The British firm warned of a collapse in China, a dangerous surge in debt globally and ongoing problems in the commodities market. It went on to say, “This is about return of capital, not return on capital. In a crowded hall, exit doors are small.” And it forecast a drop of up to 20% for U.S. and European stock markets, as well as a plunge in oil to as little as $16 a barrel.
Naturally, Dow futures reacted … by rallying almost 200 points in the early going and closing up nearly 120. In other words, everyone decided that sentiment must have gotten too bearish and went to work buying stocks because of it.
But are those contrarians right? Is a “Sell Everything” call the most bullish thing for this market?
At least one firm, Bank of America Merrill Lynch, believes so. The firm just said its “Bull & Bear Index” hit a very negative 1.3, which it called a contrarian buy signal. The Nasdaq Composite Index just fell eight days in a row, a relatively rare occurrence. So a short-term bounce is anything but surprising.
But you want to know what concerns me about this storyline? It’s too pat. I continue to see, hear and read a ton of commentary that’s more focused on playing bounces than how to avoid even more brutal losses.
Moreover, where’s the volatility and panic? The VIX index rose to around 27 yesterday, sure. But that’s far below the August peak of more than 53 … the fall 2014 peak of 31 … the 2010 and 2011 mini-panic peaks in the mid-40s … and obviously nowhere near 2008, when the VIX exploded into the 90s.
And while everyone is focused on China, and pointing to how the country restored a bit of temporary calm by stabilizing the value of the offshore yuan, few seem to be focused on the carnage elsewhere.
|When everyone’s selling, should you buy?|
The South African rand just fell to a record low yesterday. The South Korean won just fell to its lowest in five-and-a-half years overnight. The Russian ruble is dropping like a stone, now less than three percentage points from the panic low set in December 2014.
Copper futures just sank to a fresh six-and-a-half-year low of $1.95-and-change per pound. Crude oil briefly traded below $30 a barrel. Treasury bonds also jumped in price, pushing 30-year yields down by more than seven basis points and flattening the yield curve.
In other words, several peripheral markets are still signaling trouble. True panic selling still seems to be missing from the equation in stocks. And my work suggests too many investors are still trying to pick bottoms rather than stampeding to the sidelines.
|“The broader trading patterns I’m seeing aren’t encouraging.”|
This is all relatively short-term stuff. I know many of you are focused on the long term — on strategies such as building wealth through the use of stable, income-generating stocks. To that end, I still have a handful of higher-yielding, lower-volatility recommendations in services like my Safe Money Report.
But the broader trading patterns I’m seeing aren’t encouraging. Sharp short-term oversold rallies following waterfall declines are bear market-style moves, not bull market ones. Violations of major support for many stocks, followed by extremely narrow, short-term rallies driven by just a handful of momentum names, are too.
Bottom line: Unless and until the broader bear market patterns begin to change, I plan to continue maintaining a higher-than-usual amount of cash. I will also take some “short” profits into waterfall declines … lighten up into rallies and/or add new short positions … and otherwise pursue strategies that perform best when it’s tough sledding out there.
Does that sound like a solid approach to you? Are you doing something different? Anything else you’d like to add? Then hit up the comment section and let me hear about it.
Oil, stocks and strategies for this incredibly volatile market — those were among the topics being discussed at the website recently.
Reader GB shared this take on the latest oil sector calls by the major Wall Street firms: “The banks’ positions are likely to help them make money. They are not interested in helping the everyday investor.
“So jumping on the $20 oil wagon is likely an attempt to manipulate opinion (and positions) more than what they actually believe. I hope I’m right. But I think oil is near or at a bottom now, and we’re just a click away from it going up again.”
Reader J. weighed in on the current market backdrop, saying: “You can compare past times to today if all is equal. But I think the economic problems are much more out of control than prior. Possibly this crash will be worst than last. But only time will tell.”
Reader Denis offered this advice about how to cope with today’s environment: “I say keep your powder dry, and stay in cash or very liquid.”
Reader David backed that call up, saying: “I agree. I am 85% in cash, but am selling deep in the money puts to try for some income.”
On the other hand, Reader Howard said: “At some point, we must stick our toe in the water again. Cash will not make you rich without risk. At what point do we jump back in? I’ve started already. Good luck.”
Reader $1,000 Gold also said he’s putting some money to work: “I started buying back in at the 1,881 S&P level on September 28. My thinking is: No recession in sight, no crash in sight, and the market always eventually returns. As hard as it is for me to do, I like buying stocks when they’re on sale.”
There are lots of viewpoints, and lots of ways to play these markets, and I thank you for submitting them. If I didn’t get to your comments, or you have others you’d like to add, be sure to use the Money and Markets website as your resource.
Crude oil prices came dangerously close to trading with a “two handle” in the early going today, before rebounding somewhat. One firm called Wolfe Research warned that as many as a third of U.S. energy producers could face bankruptcy or forced restructuring in the next year and a half, according to The Wall Street Journal. A separate report pegs losses for North American producers at roughly $2 billion a week given current pricing.
An apparent suicide bomber struck in central Istanbul, killing at least 10 people and wounding more than a dozen others. The explosion targeted a popular area for tourists with a number of heavily visited monuments.
The craziness continues in Hong Kong as China seeks to snuff out speculation in the offshore currency market. By restricting liquidity to Hong Kong, officials drove the overnight borrowing rate there to a ridiculous 66.8% — all with the goal of driving convergence between the offshore currency rate and the onshore “official” rate.
Unfortunately, “solving” one problem creates another one — a massive liquidity squeeze for legitimate banking endeavors in Hong Kong. It’ll be interesting to see how this sorts out in the coming days.
The University of Alabama beat Clemson University 45-40 last night, winning its fourth national championship in the last seven years. The key moment came when coach Nick Saban called an onside kick at a surprising moment, putting his team in a position to take a fourth-quarter lead.
What do you think about the $2 billion-per-week in red ink that oil and gas producers are racking up — is there anything that can stop the bleeding? How about China’s latest effort to stem currency speculation — are officials fighting a losing battle against markets, or will they succeed? Is Turkey facing more instability and terrorism going forward? Share your thoughts in the comment section below.