Saturday, January 31, 2015
FAIRFIELD-SUISUN, CALIFORNIA
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What sparked week’s market sell-off?

stevenson column sig

By
From page B7 | April 13, 2014 |

It should be reasonably easy to say something useful about why the market had a terrible week. After all, when the Nasdaq, especially the technology sector, has its worst week in almost three years, something must be going on.

There is no shortage of reasons spewing forth from the sidelines, most of them both intelligent and useless.

For example, one of the alleged causes of the big sell-off was the notion that the Chinese economy was slowing down. The recent period saw “only” a 7.5 percent growth, instead of the expected 9 percent, and that, supposedly, caused investors to dump tens of billions of dollars worth of American stocks.

Let’s see; a family with, maybe $50,000 in the stock market, has the television on while eating dinner. They’re watching one of the stock market channels when the news item comes on that the growth of the Chinese economy fell from 9 percent to 7.5 percent. So which family member – Mom, Dad, sis or junior – says, “Oh my gosh, we should sell everything when the market opens tomorrow.”?

Now there is a possibility that the family is a little more sophisticated, and that, after discussing the news, guesses that although the news would ordinarily be a blip on the market’s radar screen, it could trigger a wave of selling. You know, sort of like a snowball rolling down a mountain, getting bigger and bigger until it becomes an avalanche.

Remember the ancient description of investors’ motivation; there are only two possible causes for market movements: fear and greed. It doesn’t take much to move from one to the other. We’ve certainly seen greed at work since the bear market of 2008. The best evidence might be the frenzied reaction to initial public offerings, especially of technology companies. Investors thought nothing of paying $40 a share for a new issue that was offered minutes earlier at $25.

What’s been at work here is another favorite of mine, known as “the greater fool theory.” Here’s how it goes: It doesn’t matter if you pay $40 a share for a stock that was selling for only $25 moments earlier, as long as a “greater fool” comes along and pays $50 for the same stock.

Keep in mind that lots of money can be made buying stocks you know nothing about, as long as they move up. With the help of computers, we now have what is known as “nano-trading,” which leaves the buy and sell timing to an ultrahigh-speed computerized trading system.

Speed trading has become an epidemic recently, with the hedge funds – and others – probably responsible for more than half of the volume on the New York Sock Exchange and Nasdaq. The computer, working with $50,000 of the hedge fund’s money, might make only $50 or $100 on an instant trade, but they might be able to make 1,000 trades like that in the course of a market day.

If you think it was difficult to predict market movement in past years, just try to fight the high-speed computers. Not that these propeller heads always make money. In fact, their performance records are not that impressive.

Bud Stevenson, a retired stockbroker, lives in Fairfield. Reach him at [email protected]

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  • Dr RussApril 13, 2014 - 2:25 pm

    What caused it? Take your pick. Tapering Increased scrutiny of High Frequency Trading Ukraine Syria MH370 Cliven Bundy and his band of merry men Etc... The truth is the market is sick. It's been sick with printed money chasing profits since QE began. Is the FED finally waking up to the fact that you can't paper over our problems? With it's balance sheet ballooning over the past few years, the unwind has to occur at some point. Is this that point? Whatever cause "they" assign blame to, you can rest assured it won't be the truth.

    Reply | Report abusive comment
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