Here are the 10 biggest things Doug Kass [12] learned from yesterday's Wall Street action:
1. In a market dominated by momentum-based algorithms, buyers live higher and sellers live lower. With price swings exaggerated by computer trading, the value of charts and technical analysis have lost some relevance.
2. As a result, the market has no memory from day to day.
3. Risk happens fast.
4. As David Tepper said two months ago on CNBC [13] -- when the flow changes, disruptions and bad things often happen. Note: The flow is changing.
5. Whoever thinks the market hasn't advanced since 2012 to a large degree thanks to Federal Reserve largesse is loco.
6. Ignore the business TV "talking heads" who are self-confident and glib in view. They don't recognize that we live in a world where the only certainty is a lack of certainty (and they're probably trying to sell you something). There's no "secret sauce" [14]on Wall Street.
7. We're not nearly as safe as investors and citizens as markets presume.
8. Our dependence on central planners and central bankers represents a slippery slope for markets and global economic growth. Planners and bankers are human and often make mistakes, particularly in forecasting.
9. A period of substandard global economic growth likely lies ahead. As such, worldwide growth is more susceptible to a "black swan," or even "baby swan" events. [15]
10. A period of substandard investment returns could also lie ahead.
This is not your father's market. Rather, it's a random walk [16] -- and nearly unplayable from day to day unless you're very fleet of foot.
These spastic daily market moves are in a large part governed by quant strategies that are agnostic to underlying values and have partly invalidated the interpretation of price charts and trends. They've also rendered technical analysis far less valuable than it was in the past.
From yesterday:
As I discussed in a recent speech [17] in New Orleans, many are misinterpreting daily market swings as a real price trend that they can interpret technically. But I see that as incorrect, as gamma hedging, risk-parity strategies and other quant actions have ruined our markets. In fact, I think these trends have negated not only some of the value of stock charts, but to some degree the value of technical analysis in general. This places many market participants in the position of having a false sense of security.
As I've previously written:
We live in a dystopian investment world, whose markets have morphed into an Orwellian backdrop of omnipresent government intervention and manipulation that is increasingly dictated by the quant community -- who worship at the altar of prices and price momentum (and are agnostic on values).
To understand that risk, we have to wrestle with the investment strategies that few of us see but all of us feel ... strategies that traffic in the invisible threads of the market, like volatility and correlation and other derivative dimensions.
Regardless of what the Fed does or doesn't do, regardless of how, when or if a 'lift-off' in rates occurs -- it is impossible to ignore derivative market dimensions and the vast sums of capital that flow along these dimensions.
Remember, price trend following strategies, risk-parity portfolios and volatility-managed strategies based solely on past price performance and volatility. They are agnostic to company balance sheets and income statements. Intrinsic value is not in their vocabulary -- fundamental investors like Warren Buffett are an anathema to them. But they are far more dangerous than portfolio insurance, which put an exclamation point in the 1987 market crash.
As we saw on the downside at September's end, there's a positive feedback loop between all of these strategies. Gamma hedging of derivatives caused higher market volatility, which in turn led to selling in risk-parity portfolios -- and the resulting downward price action invited further shorting by price-trend strategies.
And more recently, we've seen this feedback loop to the upside.
No wonder financial asset prices seem to no longer correlate with the real economy. This is a market with no memory from day to day.
-- Doug's Daily Diary, A Market Without Memory from Day to Day [12] (Dec. 2, 2015)
