Suck out

I'm not a big poker player, but I really enjoy the theories behind how the game is played. I think there are a lot of corollaries between a good trader and a good poker player. So let me make a poker analogy to the market action yesterday.

Yesterday I made the following statement: "...sentiment seems pretty bearish so a moderate sounding statement may bring a small rally." And that's exactly what happened. The statement sounded very much like the recent speeches we've seen from various Fed economists. Basically that inflation is too high right now, but a moderately cooling economy should allow the Fed to stay on hold for a while.

So why the rally if every one already knew this was the Fed's position? Because, in poker terms, the bond bears were all in. In poker, when players in front of you have made big bets, and the pot has gotten very large, sometimes the best strategy is to call the bet even if you think you have a less than 50% chance of winning the pot. For example, if the pot has $1,000 in it, and all you had to do was put $100 in to stay in the game, then as long as you have a better than 1/10 chance of winning, its a good bet.

That's what we had yesterday. The bond bears had bet heavily on a very hawkish Fed statement. Therefore, unless the statement was uber-hawkish, the market wasn't going to move much. On the other hand, since no one was betting on a moderate statement, that outcome resulted in a fair-sized rally.

Now, it isn't really my job to make short-term trades like that, so I can't say I made any money on my correct prognostication. But I think it reiterates the idea that you have to both analyze your economic opinion and what the market has priced in. Otherwise, you make lose money while being right all the way.