While many gather in bomb shelters across the land, I hope you are receiving internet service in order to read your morning notes. As the DOW plummeted over 1,100 points in the opening minutes yesterday, hovering around 15,500, investors scrambled to save what was left after a 30+ year run of over 1,600% gains and more than a doubling since the Crisis Lows of 2009.
There are reports throughout the country that many cities are being looted on a wholesale basis. Movement of goods has ceased, police protection has broken down, fire departments can no longer answer distress calls and rumors abound that several states have already broken away from the country and formed their own Constitution. Damn Texans : ) There is no word yet on any power structure left in DC as the networks are all down. The power grid in ma ny places has been hijacked by overseas thugs as they hold online “access” ransom in a bid to bring cash into their oil revenue starved countries.
OK I am Kidding…Really.
I promise it is a joke – really.
No I am serious, that opening really was a joke – of sorts.
But it was a pretty good joke right? I mean, given the likes of the fear-dripping commentary flooding from various talking heads on TV from about Sunday evening through this morning, one would think Armageddon has arrived – and only for the 73rd time in the last 7 years.
One of the more comical moments was when a young blonde on a network which shall go unnamed and whom I am certain was not a day over 25, nearly shouted into her mic,
“But Jim, the pre-market futures are already up over 500 points – after yesterday’s plunge that can’t be good right?”
She seemed truly pissed that good ole’ Mr. Market was screwing up the morning production script.
I kid you not – one cannot make this crap up.
Off with their heads I say – time to keep calm and carry on my friends.
On this I am not kidding:
I hailed a cab this morning, sat in the seat, and said “Adams and Wacker please.”
The cabbies answer? “Did you sell your stocks yet.”
I cringed – I wanted a little more time before I heard that from a cabbie.
My fear? This “correction” will be like the last one – too short.
So What’s The Deal?
Yea I know, China is apparently not growing at the pace expected.
The key word there is “expected” and it fits well with my reminder here about the equation I created for stress in markets years ago for long-time readers and clients:
E – R = S (expectation – reality = stress)
First, we have said this about China for – well, about 5 years now. Boring I know – but alas, we read the fine print early. In doing so, we found that China is run by a communist government – and a relatively new one at that.
So we did have an early tip.
Second, yesterday morning – just yesterday morning – and just in the SP500 index constituents, we erased $700 Billion in market values.
In other words, that 6-hour sesssion erased the next two years of ALL previously expected new growth in China – and that is when many believed they were growing their $6.2 Trillion economy at a 7% clip – which was never the case.
I am sorry – give me a second while I laugh my ass off.
By the way – expected growth is Chinese for “I am pulling this number out of thin air.”
In other words, like our good friend Alan Steel and his expert team of advisors in Scotland will tell you:
“Irrational thinking when mixed with money sometimes makes us do dumb things.”
And China? It is not growing at 7% – and hasn’t been for a long time.
BU T, that is OK. It is all going to work out just fine.
Far more important than China is what’s happening in the US.
While everyone frets about the wrong things, make certain you take two minutes to watch this video summary clip.
Don’t Think For a Second….
That yesterday’s “price action” – or Friday’s for that matter – was anything about investing or planning or patience.
As those far smarter than I have stated,
“On days like yesterday, no one needs any advice. They need a psychologist.”
It must be correct as I tried calling 18 of them myself and they were booked solid.
What we have witnessed this month is nearly exactly what we suggested in the Q2 review along with the Q2 chart updates we did in July.
It is the culmination of a brewing set of fears that have been building for many months – we called it a trade range. A stand-off between bulls and bears.
To be clear, it went something like this,
“I suspect this summer will be a lot like the last 30+ summers – boring, choppy, full of churn and angst – with the later stages of the haziest parts of August likely filling the space with selling as fears mount and few are watching.”
As also stated in previous notes,
“Ideally, I would like to see the lower end of this range break down first and wash away all ‘ hangers-on’ as weak hands will fold quickly in frustration after going nowhere for too many months. It will hurt, it will feel bad, it will sound even worse – and yet, it will be a grand opportunity to prepare for the next 25 years.”
Dire Straits put it well in these lines from one of our favorite songs:
“Now with all the clarity of a dream. The blood so red, the grass so green.”
and my all-time favorite:
“Same old fears and same old crimes. We haven’t changed since ancient times.”
So That Means?
It means in the middle of the insanity, one must ask themselves if it sounds logical?
I mean seriously?
In the first 3 ho urs yesterday, the future first “looked bad enough” to be down 1100 DOW points. An hour later it seemed like it only looked bad enough to be down 50 points.
And yes, hours after that, it closed down 600 points.
The cumulative point range traveled in those hours? Over 3,000 points. That’s 42,000,000 in dog DOW points by the way.
I ask again….sound logical? Or completely nuts? Seriously guys.
Yesterday was not humans trading. It was not investing. That was all emotion, driven by algos, machines and trigger happy 4th stringers on trade desks in the latter stages of the haziest month of the year.
It was all adenaline, juiced with emotion.
There were over 1,200 5-minute holds on stocks across the board, with the likes of Citi, Home Depot and Visa seeing nearly 20% daily price range moves….in hours.< /p>
Based on the morning futures being up over 500 points – I suspect we may watch another day like it today. The best outcome?
In the near-term, it does not matter. Repeat that in your mind. It does not matter.
In the long-term?
Within the confines of a well-structured plan, these emotional battles being fought out to the tune of large numbers should not be causing you to do anything – except for a focus on one special, scary thought:
That is? Steadily, slowly, patiently and in disciplined steps – take advantage of the insanity.
The trade range has cre ated what we are confident will become (later) a fake-out breakdwn.
It is washing away all semblance of remaining courage.
It will be volatile and we hope it will not end in one day.
Recall last October – the correction lasted all of 8 trade sessions – 12 sessions later – it was erased.
I am hopeful we get more time this year.
But, we now stand where we did last summer.
As to China – last November, their stock market stood at 2682. It rallied to 5100+ by June. Last evening it closed at 2965 – up a little over 10% YOY.
I ask you sincerely, did the world end last N ovember when the Chinese market was 10% lower? No – it didn’t.
I am going to bold here and state in no uncertain terms:
It won’t end now either.
Most logical action?
Assume we (hopefully) spend the next month or two digesting the latest events. Chop up your actions steps into equal parts over that window of time.
Three, five, ten and twenty years from now, you will be very happy that you ignored the rest.
More later—pray for another test of lows and a washout to end all washouts.
My fear? This “correction” will be like the last one – too short.