The Alfred E. Neuman Stock Market
Joel Elconin is the co-host of Benzinga's #PreMarket Prep, a daily trading idea radio show.
How does one sum up the wildest 15 minutes of trading and a session that should rank as one of the craziest in the history of Wall Street? In the infamous words of the Mad Magazine's Alfred E. Neuman, "What, me worry?"
Black Monday, Part Deux
The Dow Jones erased most of its historic 1,000-point plunge off the opening bell, as it traded lower by roughly 200 points at the time this article was written. During the collapse, several large-cap issues traded down to levels not seen in years and may not be revisited for a long time, if ever.
The overall market's dependence on high-frequency traders as a substitute for market-makers lead to a scenario where there were simply no bids.
Many issues had more price action in the first 15 minutes than they have seen in the last few years. For example, PepsiCo, Inc. (NYSE: PEP) swooned from Friday's close ($96.25) all the way to $76.48 before recovering to north of $90.
Normally slow-moving Ford Motor Company (NYSE: F) declined from Friday's close ($13.86) to $10.44 before rebounding as high as $13.47. Ford actually triggered both sell and buy circuit breakers Monday morning, as the move in the issue exceeded the daily price range limits in both directions.
CVS Health Corp (NYSE: CVS) fell over $20 from $102.21 to $81.37, or 20 percent before rebounding back over $100.
What, Me Worry?
So, why was Alfred not worried about the world caving in? He may have been raising some cash during the markets six-year bull run and, despite missing out on some upside, was ready to put some cash to work.
If that was not the case, perhaps Alfred was examining the factors that instigated the panic selling in the market.
The first one that comes to mind is "The China Syndrome," as Friday's chaos in the U.S. markets spilled over into the already weak Chinese market. This endiced an over 8 percent decline in iShares China Large-Cap ETF (NYSE: FXI) that has now been trimmed to 5.5 percent.
Keep in mind, the Chinese market has had an incredible gain since its March 2014 low ($32.58 based on FXI to its April high of $52.85), that may not have been based on the soundest group of fundamental factors.
In addition, Alfred may have anticipated a massive wave of margin selling that typically occurs on a Monday following a big down day on Friday, let alone a Thursday and Friday meltdown. In other words, most investors have been conditioned to just check up on the portfolio over the weekend to see how much money they made during the prior week. After signing into their online accounts and reading the threatening headlines over the weekend, those who were not getting margin calls may have decided to take some profits.
The margin selling coupled with sell stop-loss orders (order placed to sell a security when it reaches a certain price below the current price) resulted in the vacuum action that investors witnessed off Monday's open.
Finally, Alfred may have done some research on the factors that triggered the 2008 Financial Crisis. Back then, major financial institutions were dropping like flies (Shearson-Lehman, Bear Stearns, Washington Mutual, Wachovia Bank) due to being over-leveraged in the housing markets. Others such as Goldman Sachs and Morgan Stanley needed TARP assistance in order to keep the doors open. The granddaddy of brokerage firms, Merrill Lynch was sold in a forced fire sale to Bank Of America.
Although sub-$40 crude oil prices will force a wave of bankruptcies or consolidation, it pales in comparison to former stalwarts in the banking and brokerage sectors.
Does Alfred necessarily think the low for the move or a long-term bottom is in place? Probably not. Instead, he has checked a few things off his shopping list of stocks he has been acquiring during the long consolidation phase as the market hovered at all-time highs for months.
Those items may have included moderate to high-paying dividend issues that may survive an upcoming recession or depression, or a slight rise in interest rates. What may not be on his list are issues with price to earnings ratios that are unsustainable.
Image credit: AlienGraffiti, Flickr
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