some Reasons Why US STOCKS slide
The British day trader accused of contributing to the “Flash Crash” in 2010 sent emails showing his plans to “spoof” financial markets, a newly unsealed federal indictment says.
Navinder Singh Sarao is accused of fooling other market participants by so-called spoofing — a high-speed trading tactic involving placement of multiple bogus trading orders that are modified or canceled before they can be executed.
He often traded in the E-Mini S&P 500, a popular stock market index futures contract based on the Standard & Poor’s 500 Index. U.S. prosecutors and regulators allege that his E-Mini trading contributed to the Flash Crash on May 6, 2010, that sent the Dow Jones Industrial Average on a 1,000-point plunge before it abruptly snapped back.
The indictment, unsealed in Manhattan federal court Wednesday, cited a string of emails in which Sarao allegedly communicated about spoofing efforts with unidentified computer programmers who helped build custom-designed trading programs.
“If I am short I want to spoof it (i.e., the market) down, so I will place join offer orders,” Sarao wrote to one programmer on February 1, 2009, the indictment shows. “I want to put these join offer orders in the system much like a normal order but they are only seen when the market bid is taken out, or when the market goes offered.”
1. Investors are highly emotional
One reason I’d suggest the stock market could move lower is investor sentiment. While long-term investors are generally disciplined in regards to keeping their emotions out of the investments, there are quite a few traders that aren’t focused on the long term. Traders, active Wall Street firms, and hedge funds can very easily cause the stock market to overshoot up or down on the slightest hint of good or bad news because they allow their emotions to drive their investing, rather than focusing on the bread-and-butter fundamentals and long-term thesis that would drive a company higher or lower.
2. Oil fundamentals offer little near-term relief
It’s impossible to tell whether a rapid rise in oil prices led last week’s rally or if the rally led oil prices higher, but the point remains that oil’s (West Texas Intermediate and Brent) fundamentals remain under pressure.
For example, within the United States the oil rig count has more than halved over the past year from a peak of 1,609 to 675 as of last week. Despite this, production per rig has more than doubled, meaning despite fewer rigs we’re seeing production remain steady from the year-ago period. This isn’t helping to solve the major problem with oil, which is oversupply. If there are fears of a recession or slowdown in the U.S., China, or other developed parts of the world, this oversupply worry could further pressure the stock market.
3. Federal Reserve indecisiveness
Another concern that could rear its head and push the markets lower is indecisiveness from the Federal Open Market Committee. To be clear, there is no magic formula that determines when it’s right time or wrong time to raise or lower the federal funds target rate (which will ultimately affect the interest rates that you and I pay for our mortgages, credit cards, loans, and so on). However, with the federal funds target hovering near 0% for better than six years, skeptics abound who are worried that low lending rates could lead to a rise in inflation or perhaps another bubble in the housing market. Long story short, the more befuddled the FOMC looks, the more pressure we may see put on the stock market.
In the stock market, there are no givens. But the closest thing to a given I can point to is that stock indexes (at some point) move higher from the peak of a previous correction or recession 100% of the time. I personally don’t have the patience to count every correction or bear market in recorded history, but I can tell you for a fact that all 33 corrections/bear markets since 1950 in the S&P 500 have been put well in the rearview mirror. In fact, between 1975 and 2000, it took two years or less to recover the loss witnessed in all 12 corrections/bear markets. For risk-averse long-term investors, it simply means that buying an index fund, such as the SPDR S&P 500 ETF, should net you a positive gain over the long run if this aforementioned trend continues to hold true.
Stock market corrections are also an inevitable function of fluctuations in the U.S. economy, and your opportunity to pick up high-quality stocks at a cheaper price point than in recent months or years. Unless a company’s business model has changed, then a simple correction in the stock market probably isn’t going to have much of a long-term effect on the bottom-line profitability of a high-quality company.
Lastly, it’s important to remember that stocks still give investors their best chance to build real wealth over the long run. Sure, CDs, money market accounts, and bonds might be a less volatile bet, but compared to inflation, they’ve been moneylosers over the past couple of years. With the stock market returning an average of 8% per year, historically it gives investors a genuine opportunity to grow their wealth.
As Warren Buffett once said, “Be fearful when others are greedy, and greedy when others are fearful.” Perhaps it’s time to take those words to heart.