Padley: The rules have changed (for now)

If you’ve been getting a sore neck trying to follow the ups and downs of markets, I can assure you that you’re not alone. 

It has become commonplace to see large, relatively stable companies experience wild swings — regularly more than 20% in a single day. It’s early in results season, but we’ve already seen some big single-day moves, with the likes of Cochlear (ASX:COH), Nick Scali (ASX:NCK) and Pro Medicus (ASX:PME) experiencing double-digit share price falls.

The volatility isn't limited to individual stocks. Precious metals investors endured a white-knuckle ride in February, with gold falling over 12% in a session and silver logging its largest single-day fall on record when it crashed 36%.

Morgans’ analysts noted this pattern of increasing volatility during reporting season saying investors should brace for another period of outsized moves.

“Last year’s February and August seasons were among the most volatile on record, with more than half of reporting companies moving over 5% on the day and roughly one-third moving more than 10%, including several large-cap stalwarts.”

It’s a trend they expect to persist, driven by valuations and the rise of passive, quant and high-frequency strategies.

“A growing share of result-day volumes is driven by passive, quant and high-frequency strategies that respond instantly to news flow and management commentary, often pushing prices further in the short term than the change in fundamentals alone would justify.”

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Rise of the machines and the death of fundamentals

The idea of momentum moving through the market has also caught the attention of Marcus Padley, who says we’re in a market where fundamentals no longer matter. The big moves from one group of stocks to another are led by computers, then followed by thematic ETF flows and triggered by momentum, not valuations.

Padley says 50% of trades are being placed by machines, which are unemotional and act on momentum signals and price action. The result is powerful swings within between sectors, triggered by an event or moment. 

“It’s almost as if you imagine every theme is some hydraulic piston all connected with the same base. And if you push one of these pistons down, another piston pushes up. And then when that goes down, another one comes up.”

Padley says traditional valuation metrics like PE ratios and intrinsic value have gone out the door and seem ‘very 1980s’. In his view, the rules have changed.

“Nobody seems to care about the fundamentals anymore and ETFs are effectively camouflaging the underlying fundamentals of the stocks. So ETFs are pushing stocks because people are blindly buying into the ETF marketing message.”

I can hear some fundamental investors groaning. Padley says a time will come when investors care about textbook valuations again.

“One day it will come back. Next market crash everyone will start to get interested in fundamentals again, because we all lost our heads with momentum and algorithms. But for the moment it’s momentum and algorithms.”

Timing markets is an unconventional approach and many argue it's not a viable long term strategy. Padley has been willing to put his money where his mouth is with the launched of his MT20 fund in February 2025 and backed with his own super. The strategy has grown to $96 million returning 20% until October last year when he went 100% cash via the AAA ETF.

  

So can you take advantage of momentum?

Chasing or following momentum might be the game for some. But I’d argue it’s a high-risk approach best left to those with a lot of experience and skill, some kind of supercomputer, nerves of steel and perhaps a bit of cash they’re willing to part with (or at least a stomach for volatility).

Padley says if you want to take advantage of momentum, you’ll need to embrace technical analysis, use charts to spot market tops and bottoms, and start thinking like a computer.

“I know this doesn’t sound like quality stuff and it is not when a market is running like this, but you are going to have to be more technical, spot tops and bottoms.”

Padley also adds that a short-term mindset is required because money flows in and out of themes far quicker than it would in a typical economic cycle. 

What is interesting to note is that while volatility seems to be the catch cry for markets right now (and understandably so), the measure of market volatility has remained subdued.

As the chart below shows, the VIX has been trading at what are considered below-average levels of volatility since the April 2025 Liberation Day spike. A reading of between 15–20 is considered normal for the VIX. Below 15 is very calm.

For context, during the GFC, the VIX spiked to around 80. It reached roughly 82 during the March 2020 COVID panic, and it traded in a 40–80 range through episodes such as 9/11 and the Lehman collapse.

It's also worth noting that the major indices for the Australian and US markets are flat to slightly up over 12 months following consecutive years of double-digit gains. It's beneath the surface where the big swings are taking place.

The S&P/ASX 200 Materials Index (XMJ) is up 34% over the past 12 months, while the S&P/ASX 200 Health Care (XHJ) and S&P/ASX All Technology (XIJ) indices are down 30% and 34% respectively over the same period. The big moves are happening between sectors and themes as money moves from one idea to the next.

When it comes to trading momentum Padley says there are so many themes running through the market that it can become very hard to decipher what the 'Momentum Monsters' are doing. 

"We will trade themes if the thematic opportunity is obvious (SaaS?) and there is an ETF to suit. 

Position sizing also matters for Padley, who says the more volatile a theme or trend is the smaller the position will be. His preference, however, is to look for an 'obvious' market opportunity - such as a big sell off that catches all themes. 

If that were to transpire fundamental investors and market timers alike would be far more comfortable.

It almost sounds like we're all hoping for a market crash!