Two-Pronged Defense: When the Market Is Bullish, You Should Be Even More Cautious

What Is a Two-Pronged Defense Strategy

The two-pronged defense is our core investment strategy, which we have been implementing for over a month. Its core logic is to simultaneously guard against two extreme market sentiments: preventing forced sell-offs at market bottoms caused by excessive pessimism, and preventing chasing the market at highs driven by excessive optimism.

At the onset of the crisis, global markets experienced a collective downturn: U.S., Japanese, South Korean, and European stocks, as well as A-shares, all fell in unison; gold prices dropped sharply in the short term; and oil prices soared. At that time, our primary objective was to prevent investors from becoming overly pessimistic. We highlighted opportunities for a U.S. stock market rebound, executed three rounds of position increases at the bottom of the gold market, and took profits on WTI crude oil positions above $110.

The Nature of Current Market Optimism

The recent market rebound is essentially the result of two driving forces:

  1. The first wave of gains stemmed from quarterly rebalancing by U.S. pension funds.
  2. The second wave was driven by short-covering by hedge funds and quantitative funds.
  3. Retail investor participation in this rally has been extremely low, which is entirely different from the previous rally logic during the tariff war, where retail investors entered the market first and institutions followed to chase gains.

The current market optimism stems primarily from the signals of de-escalation released during the first round of negotiations between the U.S. and Iran regarding the Iranian nuclear issue. However, for a sustained rally in U.S. stocks, further concrete news of de-escalation is essential; otherwise, the current rebound lacks fundamental support.

Key Risks in Late April

The two weeks following April 20 represent the most critical time window of the year, with three key risks:

  1. On April 21, Warsh will testify before the Senate regarding his nomination as Federal Reserve Chair. If Warsh is confirmed, the probability of Trump launching a war will rise significantly.
  2. On April 30, the Federal Reserve will hold its interest rate meeting. To push for an interest rate cut, Trump needs to ensure Warsh passes his confirmation hearing smoothly and will not escalate domestic conflicts in the short term.
  3. On the geopolitical front, we must guard against extreme decisions by Israel or Trump that could reignite war; the market has already priced in excessive expectations of peace.

My personal assessment is that if Trump truly intends to go all-in, war is more likely to occur in May rather than April. At this stage, our core task is to safeguard the profits accumulated over the past period and prevent profit pullbacks caused by a reversal in market optimism.

The Long-Term Investment Logic for Oil

We began positioning for crude oil investments on January 30, taking profits around $110. We subsequently added to our positions once around $85, and currently plan to execute the remaining two additions below $80 to further lower our average cost.

The core rationale for our long-term bullish stance on oil remains unchanged:

  1. A blockade of the Strait of Hormuz would lead to a long-term rise in shipping insurance costs; the restructuring of insurance actuarial models would drive up crude oil transportation costs.
  2. Major global nations will increase their strategic oil reserve levels from the current 30–60 days to 90–100 days, providing long-term support on the demand side.
  3. The era of low oil prices has ended; energy security will become a core strategic objective for all nations.

The optimal strategy for current oil positions is: retain a portion of the base position for long-term holding, while using the remainder for swing trading or appropriate leverage based on individual circumstances. A sufficiently low cost basis is the cornerstone of long-term holding; defending positions with existing profits allows for a more composed approach.

Analysis of the Fed’s Policy Direction

Were it not for the current geopolitical conflicts, the Fed would undoubtedly have initiated a rate-cutting cycle. The current U.S. unemployment rate of 4.3% is inflated; in essence, long-term unemployed individuals have exited the labor market, causing both the numerator and denominator of the unemployment rate formula to shrink simultaneously.

President Trump’s core policy objective is to push for rate cuts to alleviate the U.S. government’s high interest payment burden. However, the prerequisite for rate cuts is controlling inflation, which is directly influenced by the situation in the Strait of Hormuz. This is the core logic behind why geopolitical conflicts directly impact the pace of the Fed’s policy decisions.

The key strategy at this stage is to maintain a balanced, defensive mindset: avoid blindly chasing rallies with full positions due to short-term gains, and avoid liquidating positions out of excessive pessimism over potential risks. While managing position sizes effectively, one should patiently wait for the situation to become clearer.