Just because the markets rallied yesterday doesn't mean we're letting go of the sell-off of the previous week. Sure the Dow was up 319 points. But that's still less than half of what it lost in the previous four sessions. The skeptics of our theory of a quant sell-off last week persist in the view that the coordinated movements across many markets was simply the aggregate results of many independent decisions by investors, and not a cascading quant fund effect along the lines of what we saw this past summer. The quants have wised up, they insist. They have new strategies, and aren’t all following the same path like so many ducks in a row.
We suppose there’s some sense the theory that the humans running quant funds and the super-powered computers they work for are smart enough to have adjusted their portfolios—and to have done so in ways different enough to not leave them vulnerable to another cascade. But last week’s sudden fall in tech stocks, mixed with a sell off in the broader US equities market and a dash of upside in widely shorted stocks certainly raised eyebrows.
And it wasn’t just US stocks. Monday saw a saw sharp reversals for gold and oil, and emerging markets declined. The yen is still rallying. So what is going on? John Authers of the Financial Times thinks the quant cascade theory gets it right. It’s far more likely that the similar move in so many unrelated markets were caused by shifts in the trading books of quant funds, he says.
But don’t take our word for it. Watch his Financial Times video segment here. (Hmm. Second video link of the day. Seems to be a trend. Maybe we should go for three videos to start off the morning.)
Reversal In Market [Financial Times video]
Posted by Quant Crazy, Nov 14, 2007 10:16AM
Muni bond market is also part of the crowd. Notice that in August munis got hit while the rest of the bond market was up. Now in the latest shakeup, munis also got hit, though less severely, relative to the rest of the bond market. It looks like this week things are back to "normal" but who knows.