Before Monday, you probably never heard of Chinese property developer Evergrande.
But a $300 billion debt crisis at the firm plunged global stock markets into chaos.
On Tuesday, Ted shed light on how the Evergrande debacle and China’s lurking real estate implosion are causing concerns. That’s why it was even referred to as China’s “Lehman” moment.
The Dow fell as much as 971 points as Evergrande turned into a household name.
Fast-forward to today, and those losses have been completely erased. Suddenly, Evergrande doesn’t matter anymore!
Trying to stay one step ahead of this market is enough to make your head spin … unless you understand the unseen dynamics that are driving the rapid ups and downs lately.
It has little to do with Evergrande.
Rather, there’s an obscure corner of the stock market that has flown under the radar, but has grown to become a dominant force.
As an investor, the dangers it poses to you are very real.
Humans Are No Longer in Charge
I came across an interesting figure from Statista over the weekend. It shows in the chart below that computers now manage more money in the stock market than people do:
(Click here to view larger image.)
Of the $31 trillion in U.S. public equities, automatically managed funds make up the largest portion of money management at 35% or $10.8 trillion!
Quant investors have quietly taken over asset management. Now these computer-driven strategies come in all shapes and sizes.
But the algorithms that fuel such strategies are built for speed and recognizing a stock market dislocation before the rest of the crowd is one path to profits.
Let me give you an example: There are quant strategies that seek to minimize price swings in their portfolio. So, when things get dicey, their algorithms automatically sell.
By one estimate, Monday’s volatility could create as much as $40 billion in selling pressure among the quant crowd. Their selling creates more price swings, which leads to more selling … you get my point.
It’s why sudden cascading declines in the stock market, like the one we saw on Monday, have become more common. The sudden speed of the sell-off looks like a waterfall on a chart.
And guess what? Those same algorithms work in reverse. A collapse in volatility leads to a surge in buying pressure, which is exactly what we saw later in the week.
But instead of trying to predict which way the machines will move the market, there are ways to leverage computer-driven trading to your advantage. Here’s one way to make the machines work for you.
How to Beat the Machines at Their Own Game
In order to put money to work, quants scour the stock market in search of alpha factors.
Quants have proved these metrics pinpoint outperforming stocks through decades of research and application. The thing is, there are hundreds, if not thousands of them.
They include things such as stock price momentum, value and profitability figures. And the good news is that you can tap into the profit potential of these factor strategies with exchange-traded funds (ETFs).
To start, check out the QRAFT AI-Enhanced U.S. Large Cap Momentum ETF (NYSE: AMOM). It operates on the next frontier of asset management. It combines artificial intelligence with factor-based investing, which is how you can stay one step ahead of the quants.
Research Analyst, The Bauman Letter