The market was looking for an excuse to fall and along came a virus, pursued by algorithms.
From “Is the Stock Market Being Rational?” mailed Tuesday to Above Avalon subscribers ($).
Heading into 2020, this was a market desperate for a reason to go down. We can maybe even say the market was becoming giddy at prospects of prices falling for some reason. The problem was there just wasn’t any good reason for the market to go down.
There is no explanation for how a company like Apple sees its equity value change by nearly 20% in two days. That’s not coronavirus impacting iPhone supply or demand getting hit by slower economic growth around the world…
My theory is that we are seeing the impact from years of momentum flowing to passive investing (low cost index funds)…
Another factor to consider is that active investing is increasingly being characterized by crowded trades in which everyone is chasing the same companies and ideas in an attempt to beat indexes (something that is proving harder by the year).
These factors are coming together to lead to sudden and dramatic market moves controlled by algorithms that have little to no connection to what is actually unfolding in the news cycle.
The market is not going down because portfolio managers, sitting in front of a computer, are deciding to sell shares in companies X, Y, and Z after running some financial work regarding coronavirus. Instead, the market may decline 5% one day for no other reason that the market was down 4% the previous day.
Based on current trends, it seems inevitable we are going to see longer periods of market calm periodically interrupted by sudden and shockingly dramatic stock price swings both to the downside and upside.
My take: Cybart, a former equities analyst, regularly takes first place in the Apple 3.0 Earnings Smackdowns.