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Kass: Emotion Begets More Volatility


"It's not a market. It's an HFT 'crop circle' crime scene."

-- Zero Hedge

We live in an investment backdrop that is tortured by insane volatility.

The disproportionate influence of electronic trading, high-frequency strategies (based on price momentum) and leveraged ETFs (operating in a vacuum of de-risked and inactive individual and institutional investors) corrupt the markets by exacerbating price trends (both up and down). These exaggerated moves tend to obscure any sense of fair market value at any given point in time and too often influence unduly our own investment behavior.

What Is a Proper Response to Manic Markets?

"Obviously the thing to do was to be bullish in a bull market and bearish in a bear market."

-- Edwin Lefevre (Jesse Livermore), Reminiscences of a Stock Market Operator

The game does not change and neither does human nature. So, how should the average investor respond to manic markets?

First, as I have consistently written, perma-bears and perma-bulls are attention-getters, not money-makers. When the roars of the perma-bears (within and outside of the media) sound the loudest (usually after a sharp market downturn) and/or the roars of the perma-bulls sound equally vociferous (usually after a sharp market ramp) and the fundamentals of the market and the state of the world's economies have not changed, consider buying when things look the worst and selling when things appear to be the best in the market. But, in the main, it usually pays to ignore both groups and to typically graze in between both of those extreme strategies. As to the media, listen to those in the press box and their guests playing on the field, but respond only after doing your own analysis.

Second, the investment mosaic is remarkably complex. Given that complexity and the likelihood of numerous economic outcomes, no single statement (e.g., bulls exclaiming that "stocks are good for the long run" or Cassandra clucking that "the sky is falling") should be taken seriously.

Third, even the most bullish investors should consider hedging strategies against a long book, given the tail risks from the last cycle, the structural headwinds and economic challenges (among other issues).

Fourth, even the most bearish investors should consider some long exposure, especially since stocks (regardless of the economic headwinds) are inexpensive relative to interest rates and have had a decade of neglect.

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