WASHINGTON. Thursday’s big, fat rally felt good. Too good. And given that yesterday’s 400 point gain in the Dow didn’t even equal its previous 500+ point loss, we figured yesterday’s bungee bounce up might be followed up by another drop down. And sure enough, Amazon (symbol: AMZN) and Alphabet, aka Google (GOOGL) reported disappointing (for them) earnings. Worse, Amazon indicated confused forward guidance. Result: A Wall Street catastrophe, as averages move into full correction mode.
Summing up Friday’s Wall Street catastrophe
CNBC offers a pretty good synopsis of today’s miserable action, at least as of 11:35 a.m. ET. As in, who knows where we’ll go next in this super-volatile October 2018? One Wall Street catastrophe after another?
“Stocks plunged into a correction on Friday as the release of disappointing quarterly results from key tech companies overshadowed strong economic data.
“The Dow Jones Industrial Average fell 520 points, with Home Depot lagging, and was about 1 percent away from entering correction levels. Meanwhile, the Nasdaq Composite dropped 3.3 percent.
“The S&P 500 fell 2.3 percent and is now down more than 10 percent from its 52-week high, entering correction territory. The broad index hit a record high on Sept. 21.
“Seven of the 11 S&P 500 sectors are also down at least 10 percent from their respective 52-week highs, including energy, materials and financials. Around 80 percent of the index’s stocks are also in a correction. The average stock market correction results in a 13.8 percent drop and lasts five months, according to Gluskin Sheff Research.
Re: Amazon and Google, an opiner opines on today’s crash
“Larry Benedict, CEO of The Opportunistic Trader, said traders ‘don’t want to be long heading into the weekend.’ He added: ‘S&P now down on the year and people are more afraid to be long today than they were when market was 10 percent higher.’
“Amazon and Google parent company Alphabet fell 8.2 percent and 5.4 percent, respectively, after they released their latest quarterly results. Earnings for both companies topped analyst estimates, but revenues fell short.
“There were ‘high expectations’ for this earnings season, King Lip, chief strategist at Baker Avenue Asset Management, told CNBC. ‘The earnings are not coming in as great as people had suspected,’ Lip said, adding that “for Amazon specifically, forward guidance was surprisingly light.”
Some color on a drab Friday via ZeroHedge
ZeroHedge offers more color on Wall Street’s continuing disaster, quoting a Nick Colas article via DataTrekResearch.com. Colas got the following market takeaways from an anonymous hedge fund consultant.
“#1. US equity hedge funds still have the market influence to set closing prices and drive market volatility. Keep in mind that smaller funds (and there are thousands) can flip positions on a dime. The same people selling Tech into the close yesterday might have bought today’s open.
“#2. Since many funds are flat or even down on the year, there will be tremendous pressure on them to make something between now and year-end. Midterm elections are a tradable event, so look for more volatility into early November. And since traders seek out volatility one would expect markets like energy, Tech stocks and VIX-related products/options to see larger price swings.
“#3. All this adds up to continued US equity market volatility, as we highlighted in yesterday’s Data section. We were a little taken aback by the thought that the S&P 500 has a +30% chance of making a fresh 2018 low. But then we realized that’s why hedge funds pay Lou for her/his advice. Considering the outlier event and planning for it… That’s what risk management is all about.”
Hedge funds and broad, index-based ETFs take it in the ear. Not good.
In other words, volatility is destroying the best-laid plans of many hedge funds. The hedgies, in any event, haven’t been doing too well lately. And if they trim down or close the funds, they’ll have to dump their remaining holdings, putting further downward pressure on markets.
Also, what may be coming to pass is increasing investor and investment manager reliance on index-based ETFs that have been putting stock pickers to shame for at least two or more years. We, ourselves, were just about to declare victory in our own portfolios as we increasingly adopted this tactic instead of our usual stock-picking regime. The last few days, however, may have destroyed that thesis as well. Worsening the problem, most indexes and ETFs are weighted in favor of the largest of large-cap companies. When arguably overrepresented companies like Amazon and Google (Alphabet) take a big hit, so do any indexes and related ETFs that contain their shares.
More alarming perhaps: Robo-funds, set up to safely and cheaply manage smaller investor accounts while taking the worry out of investing, may be tanking right along with the stock market. That’ll do a lot for small investor confidence.
Did the President push the hubris button this week?
Politically, the plot continues to sicken. We are pretty openly supporters of President Trump’s economic policies, which have clearly extricated us thus far from the Obama Era’s 8-year economic Slough of Despond.
But we are also firm believers of the ancient Greek concept of hubris. Loosely translated as “pride,” this takes many forms. Bragging too much about your accomplishments – like a wild, crazy and continuing bull market in stocks – is one of them. And when it gets to feeling like hubris, the hubris effect (my term) kicks in. Fans of the Holy Bible know the rest of the story: “Pride goeth before a fall.”
We have loved the Great Trump Rally. We hope it arises once again from October’s ashes, as it has several times before. Like just this past January-February. But stocks, and particularly techs, have gotten notably overpriced. The revised corporate tax reduction effect will wear off soon. And there’s still a high risk that crazed socialists will win a slim majority in the House in the upcoming midterm elections, which would effectively put the Trump Administration in stasis for the next two years, benefiting no one. You always have to watch out for hubris. It’ll get you. And maybe that’s happening now.
And here comes the headline risk: Mad but maybe fake bomber just caught in Florida
Even worse, if we’re to believe this morning’s late news reports, they’ve caught the (fake?) bomb-making dude in Florida, and… surprise… he’s allegedly a 56-year old dude with Trump stickers plastered all over his van. The media’s jumping right on this one, pumping the propaganda angle to damage the forward momentum the GOP has captured going forward into next month’s crucial election.
But let’s see whether or not this turns out to be a false-flag operation. It’s happened before. And given the weirdly specific targets of these apparently phony bombs, one wonders.
In any event, the real violence over the past year has all been done by left-wing perps – including the assassination attempt on House Whip Steve Scalise. Ditto all the nasty “drive ‘em out of the restaurant” stunts against GOPers. And the incitement to violence by insane California Rep. Maxine Waters. Against all this, it will be easy for the media to claim that “Trump incites violence,” even though the left has been doing that ever since the day after Election 2016 put Trump in the White House.
The continuing danger of headline risk
Lest we digress too far here, all this stuff is potentially market-moving headline risk. Add this to the illegal alien “blob” that’s surging toward our borders and the screaming anti-Trump propaganda spewing from various network talking heads, and you get so much current uncertainty that no one wants to remain invested over the weekend, as the CNBC piece above clearly affirmed.
As for us, we’re stuck for now. We admit we didn’t foresee a correction of such violence occurring this fall even though we anticipated some reversals. At this point in the current decline, we’ve trimmed a few positions. But we still like where we are, by and large. Furthermore, anyone selling a pile of losing positions at this point will guarantee the biggest rally of all time. That’s happened to us before. But when you do that, you’re late into the rally and you generally don’t earn those losses back, at least not any time soon.
So we’ll ride this puppy down a bit longer and cross our fingers. As we’ve said before, hope is not an investment strategy. But at this point, it’s pretty much what we have until these successive tsunamis of selling finally exhaust themselves.
Current strategy: Let’s forget all this crap until Monday and enjoy our weekend. Worrying never did anyone any good because it accomplishes nothing. We’ll be back over the weekend or early next week as the situation develops.