Rev's Forum: News Flow Is the Plaything of Trading Algorithms

 | Sep 14, 2017 | 7:24 AM EDT
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"The news isn't there to tell you what happened. It's there to tell you what it wants you to hear or what it thinks you want to hear."

--Joss Whedon

After a three-day run, the question this morning is whether there is some news that will serve as a market catalyst. Market pundits have done a remarkably poor job of predicting market action based on the headlines. That isn't anything new, but it continues to confuse market timers who are trying to catch a turn.

This morning there are quite a few headlines to consider. There are reports that President Trump is working on the outlines of a deal with Democrats on DACA (Deferred Action on Childhood Arrivals). This is the sort of deal making that many supporters had anticipated from Trump, but it is causing consternation among Republicans who wonder if he will sacrifice their legislative priorities. That possibility will become more important for the market if this bipartisan negotiation impacts tax reform.

North Korea is making threats again with some colorful rhetoric, economic news out of China is on the weak side and the Bank of England is expected to leave interest rates alone as inflationary pressures remain suppressed. The consumer price index (CPI) numbers are due to be released this morning and may show signs of inflation due to rising gasoline prices and ramifications of the two hurricanes.

There are plenty of news catalysts for the market to consider, but will any of them matter?

The thing that is important to understand is that news is no longer just good or bad. The headlines serve as triggers for algorithmic trading that tries to take advantage of poorly positioned traders. This past Monday was a classic example. Although the market had not sold off on Hurricane Irma or North Korea worries, it reacted strongly when neither of those items had the impact that was anticipated. The algorithms went into buy mode and that triggered three days of strong momentum. Whether it was justified by the news wasn't the issue. There was a convenient catalyst, and that is what produced movement.

The indices went flat yesterday and now the hunt is back on for the next market driver. The algorithms tend to work much better on the upside, which is what causes the bears so much consternation. However, we have had four or five one-day dips in the last couple months that have given the pessimists some hope that a top was finally here.

Market participants need to stay focused on the price action and watch to see if one of these news headlines is a triggering event for the computer algorithms. The machines can have a very stubborn bullish bias, so be careful about being bearish.

We have some mild selling in the very early going as the market waits for the Bank of England interest rate decision.

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