The Big Plunge

Posted: Feb 06, 2018 9:22 AM
The Big Plunge


The bottom fell out on Monday - in a classic capitulation move that saw the Dow Jones Industrial Average slump 1,600 points at one point:

  • Dow -1,175
  • S&P -113
  • NASDAQ -273
  • Russell -56

Anatomy of Destructive Session

The market spiked lower at the start of trading, and then rallied higher, but smart money wanted to see that early support point tested.  It was tested; it didn’t hold and each wave of selling triggered another wave. It was the confluence of weak hands dumping, computers and algorithms selling and perhaps a few big names getting hammered as well.

It seems as if someone was carried out on a stretcher.  Word on the street is that one of the biggest hedge funds in the industry had a program trade that ran amok.  The computer selling defied the laws of psychics at one point downside clips seem to happen at the speed of light.

Unbound Confidence Emerged

The rally was in full swing and then got even hotter late in 2017. As it got hotter, everyone got complacent as the rally went straight up.

Last September 12th the stock market rally turned sharply higher and gained momentum. Then on November 27th the rally turned even higher, going straight up. That parabolic move would eventually have to give way to a similarly sharp pullback.  It’s one of those things that when it’s talked about, it sounds reasonable. However, in the midst of it such a pullback, it can feel like being in the eye of a hurricane.

Fed Chair and Rise and Fall of Market

I find it interesting that many are comparing this period of selling to 1987. A new Fed chairman named Alan Greenspan started his new job that faced a market crisis situation.  As the man that would go on to be known as the Maestro, Mr. Greespan took swift action; the selloff was short-lived, and the ensuing rebound lasted more than a dozen years.

Greenspan took swift action by lowering rates and calming the fears of Wall Street. Later, he would be blamed for missteps in management - the market bubble on the upside and the downside.  Of course, Greenspan is best known for his observation of “Irrational exuberance,” a call on the stock market rally, which proved to be prescient four years later (I am writing this with a slightly tongue-in-cheek approach).

Yellen’s Revenge?

The New York Post headline says it all: ‘Yellen fears bubble as stock market sees sharp decline’

Former Fed chair Janet Yellen spoke to CBS news and suggested prices for stocks were high, pointing to “price to earnings ratios near the high end of their historical ranges.”  She also commented on the risk in commercial real estate, stopping short of saying the asset class is in a bubble. 

Yellen was known for her cautious approach to governing the Fed and speaking to the public that so many see her comments on the heels of a 666-point drubbing of the market as somewhat reckless. Of course, she’s still smarting over not being re-appointed by President Trump, and some think her comments were a little jab.

The good news is that Yellen doesn’t see a market pullback harming the economic recovery.

Whether deliberate or not, it didn’t help the situation yesterday. It puts more pressure on her successor Jay Powell to articulate a message that brings calmness to the market.

Jay Powell at the Plate

Jay Powell, the new Fed chairman, started his first day on the job yesterday with the biggest single- session point loss in history.  Ironically, his best move may be to telegraph to investors that he won’t be making any moves, or at least fewer moves than the Fed previously signaled.  Investors will also want to hear from the White House very soon with soothing words that will direct attention to the underlying economic fundamentals.

Sector Watch

We were reminded there isn’t any sector to hide in when these swoons occur - even utilities.

S&P 500 Index


Consumer Discretionary (XLY)


Consumer Staples (XLP)


Energy (XLE)


Financials (XLF)


Health Care (XLV)


Industrials (XLI)


Materials (XLB)


Real Estate (XLRE)


Technology (XLK)


Utilities (XLU)


For those unfamiliar with these kinds of market drops, this is gut-wrenching; even for those of us that have been through a few market crashes, it’s not a pleasant ride. While it might sound callous, the fact is this selloff is happening so sharply that it takes us to where we have to be sooner rather than later. 

When to buy?

This is the week to begin building positions in great names that we know that would be much higher based on recent earnings and guidance. 

Sector Focus:

  • (XLY) Consumer Discretionary
  • (XLI) Industrials
  • (XLB) Materials
  • (XLK) Technology

How to Buy?

You can’t take full positions in this market, but you can ease in and begin to build them.  I’m watching for the session that spikes lower, rebounds, then drops again to test and hold that support point and then trades up to the high of the session.  

I’m not sure where the near-term bottom is, but I’m confident investors that buy quality names on weakness this week will be up in 2018.  I even think there could be a so-called V-shape bounce in the market, but that doesn’t have to happen.

Stay calm and be ready.

Today’s Session

The dominoes kept falling overnight, as global equity markets took it on the chin, bringing it full-circle back to the United States this morning.   At this point, charting work, which can be helpful during market swoons as a point to measure past levels of fear and greed, won’t work this morning.  This discovery process will find fresh technical levels and turning points.

Imperfect Machines

A just machine to make big decisions

Programmed by fellows with compassion and vision

Donald Fagan IGY

On that note, so much of the action is being driven by machines that presuppose the ability to remove the emotions of humankind, but in fact, they are programmed by people with certain biases.  These machines, and their fancy algorithms, simply carry out the emotions of their programmers at a much faster pace. 

This is adding an intangible factor, creating flash declines, and it makes picking a bottom a wild guess at best.

The good news is great stocks are already oversold, and investors that can handle the gyrations will be rewarded, and those that can buy during the turmoil will be richly rewarded.

For the moment, we are keeping our powder dry.  We are reevaluating all positions and making new assumptions on the macro economic impact of this pullback, which historians will look back on and say was overdue and actually “rational.”