Markets have become more volatile in 2018 than they have been for some time. I hope you’ll reread this post I wrote on September 7, 2018 and reevaluate the risk in your portfolio today.
I have written to you before about my unease with program trading, especially stop losses (see here and here). Add to that the algorithmic groupthink of computerized trading and it’s a nasty brew.
Today the Wall Street Journal’s Stephanie Yang reports:
On Feb. 5, the Dow Jones Industrial Average suffered its worst one-day point-decline in history amid a tumultuous week for global markets. Although the blue-chip index has since erased that loss, some investors are still trying to puzzle out what caused such a drop.
One possible culprit: a cascade of automated stop-loss sell orders by trend-following investment funds that started in London and then fed into the steep rout in U.S. stocks. In the following days, the downward lurch prompted selling to spread to other assets like oil futures.
This was the conclusion of an analysis of that fraught week by Bridgeton Research Group LLC, which runs computer models predicting trading patterns of algorithmic strategies.
Stop-loss orders, or sell stops, are standing directives to sell a position—say, a stock or exchange-traded fund—once prices fall below a certain level. They have long been a tool for investors to automatically shut down a losing bet.
But the growing influence on markets of algorithmic traders and trend-following funds, which use such automatic directives, potentially makes markets more vulnerable to sharp swings if everyone starts to sell at once. Such strategies tend to have sell stops around the same levels across stock, bond and commodities futures.
“So many of these algorithms are doing the same thing. Their behavior becomes like human group think,” said Peter Hahn, co-founder of Bridgeton.
Read more here.
E.J. Smith - Your Survival Guy
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