I heard all of these today. You know some of the substantive reasons why we broke down today, but I want to talk about the machines for a moment, because the machines were very much in charge today.
When I say machines, I am not talking about tool and dye metal benders or earth movers. I am not even talking about computers.
What I am talking about are complex programs that say when something happens to one key indicator and other key indicator flashes that you are most likely going to have to take action in order to profit from -- or dodge a bullet fired from a defined direction that has produced a logical outcome.
I think to understand this stuff you have to analogize to something that is less alien and more digestible.
So let's talk football. If you know, for example, that you have the ball and it is fourth and one at midfield, for the longest time coaches went with their guts and said "we have to punt, it is too risky to get stuffed at the 50 if we don't get that yard."
Last year, though, with the Eagles in the Super Bowl, coach Doug Pederson decided to go for it against the vaunted New England Patriots. It seemed gutsy but it wasn't.
It turns out that after looking at an immense amount of data, the outcomes showed, without a doubt, that you have to go for it. It had to do with the percentages.
Consider the machines the generator of the percentages and when you have the percentages you have to do them automatically.
So when the shorter end of the yield curve, or when yields as much or more as the longer end, history says we are going into a recession. Some of the hedge funds out there have programs that say you have to sell the S&P 500 when that happens. Others say you must sell the banks when that happens. Why? Because the outcomes have typically produced negative results and you are trying to beat others who fear those negative results. It's a foot race, all because people know that if interest rates are higher going out a few years it means that there's a possible severe slowdown about to occur. This curve, as they call it, overrides whatever you hear about good employment, or consumer balance sheets or robust lending. It is predictive, not coincidental.
We do a lot of off the charts work and we know from that many funds will sell if the S&P 500 violated the 200-day moving average because, again, the outcomes are skewed to further downside. Sure it can come right back up. But the computer programs say "move before the others do."
Now here's where the mechanics come in. There are now enough funds that use the same program that there aren't enough willing to take the other side. If we all know that stocks go down on certain triggers then why would we buy stocks?
Correct: no reason. Which is how you get not just a decline; you get a freefall. Now you know when people say "it's all about the machines" or it's all about the "algos" that's what we are talking about and it is why you can have such a huge gap down with few willing to take the other side of the trade.