Sterling Market Commentary for Wednesday January 2nd, 2013
A Few Thoughts on Today’s Market: Well, I will confess to having taken most of December off and letting the political mess in Washington D.C. play out. It turned out to be a good opportunity to spend some time with family and for us to enjoy our 4 month old baby boy. The situation in Washington DC continues to make a mess of the markets with computer programs that spit out trading strategies based upon headlines written by a news industry primarily staffed by a young, underpaid and an over worked staff. These programs lack the capacity to read through the details of the articles with any form of understanding of what they are reading. They simply count key words that they assign ratings to in an attempt to determine the level of positiveness or negativeness to the news. Worse yet, the programs can be played by politicians or other parties with an agenda by gaming the “key” words used in speeches and articles. Take a moment and imagine how different public opinion and the reaction of these computer programs would be if a few key writers, who majored in English and not anything close to finance or business that would provide a real understanding of taxes and economics, had changed their opinion of the recent deal to avert the tax increases of the Fiscal Cliff. If a couple of key writers, at the right major media outlets had written that this was a rotten deal, then the market could easily be on its way significantly lower instead of sharply higher.
Here is the other problem I have with these computer driven trading programs; they are not long term investors. As near as I can determine, they are nothing more than short term speculators who move in and out of investments at lightening fast speeds and have a strong bias towards not holding positions overnight as they seek to maximize their ability to switch strategies in the shortest amount of time possible with the least amount of risk. So this leads me to my biggest concern about the activities of these computer driven trading strategies; I think they basically push the market artificially higher (or lower) than it would normally be; and when the time for a correction comes, the correction is far sharper and painful than it would otherwise be. This puts smaller investors at risk of unnecessary losses. While I do not have a good solution to what I perceive to be the problems created by all these computer driven trading programs, I do think that everyone should be aware of the risk they poise to the market and not be lured into a false sense of optimism when things could easily be a lot shakier than people realize.