Many times I have commented about the outsized influence ETFs and index funds have had upon the markets, further stating it appears the only manner to have any return is to be a closet indexer. I have cynically written if mindless passive investing is the pathway to riches, all would be gazillioneers.
Yesterday I read an interesting Goldman Sachs’ note stating around 83% of the volume of a smaller company is the result of indexing. There is no thought, just purchasing the company to ensure the proper weighting of that company in the portfolio as compared to the index.
There is no real thought or geopolitical/macroeconomic analysis made before purchasing.
It is my firsthand experience of almost thirty years in the industry when everyone is doing something to chase returns, a change is imminent.
Many times I have been asked what makes a stock go higher. I typically answer “more buyers than sellers.” Conversely I have been asked what makes a stock go lower. I answer “more sellers than buyers.”
The last 14-16 months have been difficult unless one was a closet indexer. As stated above, I believe a change is imminent where individual research will eclipse the returns of indexers by a wide margin under the simple premise of more buyers than sellers in the typical security.
Several weeks ago I referenced a Fundstrat Global Advisor stating the dispersion or variance or returns for individual stocks have not been this wide since 1979.
Again referencing yesterday’s Goldman note, through March active managers have topped the performance of the indexers for the first time since 2012.
Changing topic, albeit perhaps in some relationship to indexing, I have been following the arrest of the person now believed to be pivotal in the flash crash of May 2010. Many times I have commented about the overdue influence of algorithmic trading upon the markets, carefully avoiding the word “manipulation.” In my view algorithmic trading is just an extension of computer based indexing.
The accounts that I have read reading up to his arrest are disconcerting. It will be interesting how market trading technicalities are modified to restore confidence.
Commenting about yesterday’s market action, equities rose on earnings and economic optimism, led by the energy perhaps the result of increasing Middle East tensions. Treasuries fell on signs that the economy is shaking off weak first quarter data attributed in part to a brutal winter across the US.
Last night the foreign markets were down. London was down 0.06%, Paris down 0.99% and Frankfurt down 1.33%. Japan was up 0.27% and Hang Sang down 0.38%.
The Dow should open moderately lower as several high profile companies posted disappointing revenues and earnings. Moreover there was a weaker than forecasted manufacturing data from China and Europe. The 10-year is 5/32 to yield 1.97%. Oil is flat.
