Blame the Computers for Last Week’s Market Wipeout

So says JP Morgan’s trading honcho, Marko Kolanovic, who thinks more than half the moves were due to algos.

The algorithms did it. That’s the verdict of JP Morgan’s top trading strategist when describing last week’s volatility, with last Wednesday’s breathtaking 3% plummet in the S&P 500 as the centerpiece.

It all seemed to confirm August’s reputation as the worst month for equities. “More than half of equity moves were driven by systematic rather than fundamental trading,” wrote Marko Kolanovic, the bank’s global head of macro quantitative and derivatives strategy, in a research note.

But never fear, he said: Equity inflows should keep the market going higher. After Wednesday’s bath, the market trended upward through Monday, then dipped anew on Tuesday, off 0.79%, as the market digested news that the trade war’s end is not in sight.

The market took a dive at mid-week, its worst day of 2019, in reaction to eerie music from the bond market. The yield curve inverted for the two-year and 10-year Treasury bonds. There’s been an inversion—which customarily signals a recession—regarding the three-month T-bill and the10-year for three months, but this one was seen as more serious, even if it only lasted for a short time.

“Despite fundamental risks, recent equity and bond moves were mostly technically-driven,” Kolanovic declared in a note to clients. “More than half of equity moves were driven by systematic rather than fundamental trading.”

By his estimate, the big downdraft’s primary fuel was $75 billion in computer-driven selling. Banks’ hedging and index options delta, where the underlying stocks also dragged down the options pricing, were two of the most salient forces, he indicated.

Nonetheless, Kolanovic said he saw as much as a 2% boost next week, to round out the month.

Related Stories:

Hoo Boy, Inverted Yield Curve Adds to Stock Market Gloom

Oh, Swell: August Is the Worst Month for Stocks

What Will Happen to Stocks a Year After the Fed Cuts Rates?

Tags: , , ,