WT...? Computers Go Wild (Again) Causing Untold Damage

Apparently, Mamma Mia!!! didn’t capture it accurately…it was more like - WTF!!!!  What a day it was!......stocks collapsed as the day wore on yesterday….after attempting to give it ‘Old College Try’    - (A vigorous effort, often in the context of a nearly hopeless situation where failure IS expected) -  in the early morning….as the mkt struggled the risk management software programs that so many asset managers use today all started to signal sell orders…..as the indexes came under pressure – they waited to see if the KEY levels would hold – mkts churned for a bit – broke down…..rebounded, broke down again, rebounded again, and then broke down for the last time…..……and when it became clear that the buyers went on strike – then the algo’s all began to convulse at the same time….. sending all the indexes careening out of control -  as the final mins of the day ticked away…by now you know that the Dow lost 608 pts, the S&P gave back 84 pts, the Nasdaq lost 330 pts, the Russell choked up 57 and the Trannies – well they lost 331 pts….leaving the broader mkt now NEGATIVE on the year…..the only index still holding onto any gains is the Nasdaq at +2%....
 
Now recall a couple of things…in one of my late September notes we discussed the risks of October…and how the mkts have suffered over various years – during the month – as PM did year end planning, taking losses and locking in gains………and while all the data points were suggesting this October could be different – we remained a bit concerned…..and as we approach the end of the month – we can look back and say – ‘I told you so….;  but it is still not a reason to panic at all…..yes – maybe it’s a bit uncomfortable – but look – you are long term investor – not a short term investor…..so the sale on Wall St is nothing to be afraid of…..as long as the broader underlying story has not changed….and has it? 
 
Not really – earnings while good are expected to slow into 2019 – a fact that is being confirmed by this qtr’s earnings reports and forward guidance…. Rates are rising and will continue to rise – (no matter how much Donny jumps up and down) again the mkts are pricing in 1 more in December and 3 more in 2019……Trade tensions?  Those are still on the table and while they have not been completely solved – the expectation is that they will….so what has really changed?  Well on the macro front not so much, – but step back and look at the technicals – the underlying trend and trend lines – that so many analysts, and risk management programs use…….Once trendlines come under attack – logic appears to go out the window…and the computer programs set the world on fire…..no matter what the earnings are!
 
So that you understand – the high tech risk management programs used by so many asset managers around the world all function the same way….they look at the data – they look at earnings and they look at price action and then they spit out an action….the action is either buy/sell or hold…..and here is the kicker…..these risk management programs operate in a STERILE environment – having no attachment or understanding of how to interpret the data – but they know how to interpret breaches in trendlines……….recall the “Portfolio Insurance Debacle” that created and exacerbated the Crash of 1987….for those of you not around – let me lay it briefly….
 
This new product – was all the rage!  The physicists, engineers and computer programmers came up with a better mousetrap.  These guys were NOT traders, business, economics, finance majors…they were computer nerds who would write programs based on a set of rules….rules that were hard and fast and rules that were sterile.  So when they fed all of the weakening data into the portfolio insurance model during that fateful weekend in October 1987….the program spit out an action – and the action was to SELL x% of your portfolio to protect it…but here was the issue….the Asian mkts got it first – since they are the first to trade on Monday and then when Asia imploded, the Europeans were next and they got a message to sell x+y% of their portfolios and the blood bath accelerated….until it hit the shores of the US – but by now the world was awash in devastation…and the US asset managers were told to sell x+y+z% and BOOM the bottom fell out.  Stocks crashed, and no one thought to question the logic…I mean it was state of the art – it was the FUTURE….so just do what the computer says …. It was lunacy. Can you spell stupidity?  We did not have circuit breakers at the time – they were born out of that event…and yesterday it felt kind of the same – computer programs driving the action…. ….and in my note yesterday morning I said:
 
“Key levels to watch are the lows from last week to see if the buyers defend that position -  on the DOW 24,899, the S&P 2,710, the Nasdaq 7,274…IF THESE LEVELS FAIL – THEN A SWIFT TEST OF YESTERDAY’S LOWS IN IN SIGHT and my sense is that these will NOT hold – sending the algo’s into a sell frenzy again as the risk management software demands that asset manager raise cash to protect their portfolios…and how do you raise cash?  YOU SELL STOCKS.”
 
And sell stocks is exactly what happened……and then the mkt closed – the news media ran special programs around the collapse on Wall St……how the end was near…. run for the hills, hide in the bunker…. blah, blah, blah……I mean have we seen this before?  And then once those same risk management programs got fed the data from last night – the collapse in prices etc…. guess what?  Suddenly, those same risk management programs are sending out an action this morning….and it ain’t SELL…….and it ain’t HOLD…….and so…. the futures are SCREAMING HIGHER……Dow futures +200, S&P +22, Nasdaq +96……Why?  Because those same programs are now realizing the devastation that they caused and are signaling to asset managers – you gotta go out and BUY, BUY, BUY – stocks are CHEAP…….in the end – what you realize is that computers are great at following the rule set – but they suck when it comes to really interpreting the data and the moves….so in the end – they cause all of this swift devastation and it is up to the humans to clean up the mess…
 
But to be clear – they have caused a lot of damage to the mkts and to investor psyche….so this isn’t going to be over in a day or two….a look at the charts suggests a lot of damage – damage to individual names and to the broader indexes….and so we should expect a lot of THRASHING around in the next couple of weeks as the mkts and investors lick their wounds…..traders will continue to wreak havoc – but long term investors can find plenty of bargains…..in the right names…  So, make sure you eat – and hold on – Volatility is alive and well and will continue until we get thru the end of earnings and mid-term elections….and then we can assess the damage and move on.
 
If the mid-terms produce a fractured congress, then we can expect a reduction in some of the pro-growth policies that this current congress has pushed thru and that will be a significant change which then suggests that you rebalance your portfolio based on this new reality.  Value names will be the popular form of investment and there is plenty of value in those names.  Just sayin – boring maybe – but value absolutely.   
 
European mkts are all up this morning after getting clobbered on the opening…. the tone has turned, and investors are celebrating.  The ECB is due to make an announcement at any time now concerning policy, but it will be curious if he mentions global mkt volatility and if that played any role in his decision – The answer to that question is NO.  Expectations are for no change in policy just yet. FTSE + 0.19%, CAC 40 +1.47%, DAX + 0.48%, EUROSTOXX + 0.84%, SPAIN + 1.19% and ITALY +1.71%
 
It is another big earnings day with 80 + S&P companies reporting.  Eco data includes:  Durable Goods Orders (E: -1.4%), Jobless Claims (E: 212K) and Pending Home Sales (E: 0.0%) and we have two Fed speakers:  Vice Chair Clarida at 12:15 p.m., and Cleveland’s Mester at 7:00 p.m.  – hers is clearly a non-event for the mkts today. 
 
So, the S&P is pointing up 20 pts…. that would take us back above the 200 dma – which is now RESISTANCE…NO LONGER SUPPORT – so this is going to be the near-term challenge.  Can we pierce it and hold, or will it fail again?  But remember – do not be spooked by continued volatility…. the mkt needs to recover and that will not happen overnight. 
 
OIL is up small at $67.04 as it remains well entrenched between long term and intermediate support at $65.23/$68.01

 

Nuts 

Another quickie appetizer and so appropriate for today -

NUTS!  Any kind, any type...my favorites - Walnuts, Almonds, Salted Peanuts, Cashews.... Mix and match - no matter.  

Buon Appetito.