A Computer-Driven Stock Market

A dark pool is a private marketplace where institutional investors can anonymously trade large blocks of stock. In lieu of using dark pools to move big stock positions, institutions can use computer programs to leak buys and sells into the market place in little bits, preserving anonymity and creating the chance to make money by capturing the usually minute difference between bid and ask spreads.

Mahoney believes that up to 70.0% of the market's current volume is represented by such algorithmic or opportunistic traders. That means that the market isn't necessarily doing what we tend to think it does -- weighing the prospects of an economic recovery six to nine months down the line.

"It's been widely reported that there are high levels of cash in mutual funds and excess cash from retail investors in money market accounts and institutional cash on the side," Mahoney says.

When that money comes back into the market, the volatility index will fall; some of the algorithmic trading that makes up the volume will be displaced, as spreads narrow and arbitrage opportunities dissipate; and the market will once more take on its function as a measuring stick for the world's economic prospects.

"Real [long-term] investors haven't made their decisions yet," Mahoney says. "They're waiting to see change."

If Mahoney is right and we're in the midst of an algorithm-driven rally, it could well dissipate with little warning. Investors with short-term horizons should beware.