When you read the box score for a sports game you really don’t get a feel for what took place on the field. All that you obtain is the bottom line, the final score. While the bottom line, i.e. the closing prices, is important in the world of investing, the ebb and flow of activity during the trading day cannot be ignored.
So, the box score for yesterday reports that the S&P 500 (SPX) declined 0.49%, the Dow Jones Industrials (DJI) slipped 0.26% and the NASDAQ Composite (IXIC) dipped 1.08%. However, you had to see how the day’s action transpired to put it into its proper financial context. The S&P 500 opened slightly higher, about 5 points, most likely from some short covering from professionals after Friday’s precipitous decline. Once the market opened then the public orders hit. You see, after a huge decline on Fridays, individual investors worry over the weekend. The result is that they call their brokers or log into their eBrokers and place sell orders, when they get to work or the market opens, in fear of a downside follow through to Friday. So, the market moved into negative territory, on the back of these sell orders resulting in a 1% decline for the S&P 500 for the day. The markets troughed at their low point for the day not long after the European bourses closed. At that point, bargain hunters, once again the professionals, stepped up at critical technical support levels to buy stock, erasing the day’s loss and pushing the SPX into positive territory by about 2 points. In the last hour, the market backed off again resulting in that 0.49% decline.
What you need to understand is that all that I just described is quite normal. Monday is normally a down day. When Monday follows an ugly Friday sell-off, as I explained, retail investors will freak out and act irrationally. The first attempt at stabilizing the market after a pullback is usually thwarted, as it was yesterday. So, we now have to undergo a more systemic bottoming, stabilization and reversal process. That could take several days or weeks to occur.
There was a major internal inconsistency in the equity markets on Monday. While the SPX declined, so did implied volatility. To make a difficult concept easy, the price (volatility) that traders are willing to pay to insure their portfolios declined. These prices should increase in declining markets and decrease in rising markets. The index which is associated with implied volatility is the CBOE Volatility index (VIX). I will emphasize however that the VIX is very misleading and hence I call it the “suckers’ index.”
It is also worth noting that the price of Gold also declined on Monday. That is not what you would expect if traders were seeking the “safety” play. Also take note that we have reentered our short position in Gold via the inverse leveraged ProShares Ultra Short Gold ETF (GLL).
Confusing the issue on Tuesday will be the reaction to Apple’s (AAPL) record earnings results. It can get frustrating when Apple reports results. While the company reported better than expected earnings and revenues, disappointing iPhone unit sales and guidance spooked traders after hours and pushed the stock down about 8%. This is atypical for an Apple earnings report. The company will always under promise for the future and over deliver when reporting those later results. Then traders sell off Apple stock after hours. The company needs another gee whiz product to attract investors back to the stock. Otherwise we are left with traders banging the stock around with reckless abandon. If the stock is down by 8% on Tuesday, it will just create an opportunity for Carl Icahn to put another billion dollars to work at lower prices.
So the game plan remains unchanged. We will be better observers than participants as the stock market deals with the flu that it caught last week. Continue to raise a little cash for positions that are no longer fundamentally favorable and wait patiently to put it to work when the clouds lift.
As for today, we will have a bifurcated market. The NASDAQ is certain to get kicked in the groin by Apple while the DJIAand SPX could rise.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL and GLL — although positions can change at any time.
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