Macro Trading Framework

Macro trading is not about forecasting next quarter's GDP. It asks two more practical questions: where money will be forced to go next, and whether the market has already seen it coming.

The two legs of a stock price: earnings and the discount rate

The price of any stock can be split into two parts:

Almost every piece of macro news ends up landing on these two legs. Rising oil raises companies' costs and squeezes earnings; it also pushes up inflation, makes it harder for the central bank to cut rates, and lifts the discount rate. A stronger dollar shrinks multinationals' overseas revenue once it is converted back, and tightens funding conditions around the world. Weakening jobs first make the market hope for rate cuts, then make it worry about earnings.

So macro analysis always comes down to three questions: How will this change earnings? How will it change rates? How will it change risk appetite?

Six things a macro trader does every day

Why stock and options traders need macro too

In 2022, many large tech companies whose earnings were still growing saw their shares fall anywhere from 30% to more than half. The companies hadn't gotten worse; their valuation multiples had. Rates rose quickly from near zero, and the price the market was willing to pay for the same dollar of earnings dropped sharply. That year, stock-picking skill could hardly offset the across-the-board selloff that macro brought.

When macro dominates the market, the correlation between individual stocks rises noticeably: everything goes up together and down together. Then however deep your research on a company, it only decides how much less you lose than everyone else. For options traders it is even more direct: rates, the dollar and data days change implied volatility (IV) across the whole market, and with it the price of every option.

Three common mistakes

Using macro on different time scales

The same macro call can turn out completely differently if you use a tool built for the wrong time scale. Express a thesis that needs six months to play out with options that expire in three weeks, and you can lose the entire premium even if you are right about the direction. Chapter 10 deals with this problem in detail.

The stock market is often the last to hear the news. Bonds, the dollar, crude oil and volatility often move first, and the way they combine says more about what the market is worried about than any single number.

Seven numbers and what they mean

A few more worth keeping on a second screen: gold (a hedge against currency credibility and geopolitical risk), USD/JPY (a barometer of the carry trade) and copper (global industrial demand). There are also a few “leading clues”: Korea's stock market often leads global memory-chip stocks, financials often turn a step ahead of the Nasdaq 100, and small caps are the most sensitive to rates.

Look at the speed of change before the level

A 10-year yield at 4.8% doesn't say much by itself. Rising from 4.0% to 4.8% within one quarter hits stocks very differently from drifting up over a year. The market can digest slow change; it can't digest abrupt change.

A simple habit: for each number, record two changes, over one day and over 20 trading days. Then compare them with how much that indicator usually moves. The 10-year yield usually moves about 5 basis points a day; on a day it moves 15, it's worth stopping to ask why.

Pay most attention when relationships break

These assets have some “normal” relationships with one another. When those break, it usually means the market is trading something new:

A pre-open reading routine

1. Note the overnight change in the seven numbers: the 2-year, the 10-year, the dollar, crude oil, gold, the VIX and credit spreads.
2. Find the one that moved the most, or the most unusually.
3. Ask why: was it data, a speech, an auction, a geopolitical event, or money moving with no news behind it?
4. Decide whether it was already priced in early (Chapter 2).
5. Write one sentence: “Today the market is trading ___.” If you can't write it, there is no clear dominant theme today, so trade less.

News rarely moves stock prices directly. What moves them is how the news travels along a chain to earnings, rates and flows, and how much the market had already figured out before you did.

The main chain you'll use most

Most macro events fit into the chain below. With practice, whenever you see a piece of news you'll quickly ask, “Which link of the chain is this at?”

Every link can break

A transmission chain doesn't run automatically; every link has conditions. Being able to see where the chain breaks is worth more than knowing it by heart.

• Oil to inflation: a brief shock won't feed into core inflation. Only high oil prices that last several months seep in slowly, through freight, airfares and chemicals.
• Inflation to rates: the central bank may choose to “look through” a supply shock and not hike because of it. Then short-term rates stay put, while long-term rates may still rise on inflation worries.
• Rates to stocks: if rates are rising because the economy is strong and earnings are being revised up alongside, stocks can handle it; if earnings don't keep up, it is pure valuation compression.
• Policy response: when oil reaches a politically unacceptable level, the government may release reserves or restrict exports, and the chain can suddenly reverse.

Second-order thinking: ask “and then what?”

