• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / ETFs

Like Something Out of 'The Twilight Zone,' This Market Is About the Machines

Throw away your fundamental analysis and growth forecasts, as the market has been taken over by algorithms, quant strategies and ETFs.
By DOUG KASS
Jun 14, 2017 | 09:30 AM EDT

(This commentary originally appeared on Real Money Pro at 7:10 a.m. ET today. Click here to learn about this dynamic market information service for active traders.)

"Let's consider that statement. In the last 20 years the VIX closed lower than 10 on a total of 11 days, and 7 of those days were in the past month. Think about that - over the past 2 decades, was the last month the most benign macro environment? (e.g. last week: Comey testimony, UK elections, ECB, geopolitical uncertainty, Qatar, FANG flash crash, etc.)."

-- Marko Kalonovic, JPMorgan's head quant

I vividly remember episode 40 of Twilight Zone entitled "A Thing About Machines." (Here is a clip of the episode)

Originally aired on Oct. 28, 1960, it's the story of a repairman who pays a house call to Bartlett Finchley, who is having trouble with his television's reception. Finchley is an ill-tempered and lonely gourmet magazine critic. He abuses machines in his home and he is as inept with human beings as he with the machines, which he concludes are conspiring against him.  

Though Finchley is seen as paranoid by many, eventually every machine in the house (including his car) turns against him: 

* His typewriter types out the message, "Get out of here Finchley."

* A woman on the television speaks the same message.

* His electric razor rises menacingly in the air and lunges at him.

* An unplugged telephone has a voice that speaks the same words as the typewriter. 

Finchley drinks a bottle of liquor and passes out. When he awakes, the machines in the house tell him to get out and the razor pursues him. He runs out of the house and is chased by his driverless car, which winds up pushing him into his pool. 

Sinking to the bottom, Finchley drowns. When the police pull him out, they can't explain how he could sink to the bottom when not being weighed down, as normally a body would float, nor could they explain the car near the pool. 

Listen Luddites, for the stock market, too, it's a thing about the machines. 

Throw away your fundamental analysis, your price charts, interest rates and economic growth forecasts, as the market has lost its moorings. 

It is no longer a pyramid of fundamental and technical analysis nor is it a response to changing investor sentiment. 

The ongoing multiyear changes in the market structure and dominant investor strategies in which quants, algos and other passive strategies (e.g., ETFs) have replaced active managers raise the same risks that Finchley faced 57 years ago. 

And the overwhelming impact of central bankers' largesse is the cherry on the market's non-fundamentally influenced sundae. 

As I have written: 

"The combination of central bankers' unprecedented largesse (and liquidity) when combined with mindless quant strategies and the enormous popularity of ETFs will, as night follows day, become a toxic cocktail for the equity markets. While we live in an imperfect world, we face (with valuations at a 95% decile on a number of metrics) a stock market that views the world almost perfectly." 

Back to JPMorgan's Marko Kalonovic, who is quoted at the top of this piece and again here: 

"... some striking facts: to understand this market transformation, note that Passive and Quantitative investors now account for ~60% of equity assets (vs. less than 30% a decade ago). We estimate that only ~10% of trading volumes originates from fundamental discretionary traders. This means that while fundamental narratives explaining the price action abound, the majority of equity investors today don't buy or sell stocks based on stock-specific fundamentals.

The next and perhaps just-as-important driver is, of course, central banks, based on Kalonvic's analysis: "With ~$2T asset inflows per year, central bank liquidity creates strong interest rate and policy sensitivity for sectors and styles. Low rates also invite investors to sell volatility."

Everyone should read this important note from JPMorgan's head quant (hat tip to Zero Hedge) in order to understand how risk parity, volatility trending, stat arb and other quant strategies that are agnostic to balance sheets, income statements and private market value artificially are impacting the capital markets and, temporarily at least, are checking volatility. 

Last Friday's market schmeissing was the first shot across the bow. There will be many more of those Fridays. 

This is not my Grandma Koufax's stock market.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.
TAGS: Investing | U.S. Equity | ETFs | Funds | How-to | Markets | Risk Management | Stocks

More from ETFs

In the Wild World of Crypto, a Wild Bitcoin Play Is the Best Call

Mark Abssy
Jan 26, 2023 1:24 PM EST

The situation for bitcoin investors right now is tough, but as we look at the crypto exchange-traded funds and the digital currency, I see one good 'option.'

Overcoming Microsoft, S&P Levels Off, Bank of Canada Wisdom, Mucho Data on Tap

Stephen Guilfoyle
Jan 26, 2023 7:28 AM EST

Plus, a look at Wednesday's wishy-washy market action, the Treasury yield curve, Chevron's coming earnings and Lael Brainard's possible exit from the Fed.

At 30, This ETF Is Still the Gift That Keeps on Giving

Mark Abssy
Jan 24, 2023 1:37 PM EST

Have your cake and eat it too, as we celebrate the birthday of this fund.

At Least Investors Can Have Trust in the Media

Bruce Kamich
Jan 23, 2023 12:53 PM EST

The Communication Services Select Sector SPDR exchange-traded fund shows promise, according to the charts.

Has the New Bull Market Started?

Peter Tchir
Jan 23, 2023 9:30 AM EST

There are a few factors that will determine whether the bull is charging again, and most aren't arguing in its favor just yet.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 03:06 PM EST BOB LANG

    LEAPS Webinar

    This week, I offered a free webinar session talkin...
  • 02:53 PM EST REAL MONEY

    LIVE EVENT: Chris Versace and "Sarge" Guilfoyle Share Their Stock Market Insights

    This Monday, Jan. 30, at 12 p.m., our very own exp...
  • 04:58 PM EST REAL MONEY

    The Latest AAP Podcast!

    Listen in as AAP Tackles Earnings, the Fed, Recess...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login