Yesterday’s market action demonstrates the reason why the market is so volatile. We see a clear cause and effect between market volatility and program trading.
Technical traders move markets.
Technical traders manage billions of dollars in investments with complex computer models and algorithms. For these investors, one important indicator of the market’s future movement is the 200-day moving average of the market’s price. So, yesterday, just as the S&P 500 crossed its 200-day moving average, pre-determined technical triggers for this event created a wave of “Sell” orders, swamping the market. This caused a huge downdraft in prices and a 1% loss for the day cascaded into a 3+% loss.
In an instant, market values fell drastically. This has little to do with trade wars, interest rates, the state of the economy, or any other fundamental factors.
We are in an environment where there are too many computers programmed to do the same thing at the same time, resulting in volatile market moves. When there is unrelenting pressure to sell, it’s hard to find buyers, so the market will clear these trades at lower and lower prices. CNBC contributor Jim Cramer described this phenomena well in this segment from his show yesterday.
Little has changed in the outlook for the economy in the past two months, but as we’ve seen in similar episodes in recent years. Sudden volatility brings about more volatility for a period of time. As always, we think investors should remain focused on their long-term goals and investment strategy, and leave the rapid trading to the machines.
If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience.