Well, this is awkward…
Yesterday, as I was writing “Morning in the Markets” before the opening bell rang at 9:30, as it does every day, index futures were down across the board. After trying to make sense of the Fed’s arcane statements about the latest interest rate hike, I told you that I was looking for a reversal off the early morning lows, and I was looking at Meta (NASDAQ: META) for an upside trade…
Sadly, there were no early morning lows. Stocks churned lower pretty much all day. The S&P 500 didn’t close right on its low, but it closed close enough to the day's lows that there is no rational way to sugarcoat it.
JP Morgan (NYSE: JPM) came out with a bullish call on Meta this morning. From a rating of “neutral,” the investment bank raised its rating on Meta from “Neutral” to “Overweight.” Meta shares are up a little in today’s pre-market – cold comfort because I got cold feet, and I did not take that Meta trade yesterday, and I’ll tell you why…
I’ve talked about how the market is prone to emotional swings. But the fact is, something like 70% of all stock market trading is done by machines running trading algorithms. These algorithms make buy and sell “decisions” based on a range of conditions that have been written into the program. Like “if the S&P 500 falls below XXX, sell sell sell!”
As you’d expect, the machines execute their orders with ruthless precision. But the algorithms themselves are still written by humans. Emotions are still an important aspect. A day like yesterday, where the selling is relentless, has a look and feel of an emotional reaction. It feels like there is fear in the air.
But the thing is, relentless one-way moves like yesterday’s are a hallmark of machine-based trading. When sell orders dominate the flow, the machines stop putting out buy orders. They don’t oppose each other, they don’t go against the flow.
So, for individual investors like myself, it’s rather easy to recognize when the machines start marching in lockstep, and it’s best to stand aside.
Now, what do we do with that information?
The first thing to understand is that the machines can and will switch from “sell” to “buy” without fanfare. So it’s very easy to get caught leaning the wrong way. Remember, the algorithms use the same technical indicators human traders do – indicators like trendlines, moving averages, and support/resistance levels.
Today, the 50-day moving average for the S&P 500 sits at 3,861. As I write, S&P 500 futures are trading at 3,859. There is no doubt that the 50-day MA is accounted for in the trading algorithms. The algorithms were targeting the 50-day MA in the pre-market. The question is, what will the algorithms do now?
I will watch for a show of strength at the 50-day moving average. And that’s simply because I expect that the downside story is mostly played out after the selling we've seen. Opportunity should be to the upside. We’ll see…
That’s your “Morning in the Markets” take care, have a great weekend, and I’ll talk to you on Monday.
The Profit Sector