Some interesting factors that could magnify any sustained level of selling:
"The broad use of chart-based, trend-following, and momentum-driven trading and investing strategies is also likely to exacerbate the market's woes in the face of a sustained downturn. With fear a more powerful motivating force than greed, the herding behavior that such methods naturally encourage will likely create a snowball effect that will be hard for anyone -- either those diving in or those bailing out -- to resist.
Other modern risk-management methods and tactics will also fan the bearish flames once former long-term bull markets start coming apart at the seams. These include the widespread use of high-powered statistical and computerized models that measure and help manage risk exposure using data derived from recent market behavior. When trading conditions are serene, firms can take on more risk; if prices start swinging wildly, they must cut back on their exposure, which often means selling into a falling market.
In the past, corrections and full-fledged bear markets have been accompanied by significant price gyrations and converging correlations between different products, sectors, and markets. When that happens in an environment like we have now, where there are numerous large institutions with complex and highly-leveraged bets in myriad markets, it creates the potential for a seemingly relentless death spiral where selling leads to increased volatility, begetting further selling.
There is also the unsettling and potentially destabilizing fallout from the growing use of portfolio-based margining and risk management strategies. Aside from the sudden and unwelcome appearance of gaps between expected and actual risk of loss, rising illiquidity in some markets will force many participants to try and sell positions or hedge themselves in others that remain accessible, causing additional markets to quickly buckle under the pressure.
Another potential source of destructive energy will likely stem from capital flows linked to gyrations in foreign exchange markets, a far-reaching reassessment of trade policies in the face of slowing growth around the world, and the unwinding of global financial imbalances that are already at unsustainable extremes.
Moreover, during uncertain times, history suggests that investors tend to favor repatriating funds that are invested overseas, regardless of whether the decision makes sense in the long term.
Finally, a dramatic increase in outstanding derivatives exposure, especially in recent years, suggests that violent crosswinds associated with speculation, hedging, and unwinding will wrack the underlying assets. Formerly deep out-of-the-money and structural long-term derivatives positions that were once thought to require little oversight will suddenly demand active risk management, as will exposure taken on in more recent times. "
By Michael Panzer
http://www.safehaven...rticle-7101.htm
Is this what's making Xd concerned ?
Started by
nimblebear
, Mar 10 2007 12:44 PM
1 reply to this topic
