Sunday, October 12, 2014

Stock Market: Ignore The Herd

(Drivebycuriosity) - Last week the volatility raised her ugly head again: The S&P 500, the gauge for the US stock market, had its worst week since May 2012 and dropped 3.1%. Hedge funds and other speculators dumped anything which seemed risky.

If we believe the media the selling was caused by fears about the global economy, caused by the stuttering euro zone, and speculation that the Fed might rise her interest rates to soon.

I think that these fears are overblown. The global economy is stronger than the fear mongers want us to believe. Solid growth in the US and in China should compensate Europe´s weakness. I presume that Europe will recover sooner than the pessimists think thanks to the lowered Euro (against US-Dollar), cheaper oil and a more accommodative monetary policy by the European central bank (driveby).  I also believe that the Fed will hike her interest rates very cautiously without endangering the profit growth of the companies which is the engine of the stock market.

I assert that last week`s sell-off was just another evidence of the typical herding behavior of the hedge funds (and those who follow them). Those speculators buy and sell the same stocks, at the same time, and track each other's investment strategies. Some speculators took money from the table (the S&P 500 had a return of 220% - including dividends - since spring 2009, the begin of the bull market scottgrannis), causing others to sell too (snowball effect). I guess that the herd will return soon encouraged by climbing company profits and the ongoing growth in the US & China.

I believe that the turbulences of the recent days are just noise and will soon be forgotten. Ignore the herd.

No comments:

Post a Comment