First-order thinking says: oil is rising, so buy energy stocks. The problem is that everyone has thought of this, and energy stocks soon get crowded. Second-order thinking goes on to ask: when oil gets painfully expensive, what will the government do? If policy suddenly pushes oil down, who rebounds hardest? The answer is airlines and travel, because they were sold the hardest beforehand.

That leads to a very practical combination: hold an energy position betting on higher oil, and use a small slice of capital to buy airline stocks, or call options on them, as a “surprise hedge.” If oil keeps rising, energy makes money; if oil drops on a policy surprise, the airline rebound offsets the energy loss. Chapter 10 works through this combination with numbers.

When you can't make sense of a situation, the question to ask is “who benefits?” Every policy, conflict or technological breakthrough lowers someone's costs and raises someone's revenue, and forces someone else to spend. Following the direction money is forced to flow is more reliable than guessing the outcome of the event itself.

Same signal, opposite directions for different sectors

If long-term yields fall because the market has started to worry about a slowdown, that's bearish for stocks overall. But for “bond-like” sectors such as utilities, REITs and consumer staples, lower rates directly cut their funding costs and make their dividends more attractive, so in the short run it is actually good news.

That's why macro traders often say: trade where the money is flowing, rather than betting on the index going up or down. The index is the sum of hundreds of forces pulling in opposite directions, and the divergence between sectors is often clearer than the index itself.

Is it already priced in?

The market has expectations for almost every known event, and you can see them: Fed funds futures tell you how many hikes the market has priced, option prices tell you how big a move the market expects from an event, and analysts' consensus estimates tell you the “passing grade” for an earnings report.

There is also an often-overlooked case: priced in early. If a central bank official gives a dovish speech the day before a data release, the market may already have traded the good news of “weak data” in advance. When the data does come in weak the next day, the market may fall instead, because it's “not as bad as feared.”

Watch the reaction, not the headline

Headlines are written for everyone; reactions are votes cast with real money. Two situations are especially worth recording:

• Good news, no rally: a company announces a price increase, and the stock falls. Someone is using the good news to unload, or the market is worried about something else.
• Bad news, no drop: sanctions that look severe are announced, and oil barely moves. The market thinks they can't be enforced, or has already priced them in.

The market's reaction is the true weight of a piece of news.

Interest rates are the gravity acting on all asset prices. When they move a little, the further in the future a cash flow lies, the more it is affected. Understand this and you understand why the same rise in rates leaves some stocks almost untouched and cuts others in half.

One formula for how rates crush valuations

Think of a company as a stream of cash flows that lasts forever and grows g per year, and discount it back to today at a discount rate r: that is the classic Gordon growth model. If all earnings are paid out to shareholders, the price-to-earnings ratio (P/E) simplifies to:

Set the discount rate at 8%. A mature company with 2% long-term growth has a P/E of about 16.7; a high-growth company with 6% long-term growth has a P/E of about 50. Now raise the discount rate by 1 percentage point, to 9%:

Earnings didn't change by a cent, yet the high-growth company's theoretical value fell by a third. That is what happened to many growth stocks in 2022.

Growth stocks are long-duration assets

Take the derivative of the formula above and you get a number that looks a lot like a bond's duration:

Use this approximation for g = 5% and a 1-percentage-point rise in rates: −1% × 33 ≈ −33%, which overstates the exact −25% because the curve bends. But it captures the point: the higher the growth and the further away the earnings, the more a company looks like a 30- or 50-year bond. A company with no earnings, priced on a story ten years out, has an even longer duration.

It also explains a common pattern: on days when rates spike, small-cap growth stocks, unprofitable tech and biotech fall the most, while banks, energy and consumer staples fall the least, or even rise.

The equity risk premium: how much more stocks pay you than bonds

The inverse of the P/E is the earnings yield. A P/E of 20 means an earnings yield of 5%: for every $100 you invest, the company earns $5 a year for you. Comparing it with Treasury yields asks: how much extra compensation do you get for taking on stock risk?

A very low risk premium doesn't mean stocks will fall tomorrow. It is a poor timing tool, and valuations can stay expensive for a long time. What it really tells you is how thick the cushion is: when the premium is thin, a single rate shock is enough to cause significant valuation compression, because stocks no longer have much spare appeal relative to bonds.

Four ways the yield curve moves

Watching the 10-year alone isn't enough; you need to see whether the short end or the long end moves more. Traders measure how steep the curve is by the spread between the 2-year and the 10-year, and sort its changes into four types:

An inverted curve (2-year above 10-year) appeared before each of the past several US recessions, but it is not a timer: the inversion that began in 2022 lasted more than two years, and the economy did not fall into recession on schedule. What deserves more caution is often how the inversion ends: if the short end drops fast on rate-cut expectations and the curve steepens again, it often means the economy is genuinely weakening.

The Fed's reaction function, and market pricing

The Federal Reserve (Fed) has two goals: stable prices and full employment. Each of its decisions can be read as weighing these two goals against each other. When inflation is well above target, it tolerates more weakness in jobs; when jobs are clearly deteriorating and inflation is near target, it turns to easing faster.

For traders, the key is not what the Fed did but how far it was from what the market expected. Fed funds futures and overnight index swaps (OIS) tell you how many hikes or cuts the market has priced (CME's FedWatch tool converts this into probabilities). If the market has priced a 90% chance of a hike before the meeting, the hike itself isn't news; not hiking would be.

Also watch what officials say before the meeting. They often guide expectations deliberately to avoid springing a surprise at the meeting. This also means the speeches themselves get part of the data's impact priced in early.

The Fed credibility trade

What happens when the market has almost fully priced a hike and the Fed chooses not to hike? The reaction usually comes in two phases:

Whether phase two happens depends on whether the market still believes the Fed can keep inflation under control. If inflation is clearly still high and the Fed won't tighten, long-bond investors demand more compensation for bearing future inflation risk. Then rate-cut expectations end up pushing long-term rates higher, and stocks get no benefit at all.

The test is simple: in the days after the announcement, see whether the 10-year yield falls along with the 2-year (the market believes the Fed) or rises against it (the market is punishing it).

Treasury supply, auctions and the term premium

Long-term rates depend not only on expectations for the central bank but also on supply and demand for Treasuries. The bigger the government's deficit, the more debt it must issue; if there aren't enough buyers, it has to attract them with higher yields. The extra yield investors demand for holding long-term bonds is called the term premium.

A few details worth watching:

• Auction results: a stop-out yield clearly above the pre-auction market level (known as a “tail”), a low bid-to-cover ratio and a falling share of foreign buyers all signal weak demand. Weak 20- and 30-year auctions in particular push the long end up.
• The quarterly refunding announcement: each quarter the US Treasury publishes its borrowing plans for the period ahead, including the mix of long bonds and short-term bills. In early November 2023 the Treasury slowed the growth of long-bond issuance; combined with Fed hints of a pause in hikes, long-end yields fell back from near 5%, and stocks then rallied sharply.
• Signs of a rising term premium: the long end rises more than the short end, the dollar doesn't necessarily follow, and stocks and bonds fall together.

US interest rates set the price of money worldwide; the dollar, gold and crude oil carry that price around the world and back into the income statements of US companies.

The dollar is the world's funding currency

A large share of global trade settlement, cross-border lending and non-US corporate debt is denominated in dollars. When the dollar strengthens, these borrowers need more of their own currency to repay the same debt, and global funding conditions tighten. The effect on US stocks runs mainly through four channels:

• Earnings translation: a sizable share of S&P 500 companies' revenue comes from overseas, and the stronger the dollar, the less that revenue is worth once converted into dollars. Multinational tech and consumer brands often cite “currency headwinds” in their earnings reports.
• Commodities: commodities priced in dollars get more expensive for buyers in other countries, so demand and prices come under pressure.
• Emerging markets: capital outflows, weaker local currencies and mounting pressure on dollar debt.
• Risk appetite: a sharp rise in the dollar often coincides with global risk-off.

A stronger dollar can mean opposite things, depending on why

Traders often use a “dollar smile” curve to sum up how the dollar relates to the economic backdrop:

One case that isn't on the smile deserves its own note: US rates rising while the dollar falls. Normally higher rates make the dollar more attractive, so when the two move in opposite directions, it often means foreign investors are cutting US assets, possibly out of concern about fiscal sustainability, policy predictability or inflation control. During the tariff shock of April 2025, US stocks, Treasuries and the dollar all fell at the same time for a while.

The yen and the carry trade

Japan kept interest rates extremely low for a long time, so many investors borrowed yen, converted it into dollars or other currencies, and bought higher-yielding assets. That is the carry trade. As long as the yen holds steady or weakens, the trade earns the rate differential every day.

