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Volatile trading Monday in stocks, as Wall St bulls mount modest offensive

Written By | Mar 2, 2020

WASHINGTON – The problem with writing stock market columns these days is that the sage thoughts expressed therein are often obsolete before the virtual ink dries on the page. Monday, March 2, may be another example of this. Stock futures were up Sunday night through Monday morning, indicating positive but volatile trading ahead. And that’s the way it’s been today as thoroughly spooked Wall St. bulls emerged to tentatively bid stocks up. At least a little.

As today’s daily column unfolds, circa 10:30 a.m. ET, the Dow Jones Industrials (DJI) are up just over 100 points for a possibly fleeting gain of nearly 0.5%. Meanwhile, the broader-based S&P 500 and the tech-heavy NASDAQ are toying with the flatline, and have generally been slightly in the red since the opening bell. Clearly, today’s brave Wall St bulls will have to do better than this, even in this volatile trading environment.

Wall St bulls still shell-shocked by last week’s Daisy Cutter blowout of stocks, bonds

After last week’s massive beating by sellers, short-sellers and negatively-biased high-speed machine trading algorithms, bulls are more than a bit afraid to counter-attack the currently dominant bears. After all, they tried a couple times last week and ended up getting a series of severe beatings for their efforts. That certainly tends to have a negative affect on bullish investors, particularly given the currently volatile trading environment, as characterized in the following dramatic chart of the VIX volatility index, taken COB Friday.

volatile trading, Wall St bulls

VIX volatility index, as of COB February 28, 2020. Chart courtesy Stockcharts.com

A glance at the right-most portion of this chart could give even the most experienced investor a coronary.




If nothing else, the long-held mantra of Buy The Dip mantra (BTD; or BTFD according to ZeroHedge) has consistently rewarded investors who’ve done so over the years following the Great Recession. But last week, this reliable mantra utterly failed. Big time.

It’s certainly permissible to wander over the desolate Wall Street battlefield and stumble across the corpses of common stocks to discover that a few of them were still alive. If barely. But bargain hunters last week who picked up a few of those investment corpses ended up losing even more money as their bargains swiftly turned into bigger bargains for someone else.

What can Wall St bulls do to repair the damage? Or can they?

It will take a very long time to repair the damage the ongoing coronavirus scare has wrought upon Mr Market. That’s because the real problem isn’t the novel virus. It’s the nasty cracks that have been showing up in our financial systems since at least last summer. We’ll offer at least one explanation of this Byzantine mess in a series of special columns we started Sunday. So stay tuned.

Suffice it to say that, whatever its final outcome, the coronavirus epidemic is the excuse for February’s violent market downturn, not its real cause. (Although any fear of a new, mysterious pandemic won’t ever help an already shaky situation.) It will pass, leaving more or less casualties in its wake. Much like the flu, which causes more deaths annually than most people realize. But it’s likely not the Red Death.

Yet quarantines, suspended travel, and massive supply chain disruptions, primarily in China at the moment, will invalidate virtually all companies’ previously issues financial statements, even if only a quarter or two. But that’s too much right there for investors who’ve grown accustomed to a certain high level of growth. So they’re marking the merchandise down YUGELY, with some stocks and bonds reaching fire sale prices, particularly in energy and transportation. Those tip-toeing back into the market will have to be patient this time around. Q2 and Q3 for many companies will put them in recovery rather than growth mode. Meaning shares may not respond positively until Q4 2020 or Q1 2021.

Then there’s the November election… But let’s not pile on more uncertainty right now.

Current market volatility has resulted in mass violations of the key 200-day moving averages of many stocks

The real problem for the bulls right now is not the coronavirus. Negative headline-driven mass-selling programs have caused a great many stocks to violate their 20-, 50-, and 200-day moving averages. Of the three, the one chart watchers mind the most is the 200-day average, which gives you a longer-term view of the over-all strength of a given stock.

Usually rising (in a bull market) slower than the other moving averages, the 200-day moving average is generally what provides some support for a given stock. So when it’s violated on the downside, this spells bad news for investors who bet on continued growth in the affected shares. They take a long time to recover after violating that line. And it’s worse when the decline violates that support forcefully and on high volume.

