“Smart” Computers are Turning the Stock Market Upside Down

The DOW triggered by a French Bank citing U.S subprime mortgage issues free falls 380 points and two homebuilders Beazer Homes (BZH) and Hovnanian Enterprises (HOV) go up 10%.  Often stocks up on down market days are signalling good news ahead.  What kind of news could be on the horizon for homebuilders? Maybe they will set a record for the most unsold homes in history.

I don’t know how it is in your town, but in mine new houses are still going up left and right.  Hello homebuilder CEOs – stop building houses.  How about taking an economics course.  There is this new concept called supply and demand that you should learn about. 

Obviously the stocks weren’t up on good news, but were up on some bizarre behavior by quantitative hedge funds.  According to an article in the Wall Street Journal, “Behind the Stock Market’s Zigzag,” quantitative funds are funds that rely on computer models to pick which stocks to bet on and which to bet against.  They have been liquidating positions to raise cash.  They sold stocks they liked forcing prices lower.  For the stocks they sold short, the opposite occurred; to exit those positions, they were forced to buy.

“A massive unwinding is occurring,” says Tim Krochuck, managing director of GRT Capital Partners.  Buying and selling by hedge funds are “pushing those crummy names higher, and pushing the names you like lower.”  Do you think these are the same computers telling the homebuilders to keep building houses?

Believe it or not there are roomfuls of Ph.Ds writing the computer models for these quant funds.  This is sorta like revenge of the nerds. 

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