VZ - The Markets Speak: The Herding Effect Remains Strong

2023-07-20 09:09:29 ET

Summary

• The herding effect continues to be the main driver of the market.
• Capitalize on investment trends caused by herding behavior.
• Avoid existential risks from potential competitors.
• Choose the ultimate "picks and shovels" play instead.

Algorithmically modeling the herding effect is key for index investors who wish to capture upside moves in the market, while avoiding bear markets.

The natural herding effect of investors is strengthened by Federal Reserve gambits to inject and to withdraw liquidity from the financial system. Heavy-handed central bank moves to inject and to withdraw liquidity often overwhelm the effect of economic fundamentals on the financial markets.

Market participants focus on explicit Federal Reserve policy decisions. However, day-to-day open market operations, in which the Federal Reserve buys and sells bonds on the open market, are just as important.

These open market operations also create trends, or serial autocorrelation, in the direction of asset classes. Trading by the Fed itself in the bond market further strengthens the herding effect. The Fed literally moves asset prices through heavy-handed buying and selling through the central bank's own trading desk.

In addition, popular narratives around technological progress and societal change also fuel the herding effect.

We can see examples of this in the internet bubble of the 1990s and subsequent bust in 2000, the great financial crisis of 2008-2009, and the current focus on society-changing advances in AI.

These popular narratives can create multi-year booms and subsequent busts, further strengthening the herding effect in financial markets.

Over time, the interplay of these variables creates a massive herding effect.

For index investors, understanding whether the herding effect is creating a bull or a bear market determines the winners and the losers of the game.

Algorithmic methods can often sniff out important statistical footprints which allow us to identify when the herding effect is causing financial markets to rise or to fall.

The Zomma Directional Algorithm is designed to capitalize on trends that emerge from the investment flows caused by herding behavior.

Here's how to understand the visualization:

1. When line turns green, it signals a buy.

2. When the line turns red, it signals a sell and a move to cash.

Note: The algorithm is not designed to create short signals.

The algorithm takes advantage of trends created by the flow of investment dollars created by the herding effect.

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The herding effect continues to be the main driver of the markets.

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