The risk is a sudden, sharp rise in the yen. The debt that yen borrowers must repay grows instantly, so they have to sell whatever assets they hold to unwind, even assets that have nothing to do with one another. In late July 2024 the Bank of Japan raised rates; soon after, weak US jobs data in early August sent the yen soaring, and carry trades were unwound en masse. On August 5 the Nikkei fell about 12% in a single day, the VIX briefly spiked above 60 intraday, and popular US tech stocks were sold heavily. The market recovered most of the losses within a few weeks, but those few days of volatility were enough to knock out highly leveraged positions.

Gold: what is it hedging?

Gold pays no interest, so the cost of holding it is the real yield you give up. Traditionally, then, gold moves opposite to the 10-year real yield: when real yields rise, gold comes under pressure. Other things that move gold:

• The dollar: gold is priced in dollars, so a weaker dollar usually helps gold.
• Central bank gold buying: some countries' central banks keep adding gold to reduce their reliance on dollar assets. Since 2022 this buying has clearly weakened gold's traditional relationship with real yields.
• A credibility and geopolitical hedge: when the market worries about currency debasement, runaway deficits or escalating conflict, gold is one of the few assets that doesn't depend on any government's credit.

Silver is a precious metal but also has industrial demand (electronics, solar), so it follows gold's narrative but gets amplified by the business cycle and swings more, making it less “clean” than gold.

A practical reading: if gold is rising while real yields are also rising, buyers are paying for something other than rates, usually credibility or geopolitical risk. A gold rally like that tends to last longer than one driven purely by rate-cut expectations, and is more worth treating as a risk signal.

Crude oil: why it rises matters more than how much

You can rough out the “oil tax”: a barrel of crude is 42 gallons, so every $10 rise in crude works out to about $0.24 per gallon of refined product. If the US consumes about 135 billion gallons of gasoline a year, an extra $0.24 per gallon means about $32 billion a year flowing from consumers' pockets to energy producers. The money doesn't vanish, but what gets spent at the gas station doesn't get spent at restaurants and malls.

How to tell: on the days oil rises, check whether the S&P 500 rises with it or falls, and whether copper rises too. If stocks and copper both follow it up, it's probably demand; if stocks fall and copper doesn't rise, it's probably a supply shock.

Having oil doesn't mean having fuel

Crude has to go through a refinery to become gasoline, diesel and jet fuel. When refining capacity falls short, or inventories of one product (diesel, say) are tight, refined product prices can rise far more than crude. The price gap between crude and refined products is called the crack spread, and it determines refiners' profits.

Diesel matters especially, because trucking, farm machinery and construction equipment all run on it. Tight diesel pushes up the price of almost everything through freight costs, so its effect on inflation is broader than gasoline's. On the policy side, if diesel prices get high enough to create political pressure, the government may consider restricting exports. That would push domestic prices down and overseas prices up, changing the fortunes of the companies involved overnight.

Round numbers and policy responses

Crude often meets clear resistance or speeds up near round numbers. Not because the numbers are magic, but because they change behavior: the media starts covering it heavily, consumers start complaining, politicians start weighing in. When oil reaches a politically unacceptable level, the odds rise of policy responses such as releasing the Strategic Petroleum Reserve (SPR), pressuring producing countries or restricting exports. When you trade high oil prices, treat a policy response as a scenario that could arrive at any moment.

The same news can mean opposite things in different market regimes. So first decide which phase the market is in, then choose what to trade and with which tools. The regime call doesn't need to be precise; it just needs to keep you from being wrong about the big direction.

Four variables instead of a point forecast

Predicting “will the S&P go up or down next month?” is almost impossible to do well. It's more workable to keep watching four variables, which correspond to the four sources of valuation and earnings:

Six combinations, six playbooks

In the “sector rotation” row, earnings is the key item: earnings aren't great, but not bad enough to cause panic, so money doesn't leave stocks wholesale; it changes hands between sectors instead.

The three phases of a decline

The turn from phase one to phase two is the one most worth monitoring. A very practical rule: if yields start falling while oil is still high and jobs start to soften, start protecting, either by cutting position size or by buying a protective put spread.

Falling rates: good news or bad?

The same 30-basis-point drop in the 10-year yield could mean inflation is cooling (good) or that the market is worried about recession (bad). To tell them apart, look at how it combines with other assets:

A look back at past major pullbacks

Let's test the framework against history. The table below lists only qualitative features and approximate declines (S&P 500, peak to trough); you can check the exact figures in public databases such as FRED.

