Ah, Fear and Greed; those two drivers of market behaviour. As Kipling almost said,
“If You can meet with Fear and Greed,
And treat those two imposters just the same…..
You’ll be a man, my son!”
Or at least, you’ll be a successful financial trader. (Apologies for the clearly irreverent misquotation.)
But that’s what last week in the equity markets brought very sharply back into focus. Fear has been locked up in his box for a long while now, while greed has had us all salivating over the strength of the equity markets, particularly in the US. But then somebody chose to eat a bat or a pangolin or both - or something else similar - and suddenly fear leapt out of his confinement and started laying waste to investments, pensions, nest-eggs, or however you want to describe them. It was a sobering time, last week.
But something doesn’t entirely add up, as far as I can see (and I accept that these days I am mostly no more than an observer from the outside). If you look at the volumes traded last week (and here I am specifically talking about the London market), then actually it is not perhaps as significant as the points fall might suggest. As far as I can see, the daily volume on the LSE last week was approximately similar to what we saw in the days either side of our December general election, and also those various days during the last year or eighteen months when the Brexit issues and their associated knife-edge political shenanigans were dominating the headlines. And that was what this time provoked ten-plus percent falls?
Added to that thought is that I cannot see - and I’ve discussed this with others, probably with better knowledge than me - that there was evidence of major fund liquidations. That makes sense, of course, because we have enjoyed a very long and strong bull market, and if you are sitting on portfolio gains of, let’s say, fifty percent or so then I would argue that a ten percent drop is unlikely to provoke an immediate liquidation. After all, the default position of equity investors (as opposed to traders) is buy and hold; and be honest, that’s what history tells us is the rational move.
So it looks as though although volume was increased, it was not to what one could describe as panic level, and at the same time there doesn’t appear to be evidence that the genuine big players were baling out. Could it be, perhaps, that what happened was provoked by algorithmic trading? My concerns about the effect of algos on the markets generally are to do with the way I see most of them as - at heart - trend following programmes, and it seems to me that the behaviour I have described above is what one would expect in such circumstances. In other words, falls that seem exaggerated when plotted against volume, as programme trades follow what become self-fulfilling trend movements. Automated algo trading increases volatility: I think it is difficult to argue against that case.
Of course, if we see another ten percent (or more) fall, then I would have to withdraw my suggestion, because that presumably would begin to draw out the long-term equity holders. Anyway, I’d be interested if any readers of this have a greater depth of insight than I do.
But back to fear and greed. Greed says hold on to your positions - it will all come right in the end. Fear says you’re about to lose everything you’ve worked for for all these years - get out before it’s too late! At the moment, and I’m writing this on Monday afternoon, greed seems just about to be still in the ascendancy; that is also the overall feeling from Sunday’s journalist commentators. But another week like the last one could turn that around completely.
Still, there’s one positive: at least this time it shouldn’t be the financial industry professionals who have to shoulder all the blame - after all, it wasn’t them (us?) who felt the craving to eat bat/pangolin/whatever, was it?