When the seagulls follow the trawler

It is just over twenty years ago that the words Eric Cantona and kung fu came together, as immortal words in the minds of football fans. The Manchester United player had been playing away at Crystal Palace. He had been sent off and was walking away into the tunnel. On his way, he launched into a kung fu kick at a Crystal Palace fan who had been shouting abuse at him. In a press conference following the incident, Cantona uttered the following words:

When the seagulls follow the trawler, it is because they think sardines will be thrown into the sea

Some thought Cantona's statement was amusing, perhaps because they did not think too deeply about it. Whatever could Cantona have meant? What is clear is that there is ambiguity tin this statement, a somewhat paradoxical notion. Could he have been referring to journalists assembled at the press conference, waiting for soundbites? Was he referring to the fan, who confronted him?

Ambiguity is something which pervades real life. Markets are not immune to the notion of ambiguity. Indeed, the idea of what precisely constitutes risk on or risk off in markets is perhaps an example of this. People tend to think of risk on as a buoyant risk environment. By contrast risk off is interpreted as a poor risk environment. Typically, we might expect risky assets to do better in risk on, and underperform in risk off periods. Beforehand, people have an idea of what are precisely high risk and low risk assets. Whilst this generalisation holds true, it can sometimes come unstuck, when we consider the market interpretation of price action.

A year ago, I doubt many would have felt that drastically lower oil prices, would be "bad" on a broader basis. Today, this idea seems to have gained traction judging by Twitter for example. Whether this is right or wrong is immaterial, if the market has a certain price dynamic, we might well have to accept it (the market is right mantra).

To some extent, we could argue that another definition for risk on is essentially the case when most market participants make money. Conversely, we could define risk off, as the market as a whole losing money on a trade, which is typically known as the pain trade. To be able to understand these market dynamics, we need to understand how the market is positioned.

Hence, we can sometimes end up with the following contradictory notion. Even if the market is long what is usually a "safe" asset, a large sell off in that asset could cause enough pain to spur a broader based risk off market (and indeed vice versa, which is perhaps closer to the current relationship between crude and stocks). So maybe, there are times where market positioning and repercussions of the move are more important than the market's previous ideas of what are safe or risky assets?

As for me, when I see seagulls, I remember the legend. The legend who is Eric Cantona.

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