Friday, 18 Jan 2019

What goes up must come down, but market watchers have the whiplash

If you want to know what a whiplash is, you do not need to be stopped in a car accident or fall down a flight of stairs. Instead, you can simply watch the stock market.

Let me explain. Over the five-week period from August 29 to October 3, the top four market indicators – the Standard & Poor's 500 Index, the Dow Industrial Index, the Nasdaq Composite and the Wilshire 5000 – all reached their highest levels. historical level. The market gods poured money on investors.

Of course, interest rates were rising and there were signs of other problems. But optimism prevailed. Inventories went up and would continue to rise.

Until suddenly, they were not there. Shortly after the Dow Jones peak on Oct. 3, stocks began to fall and continued to fall for weeks.

The main reason given for the decline was. . . rising interest rates. Rates had gone up during the preparatory period, but it does not matter. Suddenly, rising rates – especially long-term rates – have been perceived as a huge problem.

Donald Trump, speaking in mid-October, blaming the Fed's short-term rate hike on the market, did not help. (I will not explain why the Fed's hike in short-term rates is likely helping the stock market by putting downward pressure on long-term rates – for more details, consult your local market guru.)

At the close of the markets on Halloween, the frightening fall of October had negated the gains of the shares for the year. Many investors felt haunted, so to speak. Fear reigned.

Talking about a "correction" was everywhere. For those who do not speak the stock market, a "correction" (later) corresponds to a fall of 10% or more of the peak of the market. It is a totally random measure, without any scientific or financial basis.

Now look. According to data collected by Wilshire Associates, the four main market indicators were affected by "corrections" in October. Declines from peak to trough ranged from 10.1% for the Dow to 14.6% for the Nasdaq.

I do not know about you, but as an English major who is also a grammar freak, the way "correction" is used – or rather, misused – annoys me. It's like hearing nails scrape a picture. (If the tables still exist.)

You see, the "correction" is nothing more than a euphemism for "a substantial drop in prices." Market news at the end of October frequently included mentions that various markets were on or off the market – as if that were important in themselves.

That's why I'm so skeptical about this term. After a "correction", the stock prices are probably correct, right? So, answer me: if, at a given moment, the Nasdaq composite is, for example, 14% below its record level and in "correction" mode, does this mean that its current level is correct? ? If so, was the previously higher Nasdaq price a mistake? Of course, these are rhetorical questions – but good ones.

"Personally, I do not believe in these" correction "type artificial markers, but a lot of the market does," says Wilshire general manager Bob Waid. "So, part of this can be a self-fulfilling prophecy."

Let's see what happened this month. Inventories have been rising since the beginning of November. Suddenly, the "correction" speech disappeared. We are now considering a post-correction rally. This is not what is called an "error".

Friday, at the close of the market, the four market indicators were up 1.4 to 3.5%. A total reversal of October.

You've certainly heard stories attributed to Wednesday's strong market rally, which is a significant part of the November hike, to Tuesday's mid-term election results. But that does not make much sense to me, given that the results – the Democrats taking control of the House, the Republicans slightly increasing their margin in the Senate – were pretty much in line with expectations.

However, in a world where people – particularly those in the Nation's capital and surrounding areas – are obsessed with meditation for months, it is natural to attribute everything to the election results. To name the old line Mark Twain: For a hammer, everything looks like a nail.

How can I explain why markets are so whiplashy? I think – but I can not prove – that this is largely due to the fact that most stock trading nowadays does not consist of transactions between people, but computers using algorithms to exchange shares at an extremely fast pace. high.

As a result, when inventories increase, they tend to continue to increase. And when they go down, they tend to keep going down.

As far as I know, by the time you see this, the upward, downward, and then upward market that we have seen over the last 10 weeks could be in decline again. Or move at the speed of the chain. Whiplash City, here we are.


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