Markets fell on Thursday reacting to the news that a commercial airliner had been shot down over the Ukraine. Stocks extended their fall when Israel invaded Gaza later in the day. But by Friday investors, trained to buy the dip, had rushed back into stocks, recouping most of the losses.
The speed by which the 1%-plus sell-off in stocks occurred on Thursday illustrates once again that this is a trigger-happy market. Event risk can drop these markets 5% in the blink of an eye. And few realize just how quickly news is translated to action these days.
The headline “Malaysian Airline shot down over Ukraine,” was first noticed and then interpreted by high speed computers on Wall Street trading desks. These smart logic algorithms are programmed to identify positive and negative news through a database of key words. “Shot down” was clearly in their vocabulary. Before the human eye could read the last word of the sentence, computers were already issuing sell orders across seventy different markets. This caused a cascade of selling which immediately pressured markets lower. By the time you and I got around to selling, the markets were already down almost 1%.
No matter that the actual facts might contradict the initial news; computers are programmed these days to sell first and question later. In this case, the news was accurate, although the perpetrators and their intent is still a mystery.
Overnight the tension remained, but events in Ukraine did not escalate, while the Israeli invasion was simply explained away as more of the same violence we have become accustomed to in that part of the world. Once again, investors chose to ignore bad news in favor of betting on the next initial public offering or takeover target.
Earlier in the week, the Fed Chairwoman Janet Yellen, speaking before the Senate Banking Committee, for the first time hedged her views on when interest rates might rise. She acknowledged that the gains in employment were a bit sharper than the Fed expected and might cause the central bank to advance the date when interest rates might start rising. She also said that certain sectors of the market appeared to be overvalued such as small cap stocks, biotech and social media.
The specific sectors she mentioned had actually been pulling back prior to her remarks. It is the second such stealth correction in these names this year. We are now seeing mid-cap stocks join the decline as well, while the markets overall continue to inch higher. The mega-cap stocks are now the main focus of investor attention.
Historically, this is just another sign that the stock markets are close to a top of some sort. When these sectors, (which have led the market higher now for many months) start to roll over, the rest of the market can’t be too far behind. Another troubling sign is the number of retail investors who are now chasing the market. This has always been a signal to step to the sidelines.
Of course, according to conventional wisdom, this time the markets are different. The old tools of analysis, they say, don’t work in this New Age market that is being supported by a central bank and its low interest rate policies. Let’s hope they are right.