Two patterns stand out:

• Treasuries hedge growth shocks, not rate or inflation shocks. In three of the five cases, the decline was caused by rates, inflation or policy, and Treasuries fell along with stocks. At times like that, the protection that really works is options, or simply a smaller position.
• Bottoms are usually confirmed by policy, not by valuations repairing themselves. In four of the five cases, the market bottomed around the time some policy changed. So in a decline, instead of asking “has it fallen enough?”, ask “what policy would make the decision-makers step in, and how far are we from that point?”

Discipline for regime calls

• Update weekly, not daily. Daily noise will have you flipping back and forth between two regimes.
• Consider switching regimes only when at least two variables change at the same time.
• Write your call down, along with “what data would make me change it,” and check it afterward.
• The regime decides your position size and playbook, not your exact entry timing. Leave timing to Chapters 6, 7 and 9.

A rising index doesn't mean most stocks are rising. In a market dominated by a few giants, reading breadth is how you see what is really going on behind the index.

Cap weighting is a magnifying glass

The S&P 500 and the Nasdaq 100 are both market-cap weighted, and the ten largest companies can make up more than a third of the index. Each stock's contribution to the index equals its weight times its move:

So when judging the index's direction, look at “weight times speed.” When two heavyweight groups pull in opposite directions, say chip stocks falling while cloud giants rise, whichever has the bigger weight and the faster move sets the index's direction. Once a heavyweight group's decline speeds up, the other few hundred stocks can't hold the index up, however well they do.

A few ratios for confirmation

Divide one ETF's price by another's and plot the result as a line, and you get a relative strength ratio. A rising ratio means the first is outperforming the second. These are the most commonly used:

Also, Korea's stock market is heavily weighted toward memory chips and semiconductors, and it often leads the turning points in global memory-chip stocks. When US memory-chip stocks are strong while Korea's market stays weak, that divergence usually doesn't last long.

Rotation and a decline look alike, but they are different

The most common mistake during sector rotation is to take a selloff in crowded winners for a selloff in the whole market, dump everything, and miss the sectors money is flowing into. Conversely, the most common mistake in a decline is to take a broad selloff for rotation and think you can dodge it by switching sectors. Correlation and credit spreads are the best tools for telling them apart.

How to play a rotation

• Buy pullbacks in former losers; sell bounces in former winners. Money moves from crowded winners into neglected sectors, and the process usually lasts several weeks.
• Use shares or longer-dated instruments. Rotation takes time to play out, and time decay on short-dated options will eat your profits.
• Wait for confirmation before adding. One day of equal-weight outperformance means nothing. It counts as confirmed when the ratio rises steadily over several days to a week or two, while money keeps flowing into the sectors that were sold off.
• When shorting, pick the weakest, not the strongest. To express a bearish view, shorting the sector with the worst relative strength is far safer than shorting the strongest index. The strongest things have money buying them; shorting them means fighting both the trend and short covering.

The cost of a crowded trade

When everyone knows about a trade and everyone owns it, its biggest risk is often that there is no next buyer, even if the logic itself isn't wrong. Once the buying stops, a little bad news is enough to send the price down fast, because everyone wants out through the same door.

Clues that a trade is crowded: the media and social platforms discuss it over and over; people around you who don't trade start asking about it; demand for call options in the options market clearly exceeds demand for put options; related ETFs see large, steady inflows; and the stock stops rising on good news. Seeing these signs doesn't mean you must sell right away, but you should stop adding and think it through: when the buying stops, who will take the other side?

Macro sets the direction over months, but the path over a few days is often set by mechanical flows. This money doesn't read the news; it buys and sells by rule, yet it is enough to turn a normal pullback into a sharp drop, or to pin the index near a certain price.

Which way market makers hedge

After a market maker sells options, it usually hedges the Delta with stock or futures to stay neutral on direction. As prices move, Delta changes (the rate of change is Gamma), so market makers have to keep adjusting the hedge. Which way they adjust depends on whether, overall, they are long Gamma or short Gamma:

In a typical index options market, clients (institutions) buy lots of put options for protection and sell call options for extra income. Market makers stand on the other side: short the puts (negative Gamma) and long the calls (positive Gamma). When prices are high, the calls matter more, and market makers are net long Gamma; when prices fall into the zone where the puts are concentrated, they flip to net short Gamma. The price where it flips is what's commonly called the Gamma flip.

