Clem Chambers: Amid shares carnage, now is the ideal time to prepare for bargain huntin

This is a nervous time for anyone with money in the markets. There has been a crash, a rally and several days of heavy falls.

If this isn’t the bottom, then the next fall will be a large one and we will have entered a new era of financial desperation. Most people who invest or trade start to see price moves as created by an invisible “them”.

Traders will say “they will push it up, then they will crash it before close,” as if there is a dark conspiracy of people somewhere pulling the strings. Generally, it’s a paranoid fantasy. Right now though, it certainly feels like there is a massive single selling entity.

Markets are driven by program trading. At the core of markets, a series of financial services companies collect all the buying and selling flow and feed it into computers.

Computers then execute the order flow as best as algorithms can by slicing and dicing the outstanding orders and slipping them gently into the pool of supply and demand.

Say you’re a large pension fund and you want to sell £250 million of a blue-chip stock. Your bank would undertake to sell this over a period of weeks, feeding the shares into the equivalent of a computer hopper, and then out to the market. It can’t be done quickly for fear of crashing the stock.

Big orders are often filled over a month, starting at the beginning of the period. That is why the beginning of this month was so important. After a global pummelling in August, the markets snapped back strongly in the last days of the month.

From a trade point of view, a slightly early end to the monthly mission would precipitate this snap back and a new month would see the start of a new program.

Low and behold, day two and three of September saw a big slump. In this model, the same sellers have kicked off the same action for yet another new month.

This is very bearish, if this is indeed what is happening.

It’s especially bearish because there’s only a small number of actors big enough to create this kind of relentless selling and they are the sovereign wealth funds. Most people think that to sell or buy a share you need only to like or dislike the stock, but in the sophisticated world of markets you can sell a stock like Shell because you need to hedge a bond or go long on a currency.

In the world of correlated finance, all instruments are fungible. These stock moves are more likely to do with hedging bonds and currencies than the health of the companies involved. It is dollar and euro stress and inflation worries that are causing giant rounds of hedging. Stocks are getting crunched in the process.

The ordinary investor can get trampled underfoot. Yet the situation also presents good opportunities. A perfectly good company can be crashed, not because of its business, but because of its correlation to another stock or its membership of a currency group or market sector. This makes the stock wildly mispriced.

The trick is to pick up the bargains after the carnage is over. That time will come, but whether it’s now or in a few weeks is hard to judge. It’s definitely a good time to start your preparations. The next few weeks will either establish a bottom or see the dreaded free-fall come to pass.

l Clem Chambers is chief executive of the stock and shares website ADVFN.com and the author of 101 Ways to Pick Stock Market Winners