So the poll question on CNBC right now is what is driving the current market turmoil? Man or Machine?
I listen to all the experts and I must say I don't agree on what should be the take-home points from the debacle. A lot of them point to high-frequency trading or automated computer based trading. The question is: at 2:15 on Tuesday, were the computers linked-in to the Fed’s statement? I don’t think so.
It is about sentiment and the feedback from the market reaction. Such a feedback spiral can feed on itself in the way that panic does.
Carter Worth yesterday said it best. Trends are broken in a way that not even Technical Analysts can decipher. I would add, they are broken in a way that not even computer based algorithms can decipher.
And I would phrase this “broken trend theory” a little different than Carter did. To me, there are two kinds of “lessons” that an investor can develop from the current situation:
One, there are trends which everybody seems to know but somehow do not act on.
And two, there are people's emotions which tend to overvalue or undervalue stocks when the trends are finally recognized…
Ideally the financial industry should be honing this understanding of the market with every new experience. If this knowledge is not further explored by financials and end up learning the wrong lessons, like it is solely due to automated trading, then these firms will forever be doomed to mediocrity. It is a very healthy sign we are seeing from the upper managements’ approaches, however, we are now witnessing more of feedback focused leaders.
After Note: I wonder if when looking back to the past week, we describe it as a Flash Dash or a Flash Dash to Stash Cash?! (Reference to my July 18th post)