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Market reflexivity – 8 reasons for the market selloff

Over the past two weeks, we have witnessed one of the sharpest and fastest selloffs in the history of global financial markets. The euphoria of January was replaced by a huge panic.

According to the theory of reflexivity of one of the biggest stock speculators – George Soros, market participants themselves directly influence the market principles and their irrational behavior leads to booms and busts that provide great opportunities for investment. Prices are influenced by the continuous feedback between the thinking of market participants and the economic realities they all observe.

Leaving aside the global crisis surrounding the coronavirus pandemic, the main causes of the market crash are:

  1. Market volatility
    The reason that there is such angst in the markets, is because the speed at which this ‘correction’ (or do we now say bear market) has happened. It is the fastest bear market in history
  2. Fear from the uncertain
    The rates on increase across other countries (outside China) are still increasing– so the fear of the unknown is gripping mkts & people.. Italy first Spain & now other European countries going into lock down (and closing their borders) adds to angst.
  3. Fear from the past
    There is a fear that we could see a repeat of 2008/ 2009 as panic selling puts untested pressure on these new complex leveraged ETF’s. Then as the market goes lower, there are margin calls (forcing more selling), then the ETF’s need to sell more (forcing more selling), moving averages & trend lines all get broken (forcing more selling), then we see that economic activity & earnings are now all going lower (forcing more selling). With all that – hysteria then takes over & more think they also better sell now before it gets really bad.
  4. Market algorithms
    ETF’s are meant to be “passive” when markets going up, but as soon as they drop at a rapid rate, the machines switch into sellers – which then can cause more redemption’s– which fuels even more selling.
  5. Emotional players
    With new real time trading – where you can trade from your phone while sitting at a café or while doing the shopping – means the reactions can be far more immediate to events, as they unfold. Thus when they see the mkt dropping fast they just join in the selling.
  6. Black gold
    The collapse in oil prices adds further sales pressure.
  7. Risk management
    Value at risk (VaR) has been causing selling as those trading desks now manage their risk (better than they did in 2008, where some were wiped out as they did not follow this as they do now) so as mkt falls they need to sell to reduce the risk.. So that too has added to selling as well. VAR is a measure of the risk of loss for investments. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. VaR is typically used by firms and regulators in the financial industry to gauge the amount of assets needed to cover possible losses.
  8. Economic pressure
    The multiple fears of an economic global recession add to the fear of the markets.

During the week, leading financial institutions have made it clear that they have the will and the means to fight the economic impact of the pandemic. Having learned the lessons of the crisis in 2008, their response was timely and adequate.

Investment portfolios are expected to re-balance next week due to the end of the month. It is very likely that stock purchases will be overstated, as bonds are currently outperforming in investment portfolios. The expiry of options and futures on stocks and indices today should also calm the market and give it a positive boost.

We have yet to see the outcome of the measures taken, with financial markets as always going to be the source of future sentiment.


 Junior Trader Radi Djuma


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