The Myth of Market In-Itself: Things That Matter #3, Pt. 2
November 9, 2017·0 comments·narrative
Markets are being levitated by an increasingly narrow band of investors, all behaving similarly. The investor archetypes that historically provided downside support and price discipline have vanished from the order book. What happens to prices when the only buyers left are all trying to sell?
- Value investors have abandoned the market. Sell-side research no longer pitches bargain opportunities. Even quantitative funds have migrated toward hybrid strategies that downplay valuation entirely. The largest structural bid under falling prices is gone.
- Mean-reversion traders are being crushed. Selling winners and buying losers has become a one-way trade to losses. The participants who would normally step in to catch falling knives have largely withdrawn. When panic accelerates downward moves, there's no relief bid.
- The only participants left are growth believers, momentum followers, and passive buyers. They're all moving in the same direction. Pension plans with unfunded liabilities have no choice but to chase returns. Broad-market index investors add no opinion on individual prices. Growth narratives drive everything.
- The order book is emptying of sellers. No one is confident enough in valuations to sell into strength. No one expects mean-reversion to work. The only way prices have fallen has been when forced selling occurs. Between those moments, nothing resists upward pressure.
- When growth narratives break, there's no one to catch the market. Every market needs participants who think prices have gone too far. That group has been surgically removed. The question isn't whether the current dynamic is sustainable. It's what happens when the beliefs supporting it crack.
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