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Needless to say, the market is not cooperating at the moment. 

It’s short-term frustrating and, oddly-enough, doing precisely what took place right before the last big demographic lift-off; the Baby Boomers of the early 1980s.

Equally, the way in which emotions have taken over in short order reminds me of so many gut-wrenching periods in the past. 

The mental damage can be significant, causing people to sell and step onto the sidelines, where they wait for the "future to become clearer..."

Good luck with that.

Folks, the future is:

1) Never "clear"

2) Will only ever "feel" a bit clearer at higher prices

Buy High, Sell Low Anyone?

It’s a painful and oft-repeated lesson on the road to regret, with far lower levels of assets and eventual disgust with the idea of investing.

So, here are a few insights that might help during those times of stress caused by these types of panicky and emotion-ridden events:

Game Chart1

The chart above shows the Dow Jones and its movements since the start of this current panic window back in early October 2018. 

It may feel like last year, but it’s not.

In the image above, the number to the left of the "=" sign matches the red numbers marked on the previous Dow Jones price action chart. 

The number on the right of the "=" sign shows the distance travelled between the segments.

The point here is that it’s not humans doing all this trading.

Game Chart2

On Friday's 558-point drop, for example, it was reported that roughly 87% of all trades were entered by the computers. 

The high-frequency-trading process (HFT) runs algorithms which sit on very fast computers in offices that are co-located in the exchanges and have previously been "explained away" as necessary for market liquidity.

For me, that last sentence is a clear sign that the SEC does not understand what HFT's are really up to. 

And when the dust has settled on this once quiet Wall Street creation, we’ll find they are nothing but a cost.

They don’t create liquidity. They don’t perform a service. And they don’t understand the value of a stock.

In fact, they don't even care about the value of a stock or a company or a cash flow. 

What they do is add and subtract things, finding "nuances" explained away as "mis-pricing" to sound more intelligent to the regulators, and then trade those nuances (whether they mean anything or not) for an average holding period of less than 1.5 seconds.

Yep, I said "seconds."

In their world, "long-term" is 5 seconds - the time it takes the average human to inhale.

The Pinball Example

Think of what happens to the ball as you pull back the lever and launch it out of the chute and back into the game.

It rattles and bounces quickly off of any number of pylons which score you points.

Now, consider that same pinball concept when a headline about a stock “missing by a penny” is released into an algorithm. It doesn’t matter why or how - or even if that missed penny is part of an increasing revenue or earnings line for the year ahead.  It only matters that it read "miss."

That’s when the pinball lever is pulled back and the algorithm runs out into the market.

It too bounces off every sitting order, and every stop in any direction. It triggers orders faster that you can watch the prices move or hit a sell button in "panic" mode.

That’s how headlines like this now make up every single earnings season a hundred times over: "XYZ misses by a penny, shares down 14.6% after hours."

And this headline is literally within a minute or two of being released by the company into the public domain.  

Think about it: Do we really think 47,000 humans waited for that headline, decided what it meant, called their broker or opened their online account page to sell…and all in roughly 45 seconds?

Eh, no.

So - I bring you back to the insanity of the graphics above. 

In a few weeks, we have seen the Dow Jones travel over 14,000 points, and that’s just on the daily swings. 

If we were to add the intra-day swings (over 2,300 alone in the last 72 hours), that number would almost double. 

In other words, since this latest bout of frantic panic began due to any number of truly unsound reasons (take your pick), we have seen the Dow Jones travel somewhere between 60% and 100% of its entire current level.

And all within a range of roughly 3,000 total points; that’s about 11% of its value.

That’s actually a fairly normal range of corrective activity – perhaps even a bit tepid  - as we’ve all lived through far worse. 

But the distance travelled is what damages the psyche of the average investor - and this is the real disservice brought by the HFT/algo guys at work.

There are however three ways to stop it:

1) Bring back the uptick rule - that's easy - and nearly ends their "business"

2) Call for a minimum holding period - say 15 seconds - and they are "finished"

3) Tax them on each trade...say a penny or two - their profits will almost evaporate in total.

As for the investors, well, I’m reminded of one of the final lines in the movie "War Games" way back when, which said:

"The only way to win is not to play the game."

Mike_williams
Author
Mike Williams
Founder and Managing Partner of Genesis Asset Management, New York