Monday, June 27, 2016

Programmed Collapse aka. Idiot Feedback Loop

It's been observed many times that stocks are different than any other "thing" that we buy in that investors like them when they have high prices and hate them when they have low prices. Every time the market rolls over volume picks up. Why? Because people are not in "stocks" for the long run, they are in them for as long as they are going up, and when they roll over, they automatically dump them via stop losses or other means...

In today's case, what we saw was the "gamma" selling predicted yesterday by JPMorgan: 

Zerohedge: June 26, 2016
JPMorgan Head Quant Sees Up to $300 Billion in Program Selling And 5-10% Downside

This is the same guy who basically "predicted" the August crash.

Zerohedge August 21st, 2015
Why The Market Is Crashing Into The Close

All good, but it still begs the question around the strategy of selling on the way down and buying on the way up. Now, above, we see that market is trapped in another vertical momentum feedback loop wherein lower prices lead to more programmed selling. In other words, if JP Morgan was predicting $300 billion in selling at Friday's closing levels, then that figure just went up, because it's a moving target. The lower the market moves, the more selling must take place to "rebalance" the risk exposure. Add in margin calls and human-placed stop losses and it's not hard to see why selling leads to more selling. That's exactly how it's programmed. 

By idiots who buy high and sell low, "to make a profit"...