Monday, September 11, 2017

Irma and N. Korea Hype

You know how the media like to blow up headlines to draw eyeballs to their articles.  It is slightly, just slightly more refined form of click bait. 

The algos didn't bite and refused to selloff the market on Friday ahead of the fear mongering.  As I said last Friday, the algos are getting much smarter.  There is definitely AI and machine learning going on, because they have gotten more sophisticated from even a few years ago.  If you had the same headlines and weekend risk 5 years ago, the S&P would have likely dipped at least 3% ahead of the event, led by emotional hedge fund managers, and then rebounded like a screaming banshee as those same hedge fund managers bought back what they sold ahead of the "scary" events. 

Nowadays, the hedge fund managers don't even do much manual trading, their performance reviews have shifted their funds to more quant based, AI and machine learning strategies.  This makes the market much less emotional and more price action based, which shows you the muted market reaction to the North Korean nuclear test last week, and less derisking ahead of the fears of a North Korean missile launch and Hurricane Irma this past weekend.  All in all, it makes the market tougher to trade, as there always has to be someone on the other side of your trade.  And AI computer based trading programs are much tougher opponents than trigger happy hedge fund managers.

We are getting a repeal of the risk off moves in Treasuries and gold this morning, along with a gap up in the S&P.  It is notable that the Treasuries and gold are selling off much more than expected for a 0.5% gap up.  It tells you that traders have resorted to hedging not by shorting S&P, but by buying Treasuries and gold.  They have finally caught up to the risk parity hedging strategy.  It could make for a nasty move if Treasuries can ever go down and stay down while stocks are flat.  But that's a story for another day.  Expecting a dull market this week in S&P land.  The bond market should be a bit more interesting, but it too is probably going to have a low volatility trade after today's selloff.


jryan said...

Where do you see bonds headed near term ?

Market Owl said...

I think bonds can bounce a little bit from here but not that much conviction yet. Think better buying opportunity will be available in October.