- Written by Sara Nunnally, Editor, Inside Investing Daily
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It's not automated trading you should fear. It's the faltering economy that's worth worrying about.
Did you catch the headlines yesterday about the Wall Street glitch?
Here's the skinny.
Markets were waiting for the Fed announcement when a technical glitch struck. From Reuters:
The run-up to the Fed statement was overshadowed by a spike in volume and volatility in some 140 New York Stock Exchange stocks shortly after the market opened due to a "technology issue" at market maker Knight Capital.
Knight (KCG) said in a statement it was advising traders to execute their trades elsewhere and its shares tumbled 32.8% to $6.94, a nine-year closing low.
This was all supposedly connected to high-frequency trading -- computers placing trades at a rapid pace may have triggered the unusual volume spikes. There were 7.26 billion shares traded on the major U.S. exchanges.
The average volume on the NYSE, NYSE Mkt, and Nasdaq is only 6.74 billion.
These kinds of "technology issues" highlight that the "art" of investment is dead... and when computers mess up, they mess up big time.
Luckily for the broad markets, this issue was contained, unlike the Flash Crash two years ago that erased 1,000 points on the Dow within minutes. But that doesn't mean investors aren't all the more wary of Wall Street.
(Though KCG is in a lot of hot water... It lost $440 million because of the glitch, and is now looking for financing to put much-needed liquidity back into its capital base.)
If you're one of those investors, let me tell you... It's not the technical glitches that you should be worried about.
It's the actual economy.
The Fed has said our economy is "decelerating somewhat." That's a big change from "expanding moderately," which the Fed announced only a month ago.
And Europe is headed up the creek, perhaps at an even faster pace than we are.
Today the ECB needed to step up to the plate or risk sending Spain and Italy deeper into debt. Bank president Mario Draghi already said he'll do whatever it takes to support the euro. And on the table were interest rates and buying bonds.
Draghi kept interest rates at 0.75% -- the lowest they've ever been, but promised to make bond purchases, said a Reuters report.
From Draghi's statement:
The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective.
The Governing Council will consider further non-standard monetary policy measures according to what is required to repair monetary policy transmission. In the coming weeks we will design the appropriate modalities for such policy measures.
Here's the problem. Markets were expecting more... Or at least something faster than "in the coming weeks."
For most European markets, this was a punch in the face. Just look at all the red:
Futures on the major U.S. indexes were mixed after the news... the Dow down and the S&P 500 and Nasdaq up.
With this much pain on both sides of the pond, worrying about technical glitches seems a bit like worrying about checking your email while your house is on fire.
I've showed you this chart before:
This is the S&P 500 for the past five years with the Federal Reserve interventions that have propped up the market.
And this is the S&P 500 now.
The index is flirting with resistance at about 1,400. And the Fed didn't announce another round of stimulus in its announcement yesterday.
This was expected, but in a paper-driven rally, not good news.
Think the Fed will hold the line if we dip back into a recession? I don't either.
"The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed," said the Fed statement.
Whatever that accommodation is, you can bet that any support it gives to the market will be fleeting.
And that's what investors should really be scared of.