We all accept the fact that, since the great volatility nightmare visited us along with the Pats Crash on Monday, things aren't the same. We just can't quantify what's not the same, other than if you blink you miss what just happened in the stock market.
But it began to dawn on me yesterday afternoon what's really happening right now and it's something that, frankly, isn't so hot for equity investors. You see, we did an interview on the set of Mad Money with of the CEO of a rapidly growing private pizza company in the late afternoon, starting at 3:48 p.m. Right before I start my first questioning, I look at the market. The Dow is up about 240 points, and I am thinking to myself, OK, we survived another one.
The interview ends at 4:05 and I go back to my quote screen and the Dow's down 19; almost every stock that was up at 3:48 is now down, some down hard.
My initial reaction is that we could have said the same thing -- different direction -- about trading at 3:48 the day before: every stock that was down a little or unchanged closed up, and up big. I am not saying that because it closed down yesterday it's therefore bad as opposed to the day before, where it is good. I am not a bull homey.
But what I am