Risk/Reward Vol. 380
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
In just two weeks the major indices have gone from record highs to correction territory (down 10% or more). On Monday, the downdraft discussed last week became a storm as the Dow Jones Industrial Average lost over 1000 points in a single day for the first time ever; only to repeat the feat on Thursday. Mid day Friday saw a 12% trough until an afternoon rally helped turn the markets positive for the day. As the sun set, a survey of the damage showed that the S&P and the Dow were down over 5% for the week and over 2% year to date. That said despite non-stop jeremiads from the talking heads on CNBC, Bloomberg and Fox Business News, the damage was hardly record breaking. Indeed, corrections are the norm in bull markets. Thirty seven drops of 10% or more have occurred since World War II. We just have not seen one in a while. And although a 1000 point drop in the Dow had not occurred until this week, neither of those days ranks in the list of the 100 worst days in the market on a percentage basis. I am not minimizing the devastation. In today's vernacular, I am just "providing context." (Don't you just hate that phrase?)
What IS unusual about this correction are the questions surrounding its cause. Unlike previous drops it is not attributable to bad economic news or to the threat of war or to any exogenous event for that matter. It has been wholly caused by the market itself. But beyond that rather unsatisfying explanation, its etiology remains a mystery. Early in the week a few synthetic exchange traded notes tied to the VIX ( itself a synthetic measure of volatility) were the scapegoats. But c'mon talking heads, how can two funds totaling a few billion dollars cause such a move in the broader markets? Some blame the threat of a government shut down. But we faced that toothless tiger two weeks ago and laughed it off. Some blame the rich compromise which averted the shutdown but at the cost of adding to our mounting debt. Was this really a surprise? Others blame the specter of higher interest rates. But the 10Year ended the week almost exactly where it was the previous Friday. The most persuasive explanation attributes the correction to a stampede by the holders of index exchange traded funds with record outflows for the week being reported. Indeed, with the popularity of ETF's like SPY, DIA and QQQ (check your portfolio and I bet most of you own one or more of these) one can buy or sell entire market indices in the blink of an eye. Indices now trade like stocks, a fact that sends ripples through the underlying shares as the ETF sponsors (Vanguard, Black Rock, State Street, etc.) buy and sell in order to maintain adequate levels of liquidity. Lastly, perhaps the cause is my readership heeding my advice of last week to practice selling for a profit. Improbable, perhaps, but even a tiny pebble can cause a ripple in an unusually calm ocean.
I will leave it to others to determine the cause. My concern is what to do now. As a frequent profit taker and constant loss minimizer, I have lots of cash on the sideline. I spent much of Friday compiling my buy list. I do believe the above named ETF's will recover and I will deploy some there. But as loyal readers know, my favorites produce juicy dividends. Dividends not only produce income, they serve as a backstop against precipitous falls. Once I am convinced that a bottom has been reached, I will be a buyer.
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