What does it take for a stock to go up in this environment and is it worth it to try to find that needle in the haystack on a day like today?
I think the answer, frankly, is no. There are far too few of them and the circumstances behind their rallies are so hard to find that it's not worth the hunt. What you have to be content with is buying the stocks of companies that you like that have hit levels that make you happy even if you may have to buy more lower if they don't hold. But with this nauseating wildness it is often better advice just to sit on your hands because we know from yesterday that any rally is suspect or ephemeral at best.
Before we go into how come a stock might be able to stabilize here, I want to describe the pressures that stocks are under to be able to stay afloat at this moment when the S&P is acting as a riptide.
First, let me dispense with something I heard all day, that stocks are going down because of weakness in the bond market that is producing higher interest rates. Let's be clear that combination is NOT behind today's sell off because bonds barely budged today. Wrong suspect!
I know there are plenty of people who want to blame the sell-off on Washington, on the coming sale of bonds to raise money for the government to pay the bills, or the prospect of a government shutdown. But we've seen that kind of thing many a time and it hasn't caused us to have a 9% decline peak to trough in a matter of days.
President Trump has linked his performance to the stock market and even if you believe that he's done nothing today to merit a decline. Nor were there any big earnings reports last night or this morning and the ones that did report were almost all resoundingly positive and, in some cases, that didn't' stop their stocks from going down.
No, the real cause of today's decline is the same as we have had for a couple of days now: the denouement of these obscure products that allowed errant money managers and neophyte investors to make a bet against volatility. Unlike the last year where this bet made you very good money because the market lacked volatility -- therefore making the VIX, the gauge of volatility -- a great short, we've got volatility in spades. It is the last thing you want to bet against.
If you remember the other day, the collapse of just one of these instruments caused a horrendous decline in the stock market, what I called the Pats crash where the Dow fell a percent in about the time it would take to get up and walk down the hall to another office or grab a Diet Pepsi, or turn on a channel to watch the Eagles victory parade in the hero starved town of my birth, Philadelphia.
Remember how these pieces of paper work. They are reset every day and sometimes they can jump gigantically or fall catastrophically if the VIX index spikes. If you shorted one of these that represents the VIX futures that soared today and the instrument is reset much higher at the end of the day, it may be impossible for you to withstand the losses. Chances are you will have to sell S&P futures or the S&P itself at the opening to raise cash if you borrowed money to make the bet.
Now here's the real bad news for the market: I counted 17 different products created by various brokers and managers that allow you to short the VIX in what's known as a leveraged fashion and almost all of them were blowing up against those who used them to bet against the fear index. Of course, money managers can borrow money to lever even more to make those bets, which is only worsening the situation.
Suffice it to say that if anyone sold short an instrument that allowed you to bet on the upside of the VIX the odds favor that person going bust at the end of the day when the securities are reset. Unless they raise money away from these, typically by, again, selling or shorting the S&P to raise cash to pay back their brokers if they borrowed money or their investors if they are angry and want their money back. Hence the downward pressure on the market.
The fact that these are largely bets that are hidden from us and the instruments they use are like cockroaches -- there's never just one blowing up -- tells you that we are in for some real pain that make owning stocks seem like a sucker's game. We have to wait until enough of the managers who used this strategy are beaten and surrender their assets before it is safe to pick at stocks aggressively. The problem, of course, is we don't know when that point will be reached so we are all being held hostage, all at the mercy of these clowns who seem to be creating their own bear market.
We don't know when that will happen, when everyone will be flushed out bit until then let's just say you have to expect some crazy volatility and if you can't handle it, like a lot of the investors who just came into the market, you most likely will sell at a terrible moment simply because you can't take the pain. I don't want you to do that -- no ever made a dime panicking, but it's human nature that you are fighting and that's a fight that most people lose.
So what can protect your stock in this environment? The list is very small. Big dividends won't. The market's going down all at once so a nice yield doesn't stop anything. You can lose far more in the stock than you can make with the dividend.
How about valuation? Stocks can always get cheaper than they are today if there is a selloff tomorrow. It's not a defense.
Buybacks don't matter because they aren't big enough to sop up the stock that is being sold and they aren't allowed to be in place after 3:45 pm as the government doesn't want the companies setting their own prices for their stocks.
So what does that leave?
What worked today?
Only ridiculously wild upside surprises that took your breath away. Today Twitter's (TWTR) stock exploded higher because it reported real profits and tremendous growth. The stock of GrubHub (GRUB) jumped gigantically because it reported an amazingly fabulous earnings report and got itself a new investor Yum! Brands (YUM) . The gains were exaggerated because 20% of the stock is sold short, or bet against GrubHub, because most people thought there was nothing special about a restaurant delivery system. They were wrong and many bought back the stock the stock to close out their positions.
Finally there's the stock of Clorox (CLX) which had a real nice jump today. Why? I think it is because CEO Benno Dorer told a story on Mad Money last night that made it clear that the year is going to be a very good one, even as many of the analysts seem to think otherwise. Plus, Dorer made it exceptionally clear that because Clorox is largely a U.S company it's tax rate is going to come down big and he is going to use the excess cash to reward shareholders with something that sounds very eye-popping.
Finally there's the stock of Bristol-Myers (BMY) , and let's just put this one in the suspicious category because there was no news at all. I suspect we are about to hear of something real good that's about to happen because it's impossible to believe that Bristol Myers would rally for no reason.
So, here's the bottom line: it's the volatility and the instruments blowing up in the wake of its spiking that's the proximate cause of the craziness. We don't know when things will get more placid again, but suffice it to say that until the market calms down or all of these VIX related stocks get crushed and the traders who bet against the VIX gets wiped out, finding winning stocks will be a bit like finding a needle in a haystack. That doesn't mean we can't find some good stocks and buy them slowly and carefully, betting that the VIX madness is almost over. It does mean, though, that you have to leave room to buy more because we don't know when the key variable, the annihilation of the short volatility trade and those who made it, will finally play out.