US Major Market Indexes Pivot From Over Sold To Over Bought

$DIA, $SPY, $QQQ

Volatility in the US stock market is being whipped up by traders who do not care what stocks are worth, valuation is not an issue with them.

Selling by price insensitive investors employing strategies that take their cue from recent trends in stocks is worsening this week’s swings. In particular, the forced selling by traders who hold positions known on Wall Street as “Short Gamma,” a bet that prices will not move much.

The research comes a week after the Standard & Poor’s 500 Index was knocked out of a trading range that had supported it for about 7 months. Sudden moves like that trigger computerized traders to buy and sell, exacerbating moves past what is justified by the economy and earnings.

We all know about this , a look back over the last 6 years, any time we have seen a period of excessive volatility like we have seen in the past 2 weeks, strategies such as those which typically are short gamma and basically need to rebalance at the end of the day.

There are 3 types of quantitative strategies, they are:

trend followers,
risk parity traders and
funds that adjust holdings when volatility in the market rises or falls.

These investors have hundreds of billions of dollars in assets with the power to move markets.

Together, institutions employing these tactics could force up to $300-B of selling in the US market over the next several weeks.

The risk is if the technical flows outsize fundamental buyers. In this environment of low liquidity, they may cause a market crash such as the what we saw at the US market open Monday, a 1000+ point deep dive in the 1st few mins on the DJIA, the most on record.

Quantitative traders have been blamed for market disruptions in the past.

Losses approaching 3 percent in the S&P 500 in 2 days in early August 2007 were ascribed in a study by the Federal Reserve Bank of New York to program traders using strategies tied to various momentum indicators.

Take good care, there will always be another trade.

Stay tuned…

HeffX-LTN

Paul Ebeling

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