"A computer once beat me at chess, but it was no match for me at kick boxing."
Last week the market had the first negative reaction to the political battles in Washington. The justification was that furor over Russia and James Comey would distract the Trump administration from its fiscal agenda, which has been the main thing driving the market. Despite delays, hopes have been high that major changes in tax policy would occur sooner rather than later.
The market lost some of its Trump optimism last week but bounced back quickly after some of the worst action of the year on Wednesday. This morning, with Donald Trump overseas, OPEC looking to hold oil output down and a little Brexit controversy, things have calmed down. The indices are holding steady and the focus has shifted back to the economy, valuations and the best way to put cash to work.
For a number of years now the market has had a very short attention span when it comes to negatives. The focus is always on how to buy the weakness rather than how the negatives can expand and take the market down. The concern is more on how to benefit from the price action rather than the emotions that political issues and news headlines might have.
An article in The Wall Street Journal this morning provides a good example of why that is the case. The article show how quant funds have seen rapid growth in recent years. Quant funds make up 27% of all U.S. stock trades which is nearly double the 14% that existed in 2013. In the first quarter of this year, quants saw inflows of $4.6 billion while the overall hedge fund business had an outflow of $5.5 billion.
Besides the growth in quants we also have high-frequency trading, which hasn't been growing much in recent years, and the boom in ETFs, which are another form of mechanical trading.
These computer programs and mechanical systems make up the great bulk of trading in the market now and they simply don't care about news headlines like humans used to. The way to gain an edge isn't to analyze news and predict emotional reactions. The way to gain an edge is to try to guess what computer programs will trigger as certain price action occurs. What drives the movement is no longer as important as the response to it.
This computer dominance in the market has changed a whole host of things. Much of the stock market commentary we see now is useless because it is still based on the quaint idea that fear and greed are the main market driving forces. Those emotions still exist at some level, but they are nothing more than data points used in formulating how the computers will address the market.
If you want to improve your trading, you have to think like a computer these days. My article this weekend address that point, and the action we see to open the week is a good example of how emotion evaporates quickly as the computers focus on navigating prices action rather than news headlines.
Prepare for an onslaught of opinions about how politics, Donald Trump, oil, Brexit, central banks and the economy will impact the market. However, be very aware that the vast majority of the volume traded in this market is by computers that care only about price action. When you appreciate that fact, you are in better position to trade the market.