That’ what we saw last week in both stocks and bonds, which is generally a pretty bearish indicator. And which is why bulls have been a little goosey on establishing a convincing rally Monday morning.

Portfolio management these days requires some significant juggling acts and safe-harbors

In my own portfolios, I’ve divested partial positions in weaker stocks, particularly in the energy sector. In some respects, many stocks here look like screaming buys. But, as we learned last week, today’s screaming buy might look like a rip-off in just a day or two, particularly in energy. This is, in many ways, the most affected sector, given the considerable shutdowns we’re seeing in international travel. No flights = No fuel sales. It’s as simple as that. (Lodging, cruise and other travel stocks don’t look so hot, either.)




On the other hand, with the exception of a few preferred stocks linked to the energy sector, most of my other high-dividend-paying preferred stocks remain in the plus column after last week’s ordeal. They are somewhat protected from blowouts by those high yields, generally in excess of 5 or 6%. I’m continually searching for bargains in this sector.

A word about CEFs, another relatively safe port in a volatile trading storm

Another sector worth a look is often neglected is the modest category of CEFs, or “Closed End Funds.” These are essentially the same as mutual funds only different. By different, we mean that the underlying company issues no new shares.

Meaning that CEFs trade like stocks. And that CEFs may end up being priced above or below actual per-share value depending on investor supply and demand.

Fidelity offers more detail.

“Like a traditional mutual fund, a CEF invests in a portfolio of securities and is managed, typically, by an investment management firm. But unlike mutual funds, CEFs are closed in the sense that capital does not regularly flow into them when investors buy shares, and it does not flow out when investors sell shares.  After the initial public offering (IPO), shares are not traded directly with the sponsoring fund family, as is the case with open-end mutual funds.

“Instead, shares are traded on an exchange, typically, and other market participants act as the corresponding buyers or sellers.”

In addition, the government demands the following limits on the use of leverage in CEFs.

“…for every $1 of debt, the fund must have $3 of assets (including the assets from the debt).  This is commonly referred to as a 33% leverage limit.”

One good-looking CEF possibly worth considering

While no investment is ever “guaranteed,” this simple rule does generally make CEFs less risky to investors when stocks run into heavy seas. Like now.

Some CEFs are currently offering juicy yields since pretty much everything that traded last week got market down hard. Including CEFs.

One CEF that looked attractive to me has a tongue-twister of a name: the Flaherty & Crumrine Preferred Securities Income Fund (trading symbol: FFC). Top-rated in all duration categories by Morningstar, FFC, like the universe of stocks, took a beating last week and went on serious sale, jacking its current effective yield up to nearly 7% before recovering a bit. Better yet, it pays monthly.

I don’t recommend stocks here for a variety of reasons. But this one is a conservative play. It might be a good place to hide for awhile until Wall Street’s coronavirus etc. storm clouds abate a bit. Wall St bulls may find this one boring. But remember, guys: What just happened to your “growth” stocks during last week’s squall of volatile trading?

Volatile trading continues as Wall St bulls approach high noon, Monday

BTW, in closing, I should note that at 11 a.m. ET, the Dow is now 373 points on the plus side for a roughly 1.75% gain. At the moment. The other major averages are up by an equivalent percentage. Heaven knows whether the mood will stick. But rumors persist that the Fed and other central banks may initiate some kind of intervention in the markets.

Sunday, the hot rumor was that this would happen Sunday evening before Asian markets opened. But that didn’t happen. But the rumors persist, causing pundits and prognosticators to move the target date to the middle of March. We’ll wait and see. But the sudden move to a more vigorous rally today could indicate that the Big Boyz are getting confident in at least a couple of imminent interest rate cuts.

We shall see.

– Headline image: This bull looks set to attack the bear at the stock exchange in Frankfurt, Germany. (Image via Wikipedia entry on market trends, GNU 1.2 license)

 

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Terry Ponick

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17