WASHINGTON, Aug. 24, 2015 – Brace yourself, traders. It looks like Wall Street is headed for a ride down Class 6 rapids this morning. For non-whitewater buffs, that near-mythical classification is synonymous with certain death. And with Dow futures off over 650 points as of 8 a.m. in Washington and New York, the QE-nourished bull market of 2009-2015 may rapidly be heading for extinction.
The immediate cause, as we pointed out Sunday in our companion column’s three-part series, is coming out of China. That country’s hard-line Communist Masters of the Universe have lost control, utterly, of their once seemingly-invincible version of capitalism by government decree. The widely followed Shanghai Composite average was down 8.5 percent in Monday trading, helping bring the Japanese Nikkei down 225 in the process.
The carnage is spreading to the Eurozone as well in Monday morning trading there, with the FTSEurofirst 300 average getting whacked about 3 percent at the halfway point.
Things don’t look any better here, as last week’s Thursday-Friday rout looks to return with a vengeance this morning at Wall Street’s 9:30 a.m. opening bell. Anyone still in stocks, which the Maven himself partially is, had better get ready for a white-knuckle ride down the river of no return.
We’ll be back today from time to time to provide updates on what’s sure to be horrendous market carnage, at least during the opening hour of trading. Meanwhile, it’s time to get right to our ….
See our 10 a.m. Monday Update: Dow plunges over 1,000 at Monday bell, attempts recovery
Trading Tips for Black Monday, Aug. 24, 2015
Let’s state at the outset that at 8 a.m. Monday, neither the Maven nor anyone else has any idea where markets are headed after what’s virtually certain to be a Monday morning bloodbath in all stocks. It’s highly likely that no sector will be spared. Any number of perps have been yelling “fire!” in the market theater all weekend, and investors, funds, tycoons and cab drivers are beating down the doors trying to get out of the burning exchanges at any cost.
In short, we are looking at a full blown panic this morning. In a situation like this, the market drops so fast that you can’t even hit a bid on the way down, meaning that putting any sell program in place now will guarantee a stunning loss.
Shorting also becomes increasingly difficult, as it’s often difficult to find stock to sell short in a high velocity panic. Further, shorting at or near the opening bell could risk a delayed trade, which could in turn risk a reactionary (if temporary) reversal of almost equal violence if enough bulls—or the not-quite-mythical Crash Prevention Team—step in with a fistful of buy orders.
With our existing positions, we are going to do the only thing that’s prudent in a condition like this. We’re going to drink a quart of Maalox and hold our positions until the initial smoke clears. At some point, there’s almost certainly going to be either a dead-cat bounce, or at least a feeble, temporary reversal in the downtrend, as markets are already extremely oversold.
This bounce—not the opening panic—is where to pare all but one’s strongest positions. Those are likely to be investments like solid preferred stocks, long-term Treasurys, high-quality bond funds, well-run REITs, and maybe a few utilities.
In a violent wash-out like this, virtually everything will be going down hard, at least initially. Any position an investor has is going to take a hit this morning, as selling will be indiscriminate, and worse, exacerbated by margin calls and forced selling, which will hit expensive stocks like Apple (symbol: AAPL) hardest as beleaguered investors will look to sell these to gain the most cash to put against those margin calls.
There could be a buy opportunity at some point, but almost certainly not today. After a hit like we’ve been taking and with Round 2 on the way, all charts patterns and technical indicators have been destroyed. Who knows what lies ahead?
We will also need to keep an eye on the news. Some are hoping the Fed will get its head out of the sand and lay on a quick dose of QE4. But that would shoot their credibility after inching toward upping interest rates for so long. They’re in a policy box for sure.
Maybe, eventually, we’ll discover that QE has been a bad idea all along. We’ll know that if the current market debacle takes averages back down to the March 2009 lows before it’s all over, which would prove that QE itself just delayed the obvious for six years. In other words, maybe our own financial gurus are just as dumb as the ones in Beijing. It’s an awful thought. But awful thoughts are all that come to mind on a morning like this.
Stay sane, have antacids at the ready, and we’ll get back here at least one more time later today to see if the horizon is still there.