Stock Watchers: Beware of Lash - The Washington Post

If you want to see what whiplash feels like, you do not have to chase after a car accident or fall down a flight of stairs. Instead, you can just watch the stock market.

Let me explain. During the five-week period from August 29 to October 3, the four key market indicators – Standard & Poor's 500 stock index, the Dow Industrials, the Nasdaq Composite and the Wilshire 5000 – all peaked. The market gods showered investors with money.

Sure, interest rates rose and there were signs of other problems. But optimism prevailed. The shares rose and would continue to rise.

Until they were suddenly not. Shortly after the Dow reached its peak on October 3, stocks fell and continued to sink for weeks.

The main reason for the decline was mentioned. , , rising interest rates. Interest rates had risen in advance – but no matter. Suddenly, rising interest rates – especially rising long-term interest rates – were seen as a major problem.

Donald Trump shook his head in mid-October, accusing the Federal Reserve's short-term rate hike for the market's decline. (I will spare you the explanation why the Fed Fed Fed rate hike is likely to benefit the stock market by pushing long rates down. For details, please contact your local market guru.)

When the markets closed on Halloween, the frightening fall in October erased share price gains for the year. Many investors felt almost tormented. The fear reigned.

There has been talk of a "correction" everywhere. For those of you who do not speak a stock market, a "correction" (more later) is a 10 percent or more decline from a market peak. It is a completely random measure, based on nothing scientific or financial.

Now look. According to the data that Wilshire Associates put together for me, in October all four key market indicators were hit by "corrections". The decreases between the peaks were between 10.1 percent for the Dow and 14.6 percent for the Nasdaq.

I do not know about you, but as an English major who also acts as a grammar wheel, I'm irritated by the way that "correction" is used – or rather abused. It's like scratching fingernails on a blackboard. (If panels are still available.)

"Correction" is nothing but a euphemism for "significant price erosion". Market news at the end of October often included the mention of different markets that were in the correction range on a given date or time – as if that were in and of itself important.

That's why I'm so skeptical about the term. After a "correction", stock prices are probably right, right? So, answer me the following: If the Nasdaq composite at some point is 14 percent below its all-time high and is in correction mode, does that mean that its current level is the right one? If so, was the Nasdaq's earlier higher price a mistake? Sure, these are rhetorical questions – but good ones.

"Personally, I do not believe in these artificial milestones of" correction, "but much of the market does," says Wilshire CEO Bob Waid. "So part of it can be a self-fulfilling prophecy."

Now let's look at what has happened so far this month. The stocks increase since November. Suddenly the "correction talk" has disappeared. Now let's look at a "rally" after the correction. This is not called an "error".

At the close of the market on Friday, the four market indicators rose between 1.4 and 3.5 percent. A total reversal from October.

Of course, you have seen stories that reflect Wednesday's strong market rise, which accounts for a significant portion of the November rise, for Tuesday's midterm election results. But that does not make much sense to me because the results – the Democrats took control of the house, the Republicans slightly increased their lead in the Senate – pretty much what was predicted.

In a world where people – especially the people in and around the capital of our nation – have been obsessed with the medium term for months, it is natural to attribute everything to the election results. To de-genderize the old Mark Twain line: For someone with a hammer, everything looks like a nail.

How do I explain why the markets are so whiplashy? I think, but I can not prove that much of this is related to the fact that most stock exchanges today are not made of people trading with each other but with computers that use algorithms to swap stocks at extremely high speeds ,

As a result, equity holdings continue to rise as stocks rise. And when they go down, they tend to continue downhill.

From what I know, the up to then down-down-heavy rally market that we've seen in the last 10 weeks can go back down. Or go up at warp speed. Whiplash City, here we come.

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