Regarding the market, a reader remarks:
When one tunes in CNBC on a day like today one hears experts of all strips scream “Buy, buy, buy!” Don’t panic! All the other experts are wrong. Listen to me!
I say buy popcorn!
Sit back with lightly salted, buttery popcorn. Hard to go wrong, I suspect. If you have cash, keep an eye on your favorite company’s stock, and if seems abnormally low, buy it.
Hard advice to follow, isn’t it? Where is the bottom of this correction, anyways?
My understanding is that we’ve entered 10% decline territory, also known as a ‘correction,’ which the experts say is well overdue. Could be right. But my thought is this: the history of the market does not include the full effect of high-frequency trader (HFT) algorithms. Of many different sorts. In the last few years, the media has documented some abnormal stock movements thought to be due to various HFTs interacting in various ways. Now, an HFT is an algorithm which necessarily imperfectly implements a human’s desires about the market, where a desire is some well-defined (or not) tactic for accumulating money – buy and hold (rare for HFTs, by their nature), buy and sell within moments, go short, others more arcane.
But these are trees. Let’s talk about the forest.
The forest is an artificial soup of an ecology, populated with non-self-aware (I hope!) algorithms (I so want to write ‘life-form’) which perform, and then on a periodic basis are evaluated, and then retired, allowed to continue, or modified and reintroduced. The goal of all is profit. It’s not unlike a real ecology with evolution, although some elements are missing. But my point is that it’s a young soup. The creatures are imperfect, sometimes irrational.
And that takes me back to my starting point. 10% territory? But just how much further down will we go? I think it’s a little harder to predict than our experts think – or at least will let on. Suppose a poorly made algorithm which happens to control a substantial portion of some large company’s stock starts selling it in response to some indicator which was poorly chosen. Other HFTs will respond by buying, but this is a signal, which means other HFTs will analyze the signal, its presence and magnitude and direction.
And do … what? If it’s a bad signal, do HFTs evaluate for ‘bad signal’? I don’t work in that area, so I don’t know. It’s all quite secretive. Some do, I’m sure, and some don’t.
And that may cause chaos for a while.
About the only advice I’d care to give is don’t leverage and don’t step out at the bottom.
