Stock Market not a Market of Stocks

So I was trying to explain why my positions have been mostly short lived to one of my clients and we got into a discussion on investment theory and whether or not I see Value Investors as Dinosaurs. My response was "yes". The reason why I feel we are in a a period where Long term asset management must be accomplished through short term methodologies is due to one main reason and that is the header of this post; we are part of a Stock Market and not a Market of Stocks. In the old days (ie 10 years ago) institutional and retail order flow would dictate whether an individual stock would rise or fall on any given day. Each stocks rise and fall was then arbitraged out via buying or selling the index, thus creating a Market of Stocks. Enter Henry Paulson and his back room dealing with the US Govt. allowing investment companies to take on massive leverage. Why lever up on individual securities when you can take that leverage and apply it to an already leveraged product like Futures? the answer is you wouldn't. Combine it with advancement in computing, programming, electronic exchanges and a high speed connection and buy and hold is a thing of the past.

So you get what we have today where once it was stocks order flow that determined the index's pricing we now have the futures trading programs that push the market and in turn computer programs designed to take advantage of discrepancies in prices in the individual stocks react accordingly (basket trading). What do you get? Extreme moves in every individual security, not because there is a fundamental change in those individual security, but because stocks are now a 1st or second derivative of futures trading.

We have seen this in the near-perfect correlation the markets traded with the dollar, yen, or euro, depending on what monetary instrument the computers decided to implement during that trending attempt.

Even the indicies have been trading at extremes. Just look at the # of 200+ moves in the dow over the last couple years.

In the data above going back almost two-and-a-half years, the Dow was up 200 or more points on 52 days and down 200 or more points on 73 days. For those still long U.S. equities, my guess is that stocks are a lot like the game of golf – you remember the far less common really good days (or golf shots) much more than you remember the more frequent bad ones and, over long stretches of time, most people see little or no overall improvement.

Buy and hold doesn't look that attractive now does it?