What goes up must come down -- but does it have to happen so all-fired fast?
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Yesterday, shares of industrial heavyweight General Electric (NYSE: GE) shot up 6.8% -- not in response to any particular news of note but simply pulled along by a broad-based rally in stocks Wednesday. Today, those same shares of General Electric stock are down 5.5% (as of 2:35 p.m. EST) -- and again, on no real news.
Does this seem strange to you? Perhaps it shouldn't.
As The Wall Street Journal reported earlier this week, one of the big developments this year is how stock market investing based on valuation and analysis of business prospects has been largely replaced by "algorithmic" trading in which "machines, models, or passive investing formulas" determine how computers will buy and sell stocks. Such automated trading programs now control roughly 85% of stock trades on the market, says the Journal, resulting in large moves in stock price whenever "an unprecedented trading herd" decides to move in a new direction.
If you ask me, that seems to describe perfectly the rapid, heavy buying of General Electric shares on no news that we saw yesterday -- and the equally rapid sell-off of GE shares today.
Most individual investors lack access to the supercomputers necessary to participate in high-frequency, algorithmic trading -- but that's not necessarily a bad thing. On the contrary, forced by necessity to not participate in this phenomenon, patient investors may actually have an advantage when we instead buy what we know and only buy when the price is right.
How is that? Think about it. Algorithmic trading is likely to remain very popular on Wall Street, all the way up to the point at which something goes very seriously wrong with it and hedge funds start losing money (as they have these past couple of months). When that happens, chances are good that stocks will once more trade based on what they're worth and not simply because a computer has noticed they're going up or down.
As disconcerting as GE's sudden stock movements this week may feel in the short term, in the long term, I think they'll prove to be of benefit to investors by shaking Wall Street's faith in its algorithms and reminding the "experts" that valuation still matters.
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