L - Thanks for the investorshub link, indicating that most recent trading volume reflects program buying and selling, based often on an index of stocks, rather than on prospects for individual securities. This is a worrisome trend, but it goes back many years.
Certainly for 20 years, and possibly more than that, most of the major changes in stock prices have been driven by fund managers--mutual funds as well as private pension funds. Fewer than 500 of these managers, whether they are associated directly with mutual funds or with banks that invest for clients, or with large pension funds have accounted for most of the trading volume. Of late, the price movements have become more volatile, possibly because of short term trading by hedge funds, and as you have noted, trading on a stock index or some subset of an index.
Since fund managers generally are a conservative lot and don't like to go out on a limb, they all seem more comfortable in following each other. That way, if they lose money, they aren't losing substantially more than their peers. Their behavior explains why the market is inefficient, contrary to the beliefs of the random walk (efficient market) theorists. It also provides a basis for an individual investor using fundamental analysis on individual stocks to get better return on investment than the professional money managers.
If an individual is going to do well in this kind of market, the individual must exercise the same kind of self disclipline that Peter Lynch praised in his "One Up on Wall Street." Though he managed one of the largest funds during the 80's (the Fidelity Magellan Fund), Lynch was able to do better than the average fund manager precisely because he looked at fundamentals and wasn't merely satisfied in going with the flow. It may seem quite frustrating for an individual investor to get whiplashed by the bizarre trading done by large funds, but the saving grace for a disciplined investor is the knowlege that fundamentals do matter. Those who ignore fundamentals may succeed for awhile, but not knowing any better, or refusing to go out on a limb often carries a higher risk than intelligent analysis.
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