"All of sudden this may be the volatility regime change people have been scared of." -- Peter Tchir (from the Financial Times)
Their Word Was Their Bond
Once upon a time there was a far different market model in place for trading equities. They were traders, floor traders to be more precise. Their word was their bond. Their words were a lot more than that, though. Without verbalizing one's bid or offer out loud, there simply was no bid or offer made. This was not the kind of job for the timid. One had to be quick and bold. There would be no eating lunch on many days for those folks. There would no use of a necessary room, unless ... well, absolutely necessary, and if so, then you ran there, and you ran back. You did not walk. Loafing would not be fair to whoever had to watch your orders while also still working his or her own. Oh, and you never, ever sat down. Never. Between 8:30 ish and 4:30 ish, you only worked. No time for anything else. You knew everything about the stocks that you were in. You were razor sharp. Sounds awful?
Not at all. That was the greatest job in the world. The nature of the job was athletic and competitive. Teamwork mattered. Learning how to stand up for your customers, so that they might stick with you also mattered. More importantly, the model was inherently fair. Now, I know there were complaints back in the day regarding certain individuals. They were few, and by the way, there will always be some weakness somewhere. If you suffered in that market model, it was not the model, I am sorry to say. You were just using the wrong floor trader. No one person ever made a trade on that floor that they themselves had not either initiated, nor agreed to.
Now, compare yesterday's "flash crash", or the one in 2010, or really any single time when electronic or mechanical trading may have done something perverse to the marketplace. That simply does not happen in an open outcry, ongoing, two-sided auction market that occurs at a centralized location. Now, I know the horses have left the barn on this. None of you will weep for my colleagues. There will be no rebirth of a slower, thoughtful model where a trader with some instinct could put his or her hands up, and just say "No, you are not going to take me there." However, a centralized point of sale for each security and a model that permits trading only in minimal pricing increments (I would like to see nickels, but would settle for pennies at first) would create a thicker book. A thicker book in one location per security would help prevent the ridiculous type of moves seen yesterday.
Am I biased on this issue? You bet your tail I'm biased. Am I right in the need to re-establish the significance of human interaction at that centralized point of sale? You all know I am, unless you are the one profiting from the perversion.
Pop Goes the Weasel
More than a thousand points in a day, nearly 1600 at the low. The oddity of a market selling off due to the prospect of higher interest rates, while traders suppress yields due to the use of the U.S. Treasury market as a safe haven. The carnage from Friday only got worse in New York on Monday. That carnage did not stop with the closing bell at 11 Wall Street, either.
The selloff spread across Asia. Japan's Nikkei 225 took a 4.7% tumble. Stocks in Hong Kong fell more than 5%. The Stoxx 600 remains more than 2% lower after opening at far worse levels than that. The story got worse domestically before it was taken overseas, however.
I did a post-closing bell interview with Neil Cavuto of Fox News last night. As Neil went through his opening monologue, I waited to hear myself addressed with a bright TV light in my face. That makes it difficult to see anything but the camera itself. As I squinted over the camera operator's head to try to look at the big NYSE scoreboard where you can see all types of data, I thought I noticed S&P futures markets lurching lower. I couldn't be sure, as those lights were glaring and my eyes are more than 50 years old, but it stayed in my head that something unknown to us at the close of business might be going on.
I had to do more television, as on a day like that there is no shortage of demand for talking heads. Finally, I do get back to my spot, and I see The Street's Jim Cramer tweeting something about the XIV. Hmm.
Roadkill
The Cboe Volatility Index (VIX.X) ran to the largest one-day increase in its history, more than 100%, after years of suppressed movement in a marketplace where central banks had done all they could to smooth out fear. The by-product of this vault for the VIX was the beat-down taken by those who had regularly made a buck through shorting volatility, even leveraging that short. This trade was ... well, roadkill.
Two names in particular were absolutely crushed after Monday's closing bell. The VelocityShares Inverse Vix ETN (XIV) , and the ProShares Short Vix short-term futures ETF (SVXY) , were both off in the neighborhood of 70% to 90% early Monday evening. Rumors swirled everywhere that these two were breaking, and that would force even more mechanical selling on the marketplace this morning, while having an immediate impact on those already mentioned foreign markets.
Oh, joy. A regular winning trade gone awry. Maybe inverse and/or leveraged positions are perverse in nature. Maybe they are inappropriate. You do what you want, but I don't play that game, and I certainly do not like it when that game impacts everyone else.
Headed to Market
While the short volatility crowd was being pummeled last night, the crypto-currency crowd really wasn't doing much better. Ever hear of Agustin Carstens? Agustin is the general manager at the Bank for International Settlements (BIS). Carstens spoke last night at Goethe University in Frankfurt, Germany, and he said at least two things that resonate this morning. Carstens was quoted in the New York Times as saying "Bitcoin is "probably not sustainable as money", and described the planet's leading crypro-currency as "a combination of a bubble, a Ponzi scheme, and an environmental disaster." Wow. Tell us how you really feel.
So, with crypto-currencies weak alongside widespread weakness across the equity space -- some of which at this point is likely to be forced and mechanical -- should you, or "we" be shopping?
The easy money days are over. I have explained my feelings on that in this space over the last few days. We have clearly entered a changed environment. That said, although now you are going to be more likely than in the past to contend with free market pricing for both credit and volatility, we still have a fundamentally sound economy and a fundamentally sound corporate earnings arena. In other words, I believe that equity markets, especially at reduced forward-looking valuations, are indeed investible. I nibbled yesterday. I even nibbled late Friday. Maybe we don't talk about that. Still, on a forced discount like the one we expect to see when they ring that bell at 09:30 this morning, I know I will be looking to add in places. But where?
Shopping List
As markets went out last night, I initiated a long position in Exxon Mobil (XOM) , down more than 10% in two days. Know what, the shares are trading below $80. There looks to be support around $78 and again above $75. I expect to be at both levels, just in case, and know what? These guys pay you 3.8% to own the shares; $64 remains for me a key level for WTI Crude, one that I think needs to be re-tested from below. Apache Energy (APA) , a holding in the Action Alerts PLUS charity portfolio that Jim Cramer co-manages, is back in my wheelhouse as well, now that Nat Gas has collapsed.
I found myself wanting to add to my overall banking position last night. I already have exposure through the ETF KBE, and through Citigroup (C) as well as KeyCorp (KEY) . What I found myself wanting, but unable to do, was to bet long Bank of America (BAC) at $29. Now, this is a little tricky. It pays a dividend, but I don't love it, so it's not a factor. I want the shares for their broad exposure to the domestic consumer, but I want them on my terms. What does that mean? Simply, I am not going to put this position on unless I am convinced that the spread between the yields for the U.S. two year and the U.S. 10-year is approaching 80 basis points. That spread came close yesterday, but with the chase for safety, rattled traders have been buying the long end of the curve, and that spread is down to 68 basis points while I bang this note out. This bid, I will have to manage in a sentient way. No "set it and forget it" type nonsense.
I added to Nvidia (NVDA) in late trade Monday. That firm reports quarterly earnings this Thursday, and has been coming in hard with the rest of the market over the past three sessions. I usually do not violate a cost basis like this, but the gap between cost and last sale in a high-flying name like this might never allow one to increase their holdings, unless one exposes oneself to increased risk at a discount. Apple (AAPL) is starting to look interesting as well. I think I need a little more compression to add here, though. With the $162 level broken, I do not trust this name until it approaches $154. Same for Intel (INTC) , one of my best performers over the past year. I am going to need $42 to get fired up, but it's not just talk. I will be there at that level. How about Disney (DIS) ? The company reports tonight, and has come in a long way; $104 might be fine for a nibble, but given the somewhat regular shaky performance seen by this name following earnings releases, I think I hold out for $102 and back it up with a par ($100) bid. Who missed Boeing over the past year? OK, you can all put your hands down. Let's go the chart for this one.
Chart of the Day: Boeing
Boeing (BA) was the big swing and miss for several traders this past year. Still, from a retail perspective, this remains a tough stock to buy very many shares of. If getting involved, one is going to have to be careful where one steps. I am flat the name. This is my actual homework, not the ramblings of a talking head without a real interest and without any skin in the game.
Now, there is evidence of the Pitchfork holding last night, though the lower wick of the Japanese candle did indeed pierce that spot. Which side of the lower trend line that this stock opens on is important this morning. The second line of defense would be the 38.2% re-tracement level off the late October through late January move, which is when the name really, really took off. That spot did provide a stop sign for yesterday's beat-down. The third line of defense lives down around $307, a 50% re-tracement. That also happens to be precisely where the 50-day simple moving average (SMA) lives. This is where I live, too.
I am OK if the name finds support anywhere close to the last sale and takes off. I have successful longs in the aerospace arena. The idea here is to try to "steal" a few shares at an artificial, mechanically enforced discount; $307, I nibble. In the $290s, I try to get long a quarter of a position. Up here, I focus elsewhere. Sarge out.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (AGN) ($4.74), (ABC) ($1.35), (ADM) ($0.71), (BDX) ($2.41), (BP) ($0.10), (CNC) ($0.93), (CMI) ($2.61), (GM) ($1.43), (LII) ($1.66), (OMC) ($1.54)
After the Close: (APC) ($0.03), (CMG) ($1.32), (GILD) ($1.67), (OLN) ($0.45), (OI) ($0.54), (SNAP) (-$0.16), DIS ($1.61).
