Technology Predicts the Future: Computer Traders
Does the stock market dictate our future, or does our future dictate the stock market?
We have once again been forced onto another wooden roller coaster. It seems that despite the grim outlook, the market wants to rise. But just as it does, we’re brought back down to reality.
Last month, we hit new lows only to rise again back to year highs. This all happened despite bad economic news and a grim outlook. History tells us that anytime we hit a major market bottom, and the market rallies despite bad news, a bull market is being formed.
It happened in 2002 with the tech bubble. It happened in 2008 with the world financial system on the brink of collapse. Is it about to happen again? Have we hit a major market bottom? Are we heading towards a brighter future?
As you know, the stock market is forward-looking by about six months. Given the trading patterns of last month, it appears that we’re almost out of the woods. But I wouldn’t get your hopes up just yet.
We are still on the brink of a worldwide financial breakdown. Europe remains the one big question that could break ten on the Richter scale, with Italy possibly being the final blow.
The average citizen has no idea how close we are to a world financial system breakdown. They have no idea what is really happening in Europe. But perhaps it’s for the better. What they don’t know can’t hurt them, right?
If Italy fails, France will be next, and with it the rest of Europe – and the world. Why?
One word: derivatives.
Many of the major US banks, including the Bank of America, hold an undisclosed but astronomical amount of derivatives tied to the Eurozone. If Europe collapses, the amount lost would be too big for any US bank to handle – meaning the numbers are so grand that they far exceed the banks’ worth.
If the major US banks fail, the world financial system will come tumbling down with it as citizens scramble to withdraw their assets from the so-called safe haven we call banks. That’s the worst-case scenario. Could the world governments let that happen? Would they?
The market, while still volatile, have shown us signs of life and a future that is brighter. The US stock market on a technical basis is showing strength, despite the caution flags.
While it may be hard to digest now, the market is the forward thinker and its almost always right.
Price action has been impressive and indicators show us there’s room for more growth. While short-term indicators show that some stocks are overbought and a slight pullback may occur, the longer-term leading indicators show us otherwise. Perhaps this is why we’ve seen stocks trying to break out, only to be slapped back down last week.
That means if things settle. and provided we don’t experience any major market news, next week may look pretty good. And let’s not forget that there is still a strong chance the Fed will stimulate over the coming months which will bolster the markets – albeit only temporarily.
But there is a curveball when looking at price action and technical indicators in this market…
Computers Predict the Future: Computer Traders
The market may no longer behave as it once did in the past. Just because history tells us the stock market is a forward thinker, doesn’t mean it is anymore. Why?
The markets are volatile and traders are taking advantage of every swing.
The worst part about the volatility is the absence of retail investors and the dominance of algorithmic high frequency software traders.
The world is literally on the brink of a financial collapse and we have software programs running and gauging our day-to-day markets. It’s a scary thought.
Software programs have bugs. At any given time, the wrong input our output could cause catastrophe. I am sure everyone has had their computer crash or had some kind of weird malfunction with a software program before. Imagine when it happens with software trading programs that control billions of dollars worth of wealth – ie. flash crashes.
Current data shows that more than 70% of all equity volume traded in the US markets are now as a result of these algo traders. In a market where retail investors are holding onto cash, this percentage may be even higher. That means the real gauge of market sentiment and technical analysis is no longer controlled by retail investors and investors with the ability to gauge economic factors. It is now controlled by computers.
If history tells us that the stock market is forward looking by 6 months, then computer programs are now dictating our future…imagine that.
It reminds me of the movie Paycheck where a machine was created to predict the future, but in actual fact it was really just creating events that we believed would be our future. I have always said that perception is reality. If computer programs are now dictating our future via the stock market, one can only imagine what our markets will look like in the future. It’s a scary thought.
Next week, I’ll be continuing with the lessons on mining valuations from a few weeks prior.
Until next week,
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