Did someone mention the middle east? Not me... ----------------------------------- Market Falling Because of Math, Not Middle East CNBC.com | February 24, 2011 | 04:28 PM EST
While the turmoil in Middle East and subsequent rise in oil above $100 is a convenient excuse to give for the one-week equity selloff, the real catalyst may be nothing more than simple math, some traders say. It?s what happens when a market devoid of fundamental analysis moves on momentum and a herd mentality.
Last Wednesday, the S&P 500 Index doubled from its bear market low of 666.79 in 2009. The 100 percent move to S&P 1333 was a much-ballyhooed milestone on trading floors and cited by pundits as reason to take profits. Sure enough, the S&P 500 hit an intraday high of 1344.07 two days later. The self-fulfilling herd had spoken.?The S&P 500 bottomed 102 weeks ago and has since rallied 100 percent,? wrote Jeff Saut, Raymond James investment strategist, in a note at the start of this week. ?There have been only two other instances when that has happened, 1934 and 1937. Following the peaks of February 1934, and March 1937, the stock market corrected.?
Saut said that?s why he got cautious on the market, but not totally bearish, because he still likes the long-term fundamentals. He recommended clients sell 20 to 30 percent of their positions to raise cash.
Getting a little more sophisticated to account for all the quantitative traders out there, Societe Generale [ SCGLY 13.33 -0.12 (-0.89%) ] put out a quite prescient note to start the week noting that the S&P 500 had made a two standard deviation move beyond its average return for any six months. The firm tracks the S&P 500 on a rolling 24-week basis and found that the 26 percent jump since September had hit that two standard deviation threshold which has foreshadowed previous corrections in the market going back to 1975. The S&P 500 dropped two percent after the Societe General and Saut notes.
?It?s a bunch of servers pinging each other,? said Reggie Middleton, editor of BoomBustBlog.com. ?The market nowadays is dominated by the same traders at the same five banks that went to the same business schools which taught them the same quantitative trading programs.?
Retail fund flows into equities have only picked up recently. Exchange volume remains anemic and several market analysts estimate program trading makes up three-fourths of the activity on any given day. These factors are making more traders pay attention to technicals rather than funamentals.
So how far do we go? An official correction would be a ten percent move from the 1344 top, equaling about 1209 on the S&P 500. One trader thinks the herd may step in before then, at about 5 percent from the top.
(20min delay)