After two days of taking a drubbing, stock investors must be asking What’s Happening? My thoughts went right to the TV Show What’s Happening!! and the character Rerun. Because, we are simply just having a rerun of a traditional profit taking – panic – correction – stabilization cycle. An early attempt to rebound yesterday was short lived in the late morning.
Of course, it is not the same every time. This time around, we must contend with algorithmic computer trading, Robo Advisors, and The Volker Rule. On Monday, all three of those factors came into play. Algorithmic trading utilized complex computer models in tandem with artificial intelligence and computer networking to make rapid fire trading decisions. They also tend to be on one side of the market and try to beat everyone else to trade execution. Robo Advisors are automated investment management programs which again use computer modeling to achieve its goals. However, on Monday several Robo Advisor sites crashed and caused more volatility once orders could be entered. Finally, there is is the Volker Rule, an integral part of the Dodd-Frank Act. Under the Volker Rule, broker-dealers cannot use their own capital to speculate in the markets. Prior to the Volker Rule, these broker-dealers provided vital liquidity to the markets during sell-offs and acted as a safety net. That liquidity is now gone, thanks to bad legislation, which has resulted in several Flash Crashes since its implementation. Finally, the market took a nose dive at 3PM when margin clerks starting to sell stock for margin calls, contributing to the day’s Flash Crash.
Algorithmic Traders, margin clerks and the Volker Rule are all guided by principals other than the fundamentals, which as we know are strong. So, we just must let the profit taking – panic – correction – stabilization cycle play out as it did in the past.
From its apex last month, the Standers & Poor’s 500 (SPX) has declined 7.79%. It will probably be off again today and breach the unofficial 10% correction level, at some point in the session.
Below is a chart from Bloomberg depicting the SPX during the 1982-2000 bull market. Can you really tell, other than the 1987 market crash and the 1998 Asian Contagion / Russian Bank crises where the corrections took place? There were several, but in the long run; it had minimal impact to investors portfolios (at least those that don’t panic)
Also, look at another Bloomberg chart depicting the current bull market since it began in 2013. Any corrections, while real and painful at the time; are in the fullness of time not harmful to investors portfolios.
So, just let this play out as it has in the past. Looking in the rear-view mirror a few weeks or months from now, the correction will seem less painful.
Finally, remember that calling market tops and bottoms are fools errands. Many so-called market experts predicted a top, 10% lower and 20% lower and 30% lower, etc. You are much better focusing in on the macro long term aspect of investing. By the way, any company that reported results last week – all the big tech names – are free to return to their stock repurchase programs this week.
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long SPY, SSO & SPXL — although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant, beverage and agricultural stocks. An individual subscription to the newsletter can be ordered at www.restaurantstox.com Furthermore; Scott is also a professor at the Seton Hall Stillman School of Business in South Orange, NJ.
– Read Scott’s intra-day thoughts and comments on Scutify for which he is a co-founder of its parent company Wall Street All-Stars, LLC
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Nice job of summing all this up Scott.
Steve – Thanks – It appears that one of the chief causes of the market sell-off / panic became more apparent this morning. Those are the esoteric volatility products. I will discuss in my next issue of MGF – Scott