Home / Archive / As Dow Jones Rallies, Trading Bots Tell Investors to Short Everything

As Dow Jones Rallies, Trading Bots Tell Investors to Short Everything

Last Updated March 4, 2021 3:18 PM
Samantha Chang
Last Updated March 4, 2021 3:18 PM

The Dow Jones Industrial Average is rebounding, but computer trading bots are alerting investors to short everything.

Trading Bots Suspicious of Dow Winning Streak

Kathryn Kaminski alphasimplex
Kathryn Kaminski (AlphaSimplex )

According to quantitative investment firm AlphaSimplex, algorithmic trading bots suggest shorting three major asset classes: stocks, currencies, and commodities.

“Pretty much any way you run the models, you end up net short a lot of asset classes,” Kathryn Kaminski told the Wall Street Journal. “This is like the chaos bet.”

Kaminski is the chief strategist at AlphaSimplex Group in Massachusetts. She says the last time the trend-following computer trading bots reversed positions so dramatically was in 2007 and 2008.

According to Kaminski, the algo trading bots have moved from holding long positions in stocks, currencies, and commodities in the third quarter of 2017 to shorting them by 2019.

In other words, the bots are betting that those asset classes will drop, signaling a potential sell-off.

Mathematical Models Not Infallible

However, the trading positions of the bots were assessed based on bearish economic data from late-2018.

At the time, the stock market was roiled by escalating US trade wars with China, as well as the Federal Reserve’s fourth rate hike in 2018.

While many analysts believe algo trading is the wave of the future , others say quantitative analysis has its limits. They note that mathematical models cannot always predict where the markets will move.

“The story has been sold almost like a 2008 protection trade,” says Chris Solarz, a managing director at Cliffwater LLC. “But it’s not necessarily true that they will offset the next crisis, because we don’t know what that’s going to look like.”

Jamie Dimon: Chill Out, No Recession Ahead

Meanwhile, many on Wall Street believe the market plunge in late-2018 was an overreaction, and that the mass sell-off is over .

The Dow Jones closed Wednesday (Jan. 9) at 23,878, up 91 points, posting a four-session winning streak.

dow jones close stock market jan 9
The Dow Jones is rallying after being decimated in late December 2018. (Yahoo Finance)

JP Morgan CEO Jamie Dimon says the media-hyped anxiety about an impending global recession is overblown. Dimon insists there is no recession on the horizon, as CCN.com reported.

The billionaire banker says everyone needs to take a chill pill and calm down. The global economy may be in a “slowdown,” but a recession is not around the corner, he says.

It’s very possible we have a slowdown. People [should] take a deep breath.  It’s not like we’re going into a global recession.

Meanwhile, investment managers like hedge funder Bill Miller say an uncertain stock market could be good news for bitcoin investors.

“Bitcoin basically has no statistical correlation with stocks or bonds, which makes it an excellent diversifier,” Miller says.

Featured Image from Shutterstock