A few clients have asked me about the recent stock market volatility in the broader market in general and with a few select stocks in particular which contain a high amount of short interest (such as AMC Entertainment and GameStop). As such, I thought I would share my reply with everyone as you may be interested in my thoughts and our strategy going forward.
We have a very few clients who always call or email when the market sells off asking what we should do and why it is happening. The honest answer of course is that the stock market is declining simply because there are more sellers than buyers when panic sets in and investors move to the exits. There doesn’t have to be one specific reason - particularly in today’s algorithmically driven market. There is a proliferation of passive ETFs and mutual funds which are driven primarily by large growth/momentum stocks (i.e. FANG – Facebook, Amazon, Netflix and Google) which have begun to sell off from high valuations. When fear or greed overcomes the market, stock volatility is exacerbated as mathematical algorithms hit certain levels driving sell or buy signals. Thus, selling by computers begets more selling and in the reverse, buying can beget buying.
The past week has continued the recent pattern of extreme volatility this year with major indices again moving into negative territory year-to-date. Though I will publish the more comprehensive market and economic quarterly newsletter soon, I thought I'd share a portion of the chapter on Media Madness from the book I'm currently writing. I hope you find the snippets from the chapter more useful than the "experts" shouting advice encouraging you to take rash action.