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Stock Market Volatility
In the first quarter of 2018, we saw the Dow Jones index went through a rollercoaster of ups and downs and in some cases by a large margin. This is called volatility and the higher the volitility, the more intense investors feel. This is a contrast to just a year ago when the market was on a steady rise reaching a peak of 26,000.
- Apr. 2018
The stock market is a primary investment vehicle for most people. We invest for our retirement and our savings. We participate either through our work’s 401K plans or through our individual IRA accounts or our investment trade accounts.
In recent quarter, the market has gone through a period of uncertainty. Enhanced by the electronic trading environment, it is behaving very erratically and unnerving. It could be up 400 points one day and down 700 another or vice versa. To the outsider, it seems irrational. Why is this happening?
My opinion is that partly it is a form of manipulation by some fund managers and partly because of the current trading environment. The speed with which trades are conducted in seconds and with automated trading by “intelligent sustems” created this atomosphere of volatility.
The question is what should an average investor do under such conditions? and how can the industry or the SEC get a handle on this problem so that small investors are not taken advantage of.
What To Do?
As a small investor, it is always good to be diversified. The broadest diversity of investing is in the index funds such as SPY. When the market makes these girations, it is best not to trade at all. Just sit and wait and watch what happens. Economics and economies goes in cycles. There is going to be an up cycle folowed by a down cycle. The problem is, no one can predict when these cycles come and go. As it should be. If someone does have a crystal ball and can see the future, then this whole system will break down.
Another way an investor can act is to use some hedging strategy to offset some of the losses. This requires some timing and knowledge. By trading in the Index funds and its complimentary short, you can minimize your losses and perhaps even profit from the volatility. Read my article on the details of this strategy in the link below.
What The SEC Should Do?
I don’t have any expertise in this specific arena. However, I have some experience watching the market and understand about transaction systems in general. My believe is that the reason we are seeing the volatility presently is due to the speed of trading. That is to say, the swings up and down in the market, especially during a trading day, is related to the fact trades are conducted via computers. Not only that, they are being executed based on some predetermined algorithm. When A and B happens, then C is bought or sold... These type of algorithm are coded into a trading system such that it can react instantly when something unusual happens. It is good in some respects but can be dangerous in other respect. For example, if someone knows enough about the algorithm, they can “game“ the system through manipulations. Assuming they have the capital behind them and certainly, some large investment houses do. They can manipulate a stock or a segment of the market and cause a trading frenzy while at the same time they can make a hefty profit.
What also allows this to happen is the short trading. That is allowing people to gamble by betting on a company’s stock going down instead of up. This is problematic on many levels. The whole concept of investing has been undermined by this process. Instead of investing in a company hoping it will grow and make money, in some cases, we are betting against a company by saying we hope this company fails so they can make a profit.
The solution is simple and clear. The SEC should limit the extend of program trading and it should disallow short trading. Both of these actions will reduce the volatility by a large amount.
In this time of uncertainty, the best advice is to stay calm and collected and don’t make any big moves. Take a wait and see attitude and see what happens. It will prevent you from making a big mistake.
Some Related Info
- Some Investment Strategies in These Trying Times
Here are some basic strategies in these trying times.
© 2018 Jack Lee