Effects around expiration

• Around monthly expiration (OpEx) (the third Friday of each month) and quarterly quad witching (the third Friday of March, June, September and December), large numbers of options expire at once, and market makers' hedges are released with them. Before expiration, price is often “pinned” to strikes with large open interest; after expiration, that constraint lifts and volatility often picks up.
• Max pain is the expiration price at which option buyers as a whole lose the most. It exerts some pull on price in the last day or two before expiration, and means less the further away expiration is.
• 0DTE options (expiring the same day) have enormous Gamma and amplify intraday swings, especially near big strikes. They have a large effect on the intraday path and little effect on direction over weeks.
• Pileups at a single strike: when a round-number strike has an unusually large number of calls, market makers need to buy to hedge as price approaches it, which can produce a burst of accelerating gains; once price moves past it, the buying disappears, and the strike may turn into resistance.

End-of-day rebalancing in leveraged ETFs

A leveraged ETF promises a fixed multiple of the underlying's daily move, so it must adjust its position before every close. Here is the derivation: a fund with leverage L and net assets A needs L·A of exposure. If the underlying rises r on the day, the exposure becomes L·A·(1+r), net assets become A·(1+L·r), and the exposure it needs is L·A·(1+L·r). Subtract one from the other:

For stocks with large leveraged ETFs tracking them (some popular tech and semiconductor names), this money amplifies late-day moves on big up and down days: the stock jumps, leveraged funds buy before the close, the next day opens higher, and that drives more buying. It works the other way on the way down. Understand this and you understand why some stocks always swing more than their fundamental news can explain.

Other mechanical flows

• Volatility-targeting funds and trend-following (CTA) funds: the former automatically cut equity exposure when realized volatility rises; the latter cut positions when prices break below trend. Both sell into declines and slowly buy back during calm rallies.
• Quarter-end and month-end rebalancing: pension funds and other funds with stock–bond allocations must sell stocks and buy bonds at the end of a quarter in which stocks rallied hard, and vice versa.
• Buyback blackout periods: companies usually suspend share buybacks for several weeks before releasing earnings, so the market loses a steady buyer. After earnings, buybacks resume and the buying comes back.
• Index changes: additions, deletions and weight changes create concentrated trading on the effective date.

How to use this information

Mechanical flows explain the path and timing, not the direction. Your macro view tells you roughly where things are heading; flows tell you on which days the move may be especially fast, and near which prices it may get pinned or suddenly accelerate.

Options data has one more use: seeing through a narrative. When a stock rallies day after day, the news will supply a fundamental reason. But if the rally happens to come with heavy buying of short-dated calls, forcing market makers to buy the stock to hedge, then a good part of the move is mechanical. The question to ask then is: once the call buying stops, who takes over?

Markets trade stories, but in the end cash flows pay the bill. People who use narratives use them to decide what to research; people used by narratives use them to decide when to go all in.

The life cycle of a narrative

Narratives decide what to research; valuation decides when to buy

A good narrative answers the question “where will the world be forced to spend money over the next few years?” For example, AI needs power, networks and data centers; reshoring needs engineering and construction (E&C), industrial equipment and logistics; population aging needs medical devices and services; security and resource independence need defense, critical minerals and energy infrastructure.

To get from a narrative to specific stocks, you can work in four steps:

A narrative being right doesn't make a given company a good way to express it. Within a correct trend, plenty of companies will fail because of execution, competition or debt. Real diversification is about risk factors, not how many stocks you hold: five stocks that all rise on the same narrative are really one trade.

Write down invalidation criteria, and make them facts

Before you buy into a narrative, write down “what facts would make me admit this call is wrong.” Note: facts, not prices.

A price stop-loss controls the loss on a single trade; factual invalidation criteria judge the narrative itself. You need both, but don't confuse them. If the price falls and the facts haven't changed, it may be an opportunity; if the price hasn't fallen but the facts have changed, you have all the more reason to get out.

Does this news matter? Ask six questions

Insiders, big money and retail sentiment

• Insider buying says more than insider selling. Executives sell stock for many reasons: diversifying their wealth, paying taxes, buying a house, and many sales are prearranged trading plans. But when they buy on the open market with their own money, there is usually only one reason. Several executives buying at the same time is an even stronger signal.
• Unusual options activity (UOA) is information, not an order. A sudden large trade at one strike price could be a bullish bet, a big institution hedging a stock position, or even someone closing a position. Judge it together with the change in open interest (OI) and the price the trade went through at, and treat it only as one clue.
• Extreme retail sentiment is a contrarian indicator. When people around you who never trade start recommending stocks, or a stock becomes the topic everyone on social media is talking about, sentiment is close to a peak. It doesn't tell you the market will fall tomorrow, but it reminds you not to add at that point.

