Skip to main content

A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.

Markets look set for a big jump higher today, but while that would be welcome, investors should remember that big moves in either direction indicate a lack of market health.

That said, things look far more stable. Goldman Sachs has published research showing signs that energy markets have fully capitulated and the worst of the selling is over. The big game now starts at 3pm – "Who's confident enough to be long over the weekend?"

"Potential signs of capitulation in options markets " – Shareville, finansakrobat

The indispensable behavioural investing blog Psy-Fi made an important point about this week's volatility; investors who want to understand what happened should hold off on believing any tidy, explanatory narrative for as long as psychologically possible.

"Markets [were] falling because they were a bit overpriced and investors were ignoring the fact because they'd got themselves into a typical feeding frenzy, ignoring the risk and ambiguity that are always present. Now that they have recognized the issue they're fighting each other to get out the door. Which is why all of the explanations for market weakness are entirely plausible and entirely wrong – they're an example of what Nassim Taleb calls 'the narrative fallacy.'"

"Facing down the narrative fallacy" – Psy-Fi

Hedge fund manager Conor Sen published a compelling corrective for U.S. market panic, noting that economic data is more positive and stable than it's been for a very long time. Mr. Sen notes:

"The challenge for portfolio managers in 2014 is that you'd be hard-pressed to find a five year period in U.S. history where the economic trajectory was more stable. Real GDP has generally grown between 2-3 per cent per year. Inflation has been in the mid 1 per cents. Job growth has been remarkably stable, averaging 150,000-225,000 per month. Profit margins have been stable for the past few years, and overall earnings growth has been, I don't know, 5-8 per cent a year. Monetary policy has been ultra accommodative. Fiscal policy has been…consistent in its level of frustration."

"The economy is getting more stable, financial markets are getting more fragile " – Conor Sen

Markets look a lot more stable but there's two reasons why investors should remain cautious. The first is hedge fund carnage, as futures trader Kevin Ferry noted yesterday:

"We are to believe that a sudden 100 [basis point] shift in … Eurodollars over a month and a 450,000 drop in open interest – IN A DAY! – resulted in no [portfolio] damage to anyone. We are going out on a limb here..Somebody got hurt…BAD. We'll find out who and how bad over the next few months. "

Hedge fund liquidations are not guaranteed but we learned from Long Term Capital Management that a big, leveraged hedge fund in trouble can quickly become everyone's problem.

"What just happened?" – Ferry, Contrarian Corner

See Also: "Fears that PIMCO and other big firms could be unable to unload risky bonds " – NYT Dealbook

The other reason for investors to stay attentive is that the technical analysis-focused traders, and they are legion, are freaked out. As I've mentioned before, it doesn't matter if you believe in technicals or not, there's enough people who do believe to shove even major markets around in the short term.

"The most significant trendline in equity land = BROKEN" – (The new) Yahoo! Finance

Tweet of the Day is from @lebullmarche "43 straight weeks of inflows to IG bond funds $5.6bn 7 straight weeks of outflows from HY bond funds $2bn via BAML pic.twitter.com/jc8pljp3HW"

Diversion: Using Ebola as an example, George Mason University economics professor Tyler Cowen highlights a fascinating study on the juvenile screaming match that modern political discussion has become.

"Five case studies in politicization" – Cowen, Marginal Revolution

See Also: "The wrong lessons of Iraq" – The Last Psychiatrist (2007)

Follow Scott Barlow on Twitter @SBarlow_ROB

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe