Free Fall

Free Fall

The White House is "always monitoring global markets," Jen Psaki said on Monday afternoon, as US equities careened lower in one of the worst selloffs of the Biden presidency. A combination of factors conspired to drive equities lower. At the macro level, sentiment was severely impaired by developments in China. Or, more aptly, by developers in China. Market participants are also concerned about Fed communications around the new dot plot. A formal taper announcement is out of the question th
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6 thoughts on “Free Fall

  1. There are different groups of investors. To a considerable extent, they trade to different rules and systems. The options market-maker unwinding hedges trades differently from the long only relative performance institutional manager. The CTA reacting to recent realized vol behaves differently from the long cycle asset allocator. The retail investor is unlike the corporate treasurer, and the various flavors of hedge fund are unlike either. Other investors trade on technical or algorithmic rules, and then there’s the bloody-minded crusty-grouchy contrarians (bless them).

    Maybe we can think of each of these groups as a curve – a jagged squiggle, sometimes – and the market as the sum of those curves.

    The curves are somewhat interdependent, because each group of investors has some influence on the others, either mechanically or psychologically. But much of the time, they move semi-independently – one group sells the market off or gooses it up, as far as it can (bounded by how much capital it has to withdraw or deploy, and how liquid the market is) – and then another group takes over when their rules are triggered, either selling or buying as their discipline requires. Sometimes these curves cancel each other, other times they reinforce – visualize waveforms and interference/resonance patterns here.

    The more investor groups’ sell or buy rules kick in together, the more the markets fall or rise.

    Every now and then, like Feb 2020, a huge external force triggers everyone’s trading rules.

    So, which investors’ sell rules got triggered, or are getting triggered? Market-makers last week. CTAs now. Who else. And whose buy rules are getting triggered, or warming up?

    The reason to think about this is that one or three groups probably won’t move the market a lot (“a lot” in the old fashioned sense, which isn’t a mere handful of percent).

    1. Some valid points there, on a longer-term perspective. But for shorter periods, I’ve found it pays to focus on which are the largest flows at that time. For instance, while my perma-bear friends were screaming about stretched valuations for the 10 years post-gfc, share buy-backs were all that one need focus on. More recently the big elephant in the room was the vol control boys.

      Very recently it appears that, as you suggest, there is more balance among the forces.

      1. A market blurb I saw:

        “Bloomberg, citing data from Vanda Research, noted that retail investors bought just over $1.9B worth of assets on Monday, the fourth-largest net buying since the start of the pandemic. Pointed out that buying was largely concentrated in ETFs that track US benchmark indexes. Megacap tech stocks, particularly Apple, along with big US banks also attracted outsized interest, as did meme names. However, retail investors were sellers of reopening plays like airline stocks, which outperformed on the White House travel update. Flow data out late last week revealed that US equities attracted $45.7B in the week-ended 15-Sep, the most since March, while the $28.3B that went into US large cap funds was a record.”

        $1.9BN is small relative to the potential CTA selling, but $28BN or $46BN is sizable.

  2. The one known perception in all the unknown perspectives is the long-term realities of how manias plays out.

    One great model to always pull up is:

    Viavi Solutions Inc

    Ask yourself who did better, the rubes that held long-term, or the speculators that appreciated the absurdity of peak stupidity. I think we have a ways to go as we head to a top, but, just saying …

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