Trade the policy, not the slogan

Political news brings a lot of noise. What a macro trader cares about is where policy will send capital: an industrial subsidy, a tariff, a defense budget or an export restriction will reliably raise or lower certain industries' revenue over several years. As for who said what, or which side you agree with, the market doesn't care.

Separating your personal beliefs from your trading judgment is the hardest part of this craft. A useful test: if the side you support loses power, would your positions keep you up at night? If so, you are betting on a belief, not on market logic you can verify.

A macro trader's month is carved up by the calendar. The dates of important data releases and meetings are announced in advance, so you can write down what you will do under each outcome before the event happens.

The fixed schedule each month

Event playbooks: write the branches in advance

On the day of an event, prices jump within seconds, and emotion most easily takes over your judgment. So write the playbook the day before, with a calm head: for each outcome, how each asset class will move and what you will do. Take CPI as an example:

The most valuable column in a playbook is “what reaction would show the market is trading something else.” For example, if CPI comes in well below expectations and the 2-year drops sharply but stocks fall too, the market is more worried about growth than about inflation. A reaction that doesn't fit the playbook often matters more than the data itself.

How much options are pricing in for an event

Option prices contain the market's expected move for an event. Using the implied volatility of options that expire in a week (which includes the event day) and of an ordinary day, you can isolate the event day. Calculated in trading days (252 a year):

Seasonality is a map, not a trigger

In commonly cited statistics, September has historically been the S&P 500's weakest month on average, and in US midterm election years the market often weakens from midyear into the fall, then does better from year-end into the following year. There are also month-end fund rebalancing, thin trading around long holidays, the buyback blackout period before earnings season, and so on.

The problem with these patterns is that the samples are small (midterms come once every four years, so several decades give you only a dozen or so), and every year's macro backdrop is completely different. So the right way to use seasonality is:

• Prepare in advance: before a seasonally weak stretch arrives, have cash, hedges and a shopping list ready, and write down what you'll buy on a 5%, 10% and 15% pullback.
• Wait for confirmation: seasonality only tells you “maybe”; price breaking a key level, breadth deteriorating and credit spreads widening are the “confirmation.” Don't try to predict the pullback; let the market confirm it.
• Stack it with other signals: seasonal weakness, rich valuations and rising rates showing up together deserve more attention than seasonality alone.

Wall Street also has plenty of calendar sayings, such as selling before certain holidays and buying back afterward. It's enough to treat them as reminders worth noticing, not as trading signals.

Discipline around events

• Hedge before the event; do little during it. Before a major event (a rate decision, key data, earnings from an important company), buy protection for existing positions, or cut size first. In the first hour after the result, prices often whipsaw, and that is when mistakes are easiest to make.
• In low-volume periods, beware of false breakouts. Around holidays and in thin summer weeks, small amounts of money can push prices around, and breakouts are less reliable.
• Be careful at the Monday open. News that piles up over the weekend hits all at once at Monday's open, and prices in the first half hour often don't reflect the day's direction.
• One day in line with expectations is not confirmation. An important turn needs at least the price action on the second and third days to confirm it.

To turn a macro view into money, you still have to answer four questions: what instrument, how big, how long to hold, and what to do if you're wrong. Many correct macro calls lose money on exactly these four questions.

A view needs all five parts written down

A view with only the first part written down is not a tradable view. The timeframe matters most, because it directly decides which instrument you should use.

Choose the instrument by timeframe

Expressing a call that needs six months to play out with call options that expire in three weeks means betting on direction and timing at once, and time is almost certain to be against you. When a macro thesis needs time, buy the stock rather than short-dated options: what we need is time, not excitement.

Pick the cleanest, weakest link

• When bullish, find the most direct beneficiary. A view on higher oil is expressed more directly through upstream producers than through integrated energy companies; a view on falling rates, more directly through small caps or REITs than through big tech.
• When bearish, find the weakest sector. If you are bearish on tech, rather than shorting the Nasdaq 100, which has the strongest trend, short the sub-sector with the worst relative strength and fading momentum. Go after the soft target, not the hard one.
• When you can't decide on direction, trade relative strength. Buying one and selling another hedges out the overall market's moves, so you bet only on the part of your view you are most sure of.

