It’s Not You, It’s The Machines

About 70% of the trades in the US stock market are made by computers. That means that there are many computer programs that automatically buy and sell stocks everyday without human intervention. The programs take in a variety of inputs such as the news, analyst reports, financial performance, economic data, etc. and then make a judgement call on whether to buy or sell, go long or short.

Humans do enter some of the trades manually and occasionally make a ‘fat finger’ mistake. But a large proportion of the price movements in stocks is due to the automated trades by the computers. So the job of many smart analysts when they wake up and see the price movement of stocks is to try and explain to the rest of the world why it has gone up or down.

It’s easy to be distracted by the daily financial news. But one should not ignore structural changes that can affect all stocks or stocks of particular sectors. One such structural change is the clear slow down of China’s $12 trillion USD economy from about 6.6% in 2018 to 6.4% in 2019. A 0.2% drop in China’s GDP is a drop of $240b which is about 80% of Malaysia’s entire 2017 GDP. It’s not an easy gap to close.

The other structural change is the fact that money printing by central banks have stopped. The US has in fact started to reverse the effects of their earlier money printing efforts since October 2017. Up to $50b is being removed from the US financial system each month. That makes $600b a year.

China’s economy slow down, coupled with increases in commodity raw material prices puts pressure on many industries. This leads to their lower profitability and drops in share prices. And with less money in the financial system to support the share prices, the stock prices will continue to fall.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.