Just Another Algo-Induced Freak-out, Or...

By Dave M - 11/2/2016 12:48 PM

The traditional fall swoon appears to have taken hold of the stock market over the past week as "what if" fears regarding the outcome of the Presidential election are beginning to run rampant. Although reports indicate that Hillary Clinton's path to 270 electoral votes is not in jeopardy, the reopening of the email issue that has plagued the former Secretary of State's bid for the White House has once again become a bit of a wild card.

In short, the markets are not prepared for a Trump victory. And frankly, there has been no need for such preparation since Clinton's lead in the battle ground states appeared insurmountable lately. But with the polls tightening since the FBI's announcement on Friday, there appears to a certain faction of traders that are putting on some "black swan" insurance - just in case.

What we're talking about is preparation for the unexpected. The surprise BREXIT vote is Exhibit A in the reason why such precautions are being put in place. Lest we forget, the vote on whether or not to leave the EU wasn't supposed to be close. Nearly every poll showed the British staying the course. But then - SURPRISE! - the vote went the other way and markets freaked out. Well, for two days, anyway.

So, when the VIX began to spike yesterday and folks on TV started getting excited about the surge of "fear" in the markets, well, one thing led to another and early gains were quickly replaced by a pretty decent dance to the downside.

The fact that the S&P 500 also broke down through important support as well as its 150-day moving average on the charts probably contributed to the selling since algos had almost certainly been programmed to issue sell signals on such an event. And before lunch was over, the Dow found itself down 200 points.

S&P 500 - Daily

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Looking at the situation from an objective point of view, I'm of the mind that this appears to be the latest case of the market being overrun by algorithmic selling. After all, nothing really changed from a fundamental standpoint yesterday. There were no new headlines to speak of and thus, there was really nothing new for traders to act on.

Apparently part of the "fear" that was in the market yesterday was attributed to the concern that the next president will embark on an aggressive fiscal stimulus campaign, which could (key word) lead to inflation, which, in turn could cause the Fed to act rashly, yada, yada, yada.

However, from a near-term perspective, it is important to note that this particular worry is not new and has been with us for a while now. So, perhaps it was the better-than expected PMI numbers in China overnight that helped spark concern about global inflation. Or maybe the fact that the Fed began a two-day deliberation yesterday was a source of discomfort.

In any event, I'm not sure there was anything going on yesterday other than a spike in the VIX and the corresponding computer-programmed response. However, today is another day and it will be interesting to see if yesterday's themes are still with us.

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the Election
      2. The State of the Earnings Season
      3. The State of Global Economies
      4. The State of Global Central Bank Policies

Thought For The Day:

Trust everyone, but cut the cards. -Ronald Reagan

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

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