Last week, it was suggested that moves in the market – especially on days when something big occurs – have become exaggerated due to the proliferation of algorithmic trading. “When a bunch of trend-following algos start chasing each other’s tail, the end result is an increase in the size of daily moves,” was one of the key points made.
As we explained, the key here is to understand that daily price action is becoming more and more volatile (and perhaps even a bit artificial) – in both directions. Once the algos get on a roll, they often just keep going until the closing bell rings. Then traders come in the next day and start all over again.
And to reiterate, we’re not complaining about the computers here. Algo-driven trading is fine, fair, and completely legal. No, the key point being made today is that investors need to recognize that the game is changing.
What Can Investors Do?
In talking to investors (professional and otherwise), it is obvious that this topic is important. Most folks recognize that the game is moving faster and farther than ever before. However, very few have any ideas about how to adapt their strategies to the changing environment.
So today, we will discuss five different ideas to help combat an environment where intraday volatility is increasing and the moves have become exaggerated.
David Moenning is the founder and chief investment strategist for StateoftheMarkets.com, a website dedicated to investor education and portfolio analysis. Mr. Moenning is also President of Heritage Capital Management, a privately owned, investment management firm. Founded in 1989, Heritage is focuses on risk management and an “own the best and ignore the rest” equity selection strategy.
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Positions in stocks mentioned: none
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM’s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.