Algorithms drove the sell-off in some of the hardest-hit stocks on Monday, Oppenheimer analyst says

Published Tue, Sep 21 20212:49 PM EDTUpdated Tue, Sep 21 20214:26 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The popular explanations for Monday's stock market rout don't hold up under closer examination, at least for some of the worst performers on the day, according to an analyst from Oppenheimer. The S & P 500 suffered its worst session since May on Monday, and the Dow Jones Industrial Average shed more than 600 points. The sell-off came as many Wall Street strategists had turned cautious on the near-term outlook for stocks, with some warning of negative catalysts from inflation, a slowdown in the economic recovery and debt issues in China. However, Oppenheimer analyst Chris Kotowski said Tuesday in a note to clients that the pullback had more to do with the mechanics of Wall Street than any macro concerns or underlying issues for the alternative asset management stocks that he watches most closely. "We don't think Mr. Market had any particular fundamental message for us on this day. Rather, we suspect that market arbitraging algorithmic strategies for some reason hit a sell button on the stocks, and people were scrambling afterwards to deduce the rationale," the note said. In Kotowski's coverage area, shares of Carlyle Group slid nearly 8%, while Apollo Group fell 7%, and KKR dropped 6%. Those were significantly bigger drops than the broader market. Much of the trading in the U.S. stock market is done almost solely by computers, which are programmed to make quick moves to take advantage of tiny arbitrage opportunities and get in early on trends in trading momentum. Sometimes, when enough signals in one direction are met, those algorithms can cause a large, unexplained move in a single stock or the broader market. Kotowski said the performance of the alternative asset manager stocks provided a clue about how sell-off truly played out. Carlyle and KKR in particular are relatively big players in Asia but don't have much exposure to the Chinese real estate market, Oppenheimer said. That would rule out one potential reason for their underperformance, which is concerns about the Evergrande debt crisis ' impact on their portfolios, Kotowski said. Tax hike proposals from Democrats in Washington also seem like an unlikely reason for the move, he said. "We do not see a fundamental reason why the 'Alts' would have been hit more than the market in general. We suspect it is more that even after this move the stocks are up 55% YTD versus 16% for the S & P 500, and someone was clearly moving to lock in profits," the note said. —CNBC's Michael Bloom contributed to this report.

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The popular explanations for Monday's stock market rout don't hold up under closer examination, at least for some of the worst performers on the day, according to an analyst from Oppenheimer.