After the disastrous 3.6% drop in the Nasdaq composite and 2.3% drop in the S&P 500, yesterday, don’t be in a hurry to jump back in. Or as they say on Wall Street – don’t catch a falling knife.
Analysts were right to badger Google’s management on monetization of AI, and Google’s inability to give straight answers made them realize that all that spending is going to see returns a few years out. It was a cue to offload and led to the overbought M-7 and tech crashing. Tesla didn’t help either with the usual vagueness – an inherently risky stock with a lot of promises.
The other big reason for the fall yesterday was algorithmic trading, or computerized trading. Algo trading uses the VIX (The Volatility Index) as a trigger for selling/buying. The VIX is often known as the Fear Gauge, and it was pretty fearful on Wednesday shooting up from 14.72 to 18.04 – a 23% jump! For the most part of 2024, the VIX has stayed steady between 12-14, so this was way out in uncertain territory.
As of writing the VIX is at 19.17, up 6%. If you recall we had another 2%, drop last week, at that time the VIX had shot up to 16.52.
THE DOOM LOOP – When markets are over leveraged, overbought or over concentrated a big fall sends it into a doom loop. An example of this would be a mutual or Index fund manager or ETF having to sell stocks because of redemptions – so he/she’s selling and driving prices down, which further leads to investors knocking on the door for more redemptions…and so on. Similarly, if you’re trading in a margin account you have to sell to meet the margins…this is self-perpetuating – a doom loop.
For Algo traders its worse, the triggers to buy and sell are preset – “stop loss limits”, the speed is too fast to have any human control, and most computerized trading firms will not allow overrides.
I would wait for the dust to settle. The S&P 500 is down almost 5% from its all-time high and the Nasdaq 8.5%. These could head to correction territory, especially the Nasdaq, which again is not the end of the world – we had a great first half of the year. There are big earnings next week – MSFT, AMZN, AAPL, META, will update then.
