Market Commentary for the week of June 13, 2011

Men versus machines.

I was talking with a client last week who asked me to “explain” the tremendous volatility in the markets recently.  Naturally, I referenced my writings about secular bear cycles, short term rhythms and psychological uncertainty.  But, more importantly, it needs to be noted that market trading is driven more and more by machines talking to each other triggering buy and sell orders that are algorithmically pre-programmed.  Gone are the days of floor traders executing the specialist’s book, doing favors for each other by hoarding positions and “working the bid.”

Today’s syncopation is well orchestrated and devoid of human response or emotion.

Machines aren’t the enemy, however.  They are simply the new reality.  As the burden of making trillion dollar bets shifts from man to machine, greater efficiency and lack of peer pressure gives the markets a new benchmark of necessary change.  Statisticians are the new floor brokers.

Similarly, the public has come to understand that massive shifts in capital cannot simply be left to clerks wearing green eyeshades.  Today, complex computations can be done in milliseconds, eliminating human error and accelerating timelines for execution strategies.

Thus, markets gyrate more virulently.  The paradigm, the culture, the symbolism is not lost on those who yearn for a simpler time.

Click, tick, pick.

But changing the timeline hasn’t changed the underlying fundamentals of good research, nor has it changed the tectonic pace at which secular events occur.  There are still only 24 hours in a day, kids still graduate at 18 years of age, spring still follows winter, and, lately, gasoline prices still refuse to come down.

In other words, secular patterns stay the same while cyclical patterns multiply and accelerate.

This is still the reason why I outperform in good and bad markets.  Asset allocation amongst leading market trends always hold me in better stead than simply chasing, or trying to chase, individual stock selection criteria.  When building portfolios for client consumption, longer-term horizons diminish the impact of panic, or manic, attempts to convert the “big score” based upon what the markets did yesterday.

Complexity vs. simplicity.

Few things are more daunting than trying to time the market.  Instead, it lessens one’s anxiety considerably to ignore the machines and to embrace a methodology that relies on certain constants, not variables, that describe asset allocation as a process, not a click.

Reducing the potential for failure and underperformance can impact positively upon results and peace of mind.  In a climate of suspicion about machines and their infallibility, it is certainly wise to widen the aperture of analysis to accept that until winter follows spring, certain immutable truths cannot be improved upon simply by writing an efficient algorithm.