It
is not easy to go against the headwinds of consensus; however, it
is often the most lucrative tack, as it suggests everyone else is the
other way and will have to turn if they are wrong.
Read More: A Contrarian Position on the Australian Dollar

Liquidating a Position

Futures contracts have a settlement date. This means that at a predetermined
time in the contract settlement month the contract stops trading,
and a price is determined by the exchange for settlement of the contract.


A party to a futures contract has two choices on liquidation of the position.
First, the position can be liquidated prior to the settlement date.
For this purpose, the party must take an offsetting position in the same
contract. For the buyer of a futures contract, this means selling the same
number of identical futures contracts; for the seller of a futures contract,
this means buying the same number of identical futures contracts.

The alternative is to wait until the settlement date. At that time the
party purchasing a futures contract accepts delivery of the underlying;
the party that sells a futures contract liquidates the position by delivering
the underlying at the agreed-upon price. As explained later, for a
stock index futures contract, settlement is made in cash only.

A useful statistic measuring the liquidity of a contract is the number
of contracts that have been entered into but not yet liquidated. This figure
is called the contract’s open interest. An open interest figure is reported by
an exchange for all the futures contracts traded.
Read More : Liquidating a Position