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A Wall Street Black Friday: Investors endure their own variation

Written By | Nov 23, 2018
Wall Street Black Friday

Cartoon by Branco. Reproduced with permission and by arrangement with Legal Insurrection. See link below this article.*

WASHINGTON. All week, Mr. Market’s increasingly frayed sectors have looked very much like bedraggled turkeys that were shipped way ahead of schedule. Friday was no exception. Misery Week began with Monday’s pre-holiday stock market walloping. It ended today with thin, post-Thanksgiving trading action. Mercifully it ended early, courtesy of today’s 1 p.m. closing bell. The Dow closed down nearly 180 points. No good news in the other averages, either. Worse, unlike 2018’s pair of White House Thanksgiving turkeys, this week-ending Wall Street Turkey received no last-minute pardon from President Trump. Today was indeed a Wall Street Black Friday for most investors. Except for the short and the gone.

So much for holiday cheer.

The real problem with summing up this week’s almost uniformly dismal numbers is this: The numbers may not tell us much about how far down averages might trend before we get at least a healthy dead-cat bounce lasting for more than a day.

Wall Street Black Friday: Your own, personal, floating crap game

Right now, Mr. Market’s bias is clearly and strongly down. With a sky-high VIX (the widely-followed market volatility average) still comfortably stuck at around 22 – an abnormally bearish number –  and with the lower volume and higher volatility that always occurs during a holiday getaway week, you can never get optimistic. Trading was predictably anemic Friday. As a result, the sellers had another field day, as potential buyers were no-shows.




Looking past Wall Street’s Black Friday malaise, the horizon looks bleak. Even Santa Claus and those big showy balloons were buffeted by gusty, frigid winds that whipped down New York’s skyscraper canyons, making constant difficulties for spectators and participants in the annual Macy’s parade. But traders didn’t have to be there to experience the same feeling.

Mr. Market’s current mood demands selling everything in your portfolio and then shorting anything else you can find. But whether this is actually prudent or not, no one can say right now. For the moment, investing has become a crapshoot. In fact, your odds at the moment are probably better if you go off and shoot craps and forget about stocks altogether.

What to do with this mess? Preferred stocks?

We confess, we and our portfolios got caught with our proverbial pants down on this Slump-athon. We’ve been pretty much fully invested all year and are now paying the price for staying bullish too long.

The only thing that’s saving our portfolios right now is our substantial holding of term-preferred and perpetual preferred stocks. These pay a high fixed dividend, which can provide a good port in a storm like this one. But even these relatively stable stocks have been damaged at least a bit by the Fed’s asinine interest rate hike campaign.

A consensus has developed, even among some #NeverTrumpers, that the Powell-led Fed has done its part to kill Trump’s Golden Goose, at least for now. On the other hand, the term-preferreds, which will expire and return par value in three to eight years, are still retaining value. That’s because no number of hikes can damage their prices much at this point as they’re within just a few years of mandatory redemption.

Our 2018 shift toward ETFs worked out fine. Until September

On the other hand, our shift to more ETFs in our portfolios, precisely designed to evade much of the current volatility scenario, has transitioned to potential “Fail” mode. Broad average-ETFs, roughly tracking the Dow, the S&P and a few other sectors, are doing their job tracking those indexes. Unfortunately, that means these ETFs, like their corresponding indexes, are getting hosed right now.

Sector ETFs are taking a beating as well. We have a large position in RYT, the Invesco (formerly Rydex) equal-weight tech ETF. But since those long-overpriced tech stocks are giving up the ghost big-time, at least for now, this once- highflying ETF has also fallen “into the crapper,” as one of my old merchant marine friends used to say many years ago.

Small stocks, large stocks and everything in-between are taking a pounding. That pounding is so bad that there’s no longer a refuge in those ETFs. It’s just awful.

The worst thing is that we, like many other investors, still were carrying nice profits on the year back around August. Since then, those profitable positions are like Monty Python’s dead parrot. They are former profits. They are deceased. Those profits are no more! Score another point for today’s Wall Street Black Friday. Dismal.

One simple hedging strategy to avoid selling everything at a loss

We figured all week if we could get something resembling a snapback rally, we’d gladly put on our usual protective hedge. That means buying shares of SDS, the trading symbol for the ProShares 2x bearish S&P 500 ETF.



This ETF effectively puts together stock and futures combinations roughly equal to double-shorting the S&P 500 average. The numbers never quite mesh, but the ETF still works pretty well as a hedge. If your bet on a market decline is on target, SDS will make you money on the short side that enables you to hold losing positions you want to retain, while hedging these positions against loss. Except that, like all leveraged hedges, you have to keep an eye on this volatile ETF. You can get killed in a New York mionute if the bulls suddenly enter the trading arena en masse while you’re out shopping.

The problem for us all week is when the market drops or crashes at the open, it’s generally not a good idea to buy shares of SDS at any price, since. The reason: at least in the early innings, the averages can snap back up for a few moments, enabling you to get a better price on these shares. As an example, stocks opened down and stayed down today, closing pretty much at their lows by that 1 p.m. closing bell.

We take a small chance on SDS (no relation to Barack Obama’s pals)

We finally took a chance and grabbed a small position in SDS right at Friday’s closed. They were priced at least slightly below the day’s underwater high. Helping the averages down again, crude oil dropped significantly overnight. That big drop hammered any stocks related to the oil or energy trade, including a few “safe” preferreds we hold in the oil and shipping patch.

With our luck these days, we’ll rally hard on Monday, forcing us to sell the SDS hedge at a loss. But we’ll wait and see. The news is hardly hopeful on this front.

Wall Street Black Friday. Could Cyber Monday numbers offer salvation?

As most investors are aware, today’s retail sale and shopping extravaganza has long been termed “Black Friday,” due to the stampede that generally occurs at retail outlets offerint one-day, doorbuster sales. Black Friday is then followed by “Cyber Monday,” a term Wall Street uses to describe the equal or greater pre-Christmas bargains offered by online retailers, i.e., Amazon.com. If preliminary numbers are optimistic and if shoppers are clearly opening their pocketbooks to pick up holiday joy, our SDS hedge could quickly go the way of the dodo.

In that case, we might actually get one of the greatest snapback rallies – or dead cat bounces – of all time. Retail has been badly battered since the summer, and a record flood of shoppers could reverse investor sentiment. On the other hand, if those numbers look anemic, look out below!

Hang in there, baby?

Best thing for us at least, is to just hang in there and be ready to move one way or the other at a moment’s notice. Selling right now could take us out right at the bottom. We’d hate ourselves for panicking out at the wrong time, as we always suggest to others that they avoid.

Buying on a bounce might also be a guaranteed fail. That’s because our long run of “buy the dip” or “BTFD” (“buy the effing dip”) is likely canceled for an indefinite period of time. It’s apparently been replaced by “sell the rally.”

We live in interesting times. We’ll be back on Monday. Enjoy your weekend.

— Headline image: Cartoon by Branco. Reproduced with permission and by arrangement with Legal Insurrection.

 

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 Senior 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