Hedging at the portfolio level

Let's run the numbers on the “surprise hedge” from Chapter 2. Suppose you hold $10,000 of energy stocks with an elasticity of 0.6 to oil (oil up 10%, the stocks up 6%). You worry that policy will suddenly push oil down, so you buy call options on an airline ETF as protection.

The point of this example is the shape. Hedging with call options, you pay a fixed, limited premium in exchange for protection against a large move in oil in the wrong direction. If you hedged by short selling energy stocks instead, you would cut your gains and your losses in equal proportion, and the view itself would be gone.

The same approach works for any macro position. First ask, “Which scenario do I fear most?” Then find the asset that gains the most in that scenario and hold it in small size or through options. Don't judge one trade on its own; look at what the whole portfolio does in each scenario.

Scale in, and add after confirmation

Macro calls rarely get the timing right on the first try. A simple way to scale in:

1. When the view forms, build one third of the planned position and make sure you can live with its swings.
2. Write a confirmation checklist in advance, for example “equal-weight outperforms for a full week,” “credit spreads are not widening,” “oil is stable.” Once the checklist is met, add another third.
3. Once the trend has emerged and makes its first healthy pullback, add the final third.
4. At any point, if an invalidation condition appears, exit everything. Without new evidence, never add to a losing macro position.

Size reflects uncertainty, not excitement

• The less certain you are, the smaller the position. The more excited you are, the more you should suspect you've fallen into a narrative.
• Count correlated positions together. Three tech stocks, a small-cap ETF and two call options may be six ways of writing the same bet. Count risk factors, not tickers.
• Manage total exposure and a daily loss limit. Beyond limits on each position, set a cap on how much the whole portfolio may lose in one day. When you hit it, stop.
• Cash is a position. Holding cash when there's no clear opportunity is an active decision. It leaves you able to buy when others are forced to sell.

A final check with scenarios and probabilities

Before you place the trade, list the two or three scenarios that could play out over the next one to three months, and give each a subjective probability and an estimated market move. For example:

The value of this table isn't in how accurate the −6% is; subjective probabilities are guesses to begin with. Its value is that it forces you to do two things. First, admit there are scenarios you don't favor, and give them a probability. Second, check that your portfolio survives every one of them. If any scenario would blow up your account, deal with it first, however low its probability.

This chapter turns the previous ten into something you can use every day. Checklist ticks are saved only in your own browser.

Morning brief template

Spend fifteen minutes before each open writing yourself a morning brief, in this order. Keep it up for a month and you'll find you read the market noticeably faster.

Date:
1. Overnight changes
    2Y ___  10Y ___  Dollar ___  Crude ___  Gold ___  VIX ___  Credit spread ___
    Biggest or most unusual move:
2. Why
    Event / data / speech / auction:
    Already priced in?
3. The bigger picture
    Current regime (Chapter 5):      This week's calendar:      Seasonal position:
4. Transmission chain
    ___ → ___ → ___    Benefits:            Hurt:
5. Check the tape
    Equal-weight vs cap-weight:    Small caps:    Financials:    Semis:    Credit:
6. Key levels (above: do what / below: do what)
    Index:            Flip and large strikes:
7. Today's plan
    Structure:    Size:    Stop-loss:    Hedge:
8. In one line: today the market is trading ___________
9. Discipline: wait for confirmation, don't chase, keep size light, do little during events

Watchlist and trigger lines

Trigger lines are there to tell you “time to reassess,” not to place orders automatically. The values below are examples; adjust them to each indicator's level and normal range of movement when you start using them. Relative changes (how much in how many days) go stale less quickly than absolute levels.

Four checklists

Scenario exercises

Come up with your own answer first, then open the answer to compare. There's no single right answer; what matters is the order of the reasoning.

Key terms

The main terms in this handbook, in the order they first appear.

Further reading and data sources

• Howard Marks, Mastering the Market Cycle: how to tell where you are in the cycle.
• Ray Dalio, Big Debt Crises: how interest rates, debt and policy interact.
• Edward Chancellor, The Price of Time: a history of interest rates, and how long stretches of low rates change asset prices.
• George Soros, The Alchemy of Finance: reflexivity, or how a narrative changes the reality it describes.
• Data: the St. Louis Fed's FRED database (rates, spreads, employment), CME FedWatch (rate hike and cut probabilities), and the US Treasury's auction results and quarterly refunding announcements.