The magnitude of the market reaction to a repricing in expectations is generally driven by positioning.
Say we are in risk on, so risk assets generally rally together like equities, commodities, commodity currencies and so on.
The magnitude of the moves in each market is determined by positioning.
If one of those markets is let’s say net short, there’s much more room to the upside.
Therefore, to get the big moves you should find the markets where a change in expectations can yield the most and then wait for the catalyst to trigger the repricing.
Recent examples include the aggressive stock market selloff when everyone was bullish because of better growth expectations and we got the catalysts that triggered the growth fears or the US Dollar selloff when positioning became overstretched on the long side (with news covers praising the greenback’s strength) and we got the trade wars triggering a repricing in rate cuts expectations on the more dovish side.
When market positioning is overstretched to one side, reactions to new information tend to be more exaggerated. If new info contradicts the consensus, traders are forced to quickly exit trades to cut losses or take profits off the table. This reaction can then be amplified by algos and so on and given the use of leverage, it can lead to big and fast moves.
That’s why as a trader, you should always be wary of positioning because it can either wipe out most of your gains when conditions change or offer you a great opportunity to ride the repricing in expectations
