WASHINGTON. We looked forward, cautiously, hoping to sing our favorite stock market song, What a Difference a Day Makes, on this sunny, windy, post-Michael Friday afternoon. But it looks like the happy dance and song will have to wait. As of 12:45 p.m. or thereabouts, the tremendous 200+ point comeback rally for stocks that launched at this morning’s opening bell has fizzled out. The red ink is flowing once again. Bye-bye comeback rally. So much for that episode of “hope and change.”
Actually, the trading action could swivel around once again by today’s closing bell. It’s been up and down, up and down this week, like playing with a yo-yo. Today’s early comeback rally could reappear. But who really knows?
Stock market carnage to continue?
The carnage on Wednesday and Thursday was pretty serious. All sorts of key support lines for the shares of countless companies large and small. When those 200-day moving averages are violated, the market’s momentum is broken and the bulls start getting scared. Which leads to more selling.
For evidence of how bad this has gotten, check out yesterday’s closing daily chart for the McClellan Oscillator (symbol: $NYMOT), which indicates extreme market tops and bottoms.
To get more perspective, check out the weekly closing chart below. That gives us a little more history, and shows us that this big drop is getting dangerously close to the swift, horrific correction we endured during the first 3 months of 2018.
Each comeback rally is getting crushed
The worst thing we saw Thursday was this: After a couple of feeble attempts to rally, huge, successive, reactive selling downdrafts took markets (and individual stocks) lower and lower still. It’s clear that part two of this week’s sickening downdraft – which is starting to resemble a crash – was due to a ton of forced margin selling, particularly on Thursday.
Oh, honey, it’s your broker on the phone. Something about a margin call?
In other words, if you’ve used your margin account to buy x amount of shares on borrowed money, and if your stocks really got clobbered, you need to start selling shares of anything you own to raise enough cash to retain a certain amount of equity in your account. If your broker can’t contact you, and if you don’t have that cash sitting in your account, your broker must, by law, start selling you out whichever way he or she sees fit.
In other words, if there’s not enough cash in your margin account to cover a massive, two-day drop in a considerable number of stocks – including those you may have bought on margin – the forced selling of positions in your account commences until you’ve raised enough cash to cover. It’s known as a margin call. Customers call it “forced selling.” And in truth, that’s exactly what it is.
I tended to be fairly conservative with recommending stocks to my customers back when I was in the brokerage biz. As a result, I rarely encountered these unpleasant moments. Indeed, such moments are never pleasant, on either side of the telephone conversation. You can just imagine how some of those conversations went yesterday. As one of my old brokerage instructors liked to say, “People are funny… about money.” Yeah. They are.
Bottom line: What we witnessed Thursday afternoon were waves of forced selling due to margin calls, with each successive wave occurring after markets tried to rally. Which is why those rallies never made it to first base.
When you see mass margin calls, you know why the market is tanking. Big time.
Mass margin calls are horrifying, particularly to retail customers, i.e., you, me and the occasional Joe Sixpack. It all seems horribly unfair, like some kind of dirty trick. But if you sign the papers for a margin account, you agreed to this. And besides, it’s the rules. The SEC says so. That’s why, all of a sudden, you get that margin call. You get sold out, and there goes a nice chunk of your precious trading or investment account. Forever. It’s a real loss, not a paper loss. But you were forced to take it anyway. Which is why I generally don’t trade on margin, BTW.
Now, just imagine all this horror taking place in individual and corporate accounts around the world. You’ll immediately sense the magnitude of the losses that occur during the type of trading days we’ve been forced to endure this week.
Have you ever lost your faith? It happens in bull markets, too.
What’s going on here? It’s the worst thing possible in a bull market: People are losing faith. It looks like the game they’ve been successfully playing has suddenly changed. Regular bulls are wavering. Perma-bulls get that gnawing suspicion that their time in the investing sun may be up. The feeling spreads, like a good line of gossip. Investors quickly lose faith and start disbelieving in their former convictions. That’s when it’s time for the bears to take over. And it’s not a good time for the bulls.
We may be witnessing the beginning of mass sentiment change, particularly following Thursday’s comeback rally fails. This latest nasty turn in the market may very well have occurred, at least in part, due to the Fed’s blind, relentless attempt to get interest rates “back to normal,” whatever that is.
Don’t fight the Fed?
But for this Fed, apparently, “normal” means that middle-class homebuyers are once again priced out of the housing market by too-high mortgage rates, just for starters. The result is that mortgage apps declined considerably in recent weeks as those mortgage rates kept climbing, and now we’re seeing the results. Housing slowdowns have a domino effect on many other industries, and, oh-oh. Do we smell a recession? A Deep State anti-Trump conspiracy? We can think what we like. But something unpleasant is happening and we all want some a believable answer as to why that is. Are the bigwigs screwing us again?
That’s not what investors want to hear. And indeed the above suspicions may not be true at all. Maybe stocks just got too far ahead of their earnings and needed to correct back down to a reasonable level.
But when the market action makes us feel like something nasty is advancing toward the horizon; when it feels like the dominoes are beginning to fall, investors large and small head for the exits en masse. It’s like a cattle stampede. Which again is what we’re seeing right now.
Umm, is the comeback rally back?
Oh, wait! The Dow is going back up now, around 1:15 p.m. ET. The comeback rally has returned. The Dow is back in the green for a 174-point gain! And right after I picked up shares of the double-short S&P 500 ETF, (symbol: SDS) to partially hedge my largest account.
In all honesty, I actually did this to launch a reverse jinx on the market slide. Seriously. Every time I put on this hedge, save for once, I lose money on the hedge. Somehow, my wrongness on hedging this account is virtually infallible. So I figured that, to rescue the bull market and the Great Trump Rally, at least for myself, I’d better hedge my position. And lo and behold! The S&P 500 itself is actually up 21.45 points now for a nearly 0.8 percent gain. Even the battered, tech heavy NASDAQ is steaming ahead by 103.89 points, a nearly 1.5 percent gain on the day. Another comeback rally. For now.
Taking things one day at a time
In this current market, we always have to emphasize “for now.” Until the selling, forced selling and margin call adjustments settle down, and until the VIX volatility measure settles back down again from its two-day spike, this nonsense will continue. Worse, if the Fed keeps up killing the ongoing Trump Rally – just prior to Election 2018, no less – who knows how bad things could get?
And who really knows where we’re going? Really. Of course, all CNBC’s smart-ass talking heads will tell you they know. But 95 percent of them are only touting their picks. That way, you’ll buy them so these lousy touts can sell them to you higher.
By Friday’s 4 p.m. closing bell, our headline above may very well be the way today’s trading action ends. On the other hand, if markets get back to a big-time comeback rally – again – readers may read that headline at the Saturday breakfast table and wonder what the heck I’ve been smoking.
It’s been that kind of week.
—Headline image: PR graphics for Zombie yo-yo, via Amazon.com.