2 Reasons for Wall Street's Recent Rally
While I might be wrong, I have a view of two important and overriding reasons why the U.S. stock market has bolted higher over the last month:
1. An Epic Performance Chase
There has rarely been such divergent group performance as there has been this year. This has led to a vast difference in professional money management (hedge-fund) performance. As a result, a lot of money managers are negative or flat for the year and are chasing the "winners" right now.
2. Quants (computer trading programs not people) Rule the Day (and Also Chase Performance)
Quants base their risk-parity portfolios and price-trend and volatility-managed strategies solely on stocks' past price performance and volatility. As I mentioned in yesterday's opening missive, they're agnostic about balance sheets and income statements, while fundamental investors like Warren Buffett are an anathema to them and the term "intrinsic value" isn't even in their vocabulary.
They influence prices to the downside and upside, as there's a positive-feedback loop between all of these strategies, hence the extreme volatility.
These computer based trading programs caused higher market volatility in late September, which in turn led to selling in risk-parity portfolios.
B/c many in the investment world have not had a good year, the month of October moved up almost in a straight line with the overall markets gaining almost 8% during the month (which is crazy and not healthy for stocks or mutual funds - this is b/c stocks don't move up in a straight line and when they do it doesn't end well).
I've been calling for the markets to sell off and I continue to stand by that view. While my intermediate term view of stocks is uncertain, as in I don't know how they will perform for the remainder of the year, I do believe we will see a selloff in stocks over the near term as 3rd quarter earnings have not been that impressive and economic numbers have been dissapointing at best.
We shall see.....
