North Korean Missiles Are no Match for Buy-the-Dip Algorithmic Trading
Today's market action illustrates one of the biggest changes that has occurred in recent years. News events do not drive the market like they used to. News merely serves as a triggering event for trading strategies that are primarily focused on a combination of psychology and technical conditions.
Source: James "Rev Shark" DePorre
What occurred this morning is a good example of something we have often seen. The news that North Korea had fired a missile over Japan is unquestionably a negative event. There is no ambiguity about that -- but rather than cause anxiety and worry like it used to in the days when humans were placing their own trades, it was a trigger for preplanned trades.
The preplanned trade in the case is to sell index shorts (like I did) and to buy the dip. It is self-fulfilling to a large degree, but the folks that program the algorithms will continue to do what has worked until conditions change.
What many people don't recognize about this action is that the algorithmic trading removes emotion from the market. Traders used to always talk about fear and greed driving the action. Now the focus goes several levels beyond that. No longer is it as simple as "a missile equals bad news."
It is often argued that programmers are still human, and have the same emotion -- but the difference is that they have removed the emotional element by making the execution automatic. They are not sucked into the thinking that the guy on the street may engage in when he reads the headlines.
This strategic approach has changed market behavior more than anything else in recent years. It is why it has been so futile to try to predict market tops and why corrective action is so rare.
When a real correction finally does occur, it probably won't happen on an event like North Korea launching a missile. It will occur because the algorithms don't have a clear-cut news catalyst that they can buy.
To navigate this market effectively, you have to think about news events in a different manner. They are no longer inherently good or bad. They are merely triggers for certain patterns of technical action.
The indices are trading in positive ground and have shrugged off all the overnight news as I write. North Korean missiles are no match for computer algorithms.