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August 28, 2015 at 11:57 AM
Here’s a bit of role reversal for you: Mom and Pop were content to ride out the market’s volatility this past month, more or less sitting tight. Meanwhile, the pros were driven to the point of near panic.
What was all the fuss about? Take your pick. Perhaps the China slowdown will cause a global recession. Maybe the Federal Reserve is going to raise rates and kill the bull market. Oil prices might fall too far, destroying emerging markets. Or the U.S. economy is about to go belly-up.
Whatever the fear was, someone was there to give it voice. The downside of the Twitter era is that everyone has a megaphone, and any lack of wisdom of insight is no deterrent to broadcasting it. This month, that described Wall Street and not Main Street. It was the pros who lost it.
Source: Bianco Research
Start with hedge funds. After missing a generational rally in which the Standard & Poor’s 500 Index tripled, hedge funds finally began going long U.S. equities — just before the China trap door swung open. The Wall Street Journal reported that many funds got shellacked this month, giving up all of their year-to-date gains in a week. Bridgewater, Omega, Third Point and Pershing Square all took a beating, but only Omega seemed to be positioned to capture the bounce-back rally (note that I am not objective, as you can hear in my Masters in Business podcast with Omega founder Leon Cooperman).
Beyond the hedge funds, the algorithmic traders seemed to have run amok as well. It is a natural human response, to borrow from Daniel Kahneman’s book “Thinking, Fast and Slow,” to react emotionally first and logically second. However, no one can think faster than a machine, and the algos managed to engage in some very fast, and what looked like emotionally driven trading. As we saw this week, that sort of behavior was amply punished. My colleague Josh Brown summed it up in a post, “Computers are the new Dumb Money:
“You want the box score on this latest weekly battle in the stock market?
“No problem: Humans 1, Machines 0
