October month is living up to its name so far. All the gains of the year are wiped out and all the three indexes are in correction territory (more than 10% off from their highs). What’s causing this? Trade wars, Geo-Political wars or “Algorithmic” wars!
We can do guess work all day long but this is no different than the popular parable of Blind men and Elephant. Each Blind men feels a different part of the elephant and conceptualizes the tail for a rope, leg for a pillar and so on. Just like that we all are trying to find out the reason behind this sell-off and frankly speaking there may not be a single reason. Trade wars and Geo-Political anxiety definitely impacts the markets but the worst of all is the algorithms that wreak havoc in the Markets. Algorithms are computer programs that get triggered based on a variety of circumstances and there are not one or two but thousands! These algorithms react to technical indicators like 50/100/200 DMA (Daily Moving Average) and buy or sell based on several factors. This causes volatility in the Markets and retail investors can get badly bruised as they react out of fear. The unpredictable nature of algorithms was in full display during the 2007/2008 financial crisis. In fact, Money managers were glued to their screens in the last hour of the trading when suddenly the Markets used to tank or spike based on the tug of war of this algorithms. Eventually the Markets finds its footing but not without casualties. We at Kuber Investments thrive on this algorithmic wars and manage risk using various option strategies.
Bottomline, with great power comes great responsibilities but with these powerful algorithms comes great uncertainties! Enjoy this algorithmic roller coaster ride and hope you have fun.