Why the stock market prices make less and less sense as indicators for anything …
Even several years ago, a friend of mine proudly told me that the only way he is trading shares is through a bank that is into Algo Trading. All you have to do is buy and sell according to a strict algorithm (system) based on the stock price deviations. You have to take into consideration all papers listed in the DAX, sorted according to their relevance. The only thing that is important is to avoid action based on speculation at all costs.
Basically, using this method you can – mathematically spoken – never loose and only win, because, regardless of fluctuation, in the end the stock market prices will always climb eventually. And if there is really a total collaps, then all is ”gone“ anyway. To me, this looks strikingly logical.
Except that now I read that currently more than 50% of the turnover at stock markets is based on algo trading. And then I keep reading all the things they interpret into the stock market. The US rating, the business numbers from who-knows-where, the speech by a politician, the situation in the European “debtor’s countries”. …
For instance, this morning, I read [ARD]:
Steuerpläne treten Verkaufswelle los
(Tax Plans Start a Sales Wave)
Plummeting GDP data in the Euro zone, weak data from overseas and a disappointing summit meeting in Paris caused the DAX to fall considerably this morning …
Except – this cannot and will not play a role for algo trading. According to my logic thinking, however, it means that the entire stock price evaluation is now nothing more than rhetorical fantasy and that stock market prices no longer have anything at all to do with reality. Because algo trading develops a totally new – let us call it – “mathematical reality”. And, like all that is systemic, this will probably tend towards developing a life of its own and then replacing reality.
So here is my advice:
Enjoy your speculating!
But count me out.
RMD
(Translate by EG)
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