When we measure volatility, it pays to think about how a trade is actually completed. As we have seen through many outlets, this year has been one with very few 1% moves in the market. Well, are we all complacent or is it something else. When I want to buy a stock, I go into the market and place a limit order. I may be up against algorithms, but a human programmed them, so essentially the parameters are human. What happens when there is a constant buy pattern, on an automatic schedule? The market would go up steadily.
That may be what automated and index investing has done for us-created a smooth ride up. When a few people decided what is good for us (the index-makers), and we follow herd mentality into it, volatility, or in this case, free thought and action, are less. So now an increasing percent of capital is in an automatic investment plan which tends to focus on index funds. This means less buyers are thinking about price and the index provider is buying no matter the underlying value.
This, in theory, and shown below in practice, has lowered the amount of free-float in the markets.
To combat any ingrained beliefs about indexing, it is a good idea to read a conflicting view. For this reason I am now reading: The Little Book of Common Sense Investing.
Sources: WSJ Daily Shot 9.29.17