Hedge Fund Manager Sees China Deal as Bearish

Hedge Fund Manager Shawn Matthews

Hedge fund manager Shawn Matthews holds a cautious stance right now, fears that won’t be overcome by a successful U.S./China trade deal, this will in fact worsen them for him.

There has been much talk of late about how at least an improvement in the trade battle between the United States and China that lingers on would help the markets. We certainly have seen the negative effects of this on the bottom line of companies, although much of this damage has been caused more by shrinking Chinese demand than anything.

Still though, the barriers that have already been in place and the real threats of this war escalating and having a more profound impact upon business have to weigh on the markets. Markets function by taking in all the information we know, about the past, the present and the future, and then forecasting future prices.

Trade wars and threats of trade wars do influence the future outcome of stock prices, and just about everyone will agree that this all has a negative impact upon these prices. An alleviation of this downward pressure or especially a successful resolution of the issue should therefore buoy stocks, or we would think so anyway.

The View That This Will Cause a Selloff

If we are to believe Shawn Matthews, founder of macro hedge fund Hondius Capital Management, if this happens, then this is the time where we really want to have our hands on our guns and even pull the trigger.

Hondius isn’t your typical hedge fund, and Matthews not your run of the mill hedge fund manager either. The fund bills themselves as “alternative,” and their recent investment of $800 billion in a project to improve infrastructure in Zimbabwe gives us an idea that they are off the beaten path for sure.

It’s not that Matthews has a lot of people behind this view, and it certainly may appear to be very much off the wall, but we still should be examining ideas regardless, perhaps especially ones that strike us as unusual.

Matthews isn’t expecting that a U.S./China trade deal would be bad news in itself for the market or the companies that are affected by this, as this is clearly seen as good news by everyone involved.

There is an old saying in the market though that tells us to sell on the news, and this would indeed be the news, so if we follow this advice, we’d be selling all right.

To be fair, Matthews isn’t forecasting doom or anything, just an opposite reaction from what we may have thought we’d see. He also isn’t recommending that we sell everything at that point, only cut back, and it’s smart to cut back when you have a reasonable basis to believe it is to your advantage.

Matthews tells us that if such an agreement is reached, “people will then look to the positions in their portfolios and re-assess their risks.” This, according to him, will create downward momentum as investors look to cut back.

There are always people looking to sell at various points and prices change when the selling pressure we have overcomes the degree of buying pressure, and vice versa, and the magnitude of these moves depends in part upon creating inertia as more and more people pile on the side that is moving.

Sell-Offs After Good News Does Happen Though

We do see sell-offs after good news sometimes, but this tends to be with the stock of companies more than with the market itself, and there are good reasons for this. Company news tends to be more localized, where market news is much broader, extending to the entire market, and its positive effects are much more expanded.

With such a larger effect overall and with complete breadth, positive news will be much harder to put down than with a certain company’s stock. Markets are indeed driven by sentiment entirely, so this could certainly happen, but the usual expectation with these things is that the positive sentiment this creates will more than set off those who are disposed to get out.

So, it is possible that we could see a selloff from good news coming from such a big issue, and we do want to take views such as this seriously, to the extent that we are at least aware of the possibility of this actually happening, to be more ready if it does.

Matthews is seeing signs from the bond market that do not look very bullish to him, “showing signs of caution.” This may not seem to matter to whether or not a China deal brings a surge or a selloff, but given that weakening sentiment makes selloffs more likely, this does seem to be a pertinent observation and one that would hold some influence should he be right about the selloff event itself.

He has predicted that we will likely get a deal in place by March 1, and there are things that suggest this may be possible, but a lot has to come together over the next 3 weeks. It’s safer to say that we may see at least some progress this soon, and if the situation isn’t resolved, and things go well nonetheless, this would bode quite well.

What makes this view of Matthews’ unusual is that it doesn’t really square with the way we normally interpret these things. On the fundamental side, which uses real world data to forecast markets, this of course would run completely contrary to relying on this approach.

From a technical standpoint, we would want to see this play out on price charts at least somewhat, and would take much more of a wait-and-see attitude, being moved not by such things as expecting widespread selling in reaction to major good news, but by the actual evidence of such a move.

The market does have its ear pretty close to the ground and does generally behave fairly rationally, and is influenced by a number of things, but does sway to the music quite a bit, so those who are a little skeptical would be probably excused. A better view may be to wait until this at least looks like it is going on, an entry point that will not occur until after announcements.

Matthews isn’t suggesting we move on this now, and he continues to recommend people hold their long positions at this point, at least until the appointed time. If his attitude is cautious, perhaps we could stand to be a little more cautious ourselves at times.

Reasonable caution is a good thing, and if Matthews has awakened our awareness to look for the unexpected, he has served us well.

Ken Stephens

Chief Editor, MarketReview.com

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.

Contact Ken: [email protected]

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