Stock Market of the Living Dead: Traders head for the exits

Still from George Romero's 1968 classic film
Still from George Romero's 1968 classic film "Night of the Living Dead." (Via Wikipedia. Image not copyrighted.)

WASHINGTON, April 11, 2014 – Some mornings it’s just best to stay in bed. This morning was one of them, as stocks continued their sickening swoon from the opening bell. For the majority of stocks, it’s like the “Night of the Living Dead” out there except that we’re still in the a.m.

Unfortunately, the Maven actually did get up this morning and is currently staring at his computer screen wondering if he’ll have any money left at the end of the day, as he gulps down an invigorating cup of Kirkland’s Seattle Mountain Blend coffee wondering how much longer he’ll be able to afford that luxury, given the latest shoot-the-moon prices premium Arabica beans are fetching.

Returning to the Wall Street carnage, for us at least, it’s not all that bad. We’re only partially invested, we’ve hedged the portfolio with a variable amount of shares of short S&P 500 ETF SH, and we’ve mostly rotated to utilities, preferred stocks, and a couple of MLPs over the past month or so. These have proved to be islands of stability in a very troubled sea. Our bonds continue to do well, further cushioning the blow.

That’s not the case, however, for hapless investors in biotechs. As the biotech ETF (IBB) clearly indicates, these highflying darlings have seen the bottom drop out in less than a month, putting them in at least a short term and quite-violent bear market. They rose too high, too fast, got a little bad press recently, and now the stocks are being taken out back and shot. Wholesale.

The Maven’s main area of portfolio damage is a bit more unusual. His largish position in the unusual, high-yielding HVPW ETF is bleeding from multiple stab wounds inflicted by the very attraction of its unusual structure. The letters in the ETF in this case stand for “high volatility put-write.” In other words, this is an actively managed ETF that purchases selected high volatility stocks, hedges them with puts, and collects the premium with the goal of a 9 percent annualized yield with dividends paid every other month.

The only problem here is that term “high volatility.” These are the stocks, like those now-dicey biotechs, that are getting flayed alive right now. So is HVPW. We’ve dumped a bit at a loss to pare the position somewhat. That said, we’ll still get decent yield, albeit likely not 9 percent for a while. So we can afford to close our eyes and sit this one out for now.

It’s all unfair, of course. But when huge gobs of stocks in a given industry start getting hit with massive sell orders, it’s always best to get out of the way. Those haggard, battered unfortunates who didn’t are now staggering through the narrow streets and alleyways of lower Manhattan looking for warm bodies to feed upon.

We try to stay fully invested, as this has proved the best long term strategery (hat tip to G. W. Bush) for decades. But it’s days and weeks like this one that make you wonder if “things are different now.”

Today’s trading tips:

Not much here. If you’re out of the market, stay out for now. If you’re in, pare positions down on the occasional lucky up day in this market nor’easter until you’re only sitting on boring but low volatility things like utility stocks and select preferred stocks of stable companies.

It’s likely a good idea now to recall that old team sport mantra, particularly true when you’re in a tight game with a dangerous opponent like this one: “Defense, defense, defense.”

This has become the kind of market where everything looks like a bargain for tomorrow after the current afternoon’s closing bell. But, like the now sadly-defunct Syms discount clothing chain, you can be sure that another price markdown will occur sometime next week.

In other words, at least for now, the “buy on the dips” strategy that has worked well since the last sickening market thud in 2011, is likely to kill value if you employ it now. So don’t.

Get down to a comfortable position—one that allows you to sleep peacefully at night—and enjoy what’s looking like a half-decent spring weekend, at least on the East Coast.

We’ll be back again next week with plenty of Tums, Maalox, and ibuprofen at hand.

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  • Heh

    90% cash since Monday, banked about 20% profit. Sitting and watching