There has been a lot of talk about the fact that the S&P 500 has displayed a remarkable tendency to produce a “V bottom” during the majority of the pullbacks seen over the last couple of years. Including yesterday’s action, the blue chip index has put in a total of 10 such “V bottoms” since the end of 2012. Doing the math, this means that the market has “V’d” about 5 times a year in the last two years whereas in the prior 62 years, the “V’s” were seen only about once every year and a half.
The obvious point here is that something has clearly changed in the market over the last two years. And then the obvious questions include: What has changed? And is this a permanent change in the market’s behavior?
Should investors blame this new pattern on HFT? Automated millisecond trend following? The proliferation of ETF trading? Or is there something else to consider?
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While what follows is merely conjecture and could easily be proved wrong at any time, one thought is that QE is actually to blame for the huge increase in “V bottoms.”
The Mere Mention of QE Causes…
We’ve seen it over and over again lately. Stocks pull back on some new fear/concern/worry but then, just about the time things start to get hairy, a central bank official starts talking about QE (or monetary stimulus in the case of China).
Bam! At the drop of an algo, the fears in the market are instantly forgotten and the computers fall all over each other to jump back on the bull train.
David Moenning is Mr. Moenning is President of Heritage Capital Research, a privately owned, investment research firm. Heritage focuses on active 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.