December 1, 2021

The Flaw

It was Monday, Dec 24, 2018. 

The Friday before, the S&P 500 had dropped 3%, bringing monthly losses to 13% and putting the market on bear turf.  Everybody thought, “Thank God for Christmas, we can catch a breath.”

Instead, stocks caromed down another 3% in the half-day of trading Christmas Eve.  After unwrapping presents, stocks opened the 26th with most on vacation and shot up 5%.

Remember that? 

Suppose you close your offices for the holidays and come back to find the place trashed.  It’s not supposed to happen when nobody is in.  Right?  You wonder who the hell did it.

We first got a sense of the stock market’s capacity for freakish outcomes May 6, 2010. Stocks collapsed in this “Flash Crash,” some to a penny, before resurrecting like a geyser.  We learned about “high-frequency trading,” computers buzz-sawing data, spraying prices, shredding stocks.

Illustration 180830251 / High Frequency Trading © Nadiia Prokhorova | Dreamstime.com

It’s happened a growing number of times since.  Computers thrashed through the market in March 2020 like Godzilla vs Kong, demolishing prices, splashing volume everywhere.

And it just happened again.

Everybody cleared their desks and went off to get a tryptophan high, and while we were cleaning up the dishes and looking at the college sports lineup the day after Thanksgiving, a half-day and often the lightest trading of the year, a Transformer went berserk and blew up on Wall Street, blasting almost a thousand points off the Dow.

This ought to disturb you, public companies and investors.  It’s your equity.  You leave. And some computer freakshow guns up in a hot rod and hits you with a smash-and-grab.

The earth is not flat.  And the stock market doesn’t work the way the CEO thinks.

We were in Fiji sailing before the Pandemic.  There was a low sand bar connecting what would otherwise be two islands. We anchored and walked it, observing large numbers of hermit crabs hurrying across, lengthwise.

We picked some up and put them down by the water. But no, that was distressing to them, and they flailed frantically to catch up to the rest, dragging their little hermit shells.

Later, we got it.  The tide was coming in. If you didn’t make it to the Hermit rendezvous on the right side behind some big rocks, you were swept away.

They were on a clock. They’re programmed with sea market structure. They grasped the divide between Controllables and Non-Controllables and the need to respond to both.

If hermit crabs can, we can. Traders, know when you’re vulnerable. That’s around options-expirations, holidays, month-ends, earnings.  And when Demand is falling, as it’s been doing since Nov 17, when options-expirations started (Broad Sentiment at EDGE shows you).

New month, new money, so it might reverse on a dime. Knowing, making informed choices, is the key.

Public companies, no market constituency has a greater need than you to know how the stock market works. In a sense, you’re the elevators everybody boards for the ride.

Lead riders to think that Story is safety, and you’re not only hurting them but leaving your executives and boards without defense.  The stock market is motivated primarily by things other than Story. Data is always, always, a safeguard.

What about omicron? It’s an anagram for moronic. It’s 15th among 24 Greek letters. The WHO has been using them to track variants. We heard a lot about Delta. Nothing about variants Epsilon through Lambda, which exist but haven’t mattered.

The WHO skipped Nu and Xi, too culturally insensitive. Next up was omicron.

Easy scapegoat. Investors fear omicron!  Except investors didn’t do Friday, didn’t do yesterday. Friday, the only behavior up was Fast Trading. Those bloody machines. Futures expired yesterday. Volatility destroys them. That’s market structure, not a virus.

Our trouble is a stock market where machines sifting data like scientists can exploit supply/demand imbalances to profit on the pursuit of price. 

It’s the prevalent behavior in the market. It manifests starkly whenever there are unusual changes to investment, because that’s when PRICE can be exploited.  Machines don’t “think” but they’re programmed to respond.

Suppose I said, “Here are the keys to this roadster.  It’s powerful, fast, and fun. Enjoy it.”

I hand you the keys and start to walk away.  Then I stop and say, “Oh, every now and then it veers off the road for no reason.”

What would a rational person do?  Ponder that.

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