January 2, 2019

The markets historically start the year off going up or down in a big way, as investors and fund managers, etc. rebalance and reset their portfolios for the first of the year. Today was no different, with the markets opening down at the open and, as I write this, the market is trading higher for the day.


01-02-2019 SPY

One of the big challenges that everyone has going forward is: are you managing your portfolio against fundamentals, other investors, managers or against a computer? It has become clear that we are all managing against computerized trading. According to Marko Kolanovic of JP Morgan in the Wall Street Journal, over 85% of all the trading volume is computerized trading. Computerized trading has been pushing the market all over the place the last three months. They are trading a lot more than retail investors, and anyone else. They automatically buy and sell based on pre-set inputs. Many of the computerized trading systems are momentum based, so when they start to sell, they can move the market lower at lightning speed.

The current downside is emotionally-driven trading, exacerbated by computer trading programs triggering sell signals. I don’t see this market volatility as being driven by fundamental forces signaling a recession. This looks like the classic signs of a short-term market sell-off, not a longer-term one. The market is going to trade back and forth for a period of time as the computerized trading calms down.

These types of market conditions are ones where investors make the most mistakes. The human instinct is to “react” or to “do something” about the market action, when sitting tight can often be the best course of action.


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