Can't see the direction, can't predict the reversal! When AI disruption collides with geopolitical turbulence, how to trade in a market with zero certainty?

As AI reshapes fundamentals and geopolitical conflicts disrupt expectations, the market is entering a phase of “unclear direction but unavoidable trading.”

According to Wind Trading Desk, on March 23, Bank of America Merrill Lynch released its latest “Global Equity Volatility Insights” report, stating that global markets are in a “state of certainty vacuum.” The report notes: “When geopolitical pressures coexist with AI disruptions, markets lack clear anchors, and investors can only rely on short-term effective trading logic.”

This shift is reshaping capital behavior and price structures. “In a low-confidence market environment, investors tend to chase current momentum trades until they exhaust and turn fragile.”

The report cites examples such as South Korean stocks, gold, silver, and other assets with previous “bubble characteristics” experiencing larger pullbacks amid geopolitical shocks. The logic is simple: when capital is based not on fundamentals but on trends, a trend reversal leads to more severe price declines.

Pre-rupture of bubbles: from gold and silver to Korean stocks

Bank of America points out that the historic volatility seen in gold, silver, and the KOSPI index over the past few weeks is no coincidence.

Their “Bubble Risk Indicator” (BRI) had warned of bubble risks in these areas in advance. Data shows that after weeks of bubble-like behavior, gold experienced a historic correction last week, contrasting sharply with its traditional status as a “safe-haven asset.” Strategist Benjamin Bowler states in the report:

“Momentum trades work until they exhaust and become fragile, making tools like the Bubble Risk Indicator especially useful for risk assessment.”

Currently, volatility markets provide the clearest signal: uncertainty is being priced at extremes. The report highlights an astonishing phenomenon: the levels of VIX spot and futures are far above the actual volatility of the S&P 500 (20+ vs 10+), and the VIX futures curve is unusually flat at such high volatility levels.

This “high premium + flat curve” combination is almost unprecedented in the past 20 years. It indicates that markets are not only pricing in enormous risk premiums for geopolitical events but are also completely unable to predict when risks will be resolved.

Deterioration of US stock microstructure: why do prices always reverse?

In an environment full of uncertainty, investors have recently found that US stocks are highly prone to “mean reversion” and intraday reversals. Bank of America analysis attributes this to policy flip-flopping, macro data swings, and deeper changes in market microstructure.

The report reveals that as the US government withdrew threats against Iran’s energy infrastructure, market sentiment shifted 180 degrees. It states:

“As the market digested President Trump’s statements about ‘temporarily halting hostile actions in Iran,’ asset prices surged. This reminds us that intraday volatility captures current stock market risks better than closing volatility.”

This “rapid reversal” has led to imbalance in market microstructure. BoA observed that although the S&P 500 rebounded on signals of de-escalation with Iran, the proportion of overnight trading volume had risen to 20%, while order book depth was shrinking. Such “news-driven” rebounds are prone to overreaction, followed by sharp mean reversion when liquidity returns.

“This environment makes overnight trading highly susceptible to overreactions. Due to lack of liquidity support, such pricing becomes very fragile. When the next batch of investors returns and liquidity improves, prices often reverse.”

European energy sector: vulnerable at a crossroads

In European markets, geopolitical conflicts have pushed energy prices toward a fork in the road, making the European energy sector (SXEP) particularly risky. Although the sector has risen 27% this year, outperforming nearly all European peers, its “Bubble Risk Indicator” (BRI) readings are approaching the peaks seen early in the Russia-Ukraine conflict in 2022.

Bank of America believes that the European energy sector has already diverged from the typical energy and equity beta implied by its usual levels, with positions abnormally crowded. Two possible future geopolitical paths are unfavorable for this sector:

• De-escalation: Energy prices reset downward directly.

• Escalation: Extremely high energy prices will suppress global growth prospects, causing the correlation between related stocks and commodities to shift from positive to negative.

“Under both geopolitical scenarios, we see the vulnerability of the European energy sector.”

“Vacuum of certainty” survival rules

In an environment of “certainty vacuum,” analyst Benjamin Bowler suggests that investors should avoid blindly chasing momentum and instead leverage structural opportunities in volatility markets. The focus should shift from trend-following to volatility management.

Bowler recommends: first, using VIX April put spreads to bet on short-term de-escalation of geopolitical conflicts; second, employing zero DTE (zero days to expiration) options to construct reversal strategies, hedging against intraday overreactions caused by overnight liquidity gaps; third, conducting “cross-sector volatility hedges” in Europe—buying puts on overheated energy stocks (SXEP) while selling puts on undervalued resource stocks (SXPP).

This combination aims to exploit disconnects in volatility pricing, protecting portfolios amid “gradual declines” and “sudden reversals,” and hedging against potential AI bubble bursts.

All the above insights are from Wind Trading Desk.

For more detailed analysis, real-time commentary, and frontline research, please join【Wind Trading Desk▪Annual Membership】.

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Market risks are inherent; investment should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Investment is at your own risk.