Algos And ETFs Might Give Stock Pickers A New Life

Graph 3 – Micron stock price (from June 2016 to June 2018)

(Click on image to enlarge)

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(Source: Yahoo Finance)

In the 2nd half of 2018, when it became apparent that the Fed and the trade war were impacting the economy, traders started ditching cyclical companies. And, one good way to do it is by shorting semis. They have always been very sensitive to economic cycles, and now you can easily short them by shorting an ETF.

Graph 4 – Micron stock price (from June 2016 to December 2018)

(Click on image to enlarge)

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(Source: Yahoo Finance)

Basically, we were back to the 1st half of 2017 price levels. However, for Micron, the fundamentals were significantly better.

Conclusions

Once seen as a threat by traders and portfolio managers, algos and ETFs might be creating pockets of opportunities for stock pickers. The extreme and fast moves provoked by those tools, allied to the herd effect, seem to be creating huge divergences in the value/price relation.

Actually, algos might help stock pickers timing the market, by creating discontinuities. Released data, read by algos, tends generates trades that close value/price gaps or, sometimes, does the opposite. Stock pickers just have to do their research and wait for an opening to buy or sell.

On the other hand, ETFs create extreme herd effects. Sometimes, it works as a tide that lifts all boats. Again, that is an opportunity for stock pickers to separate the wheat from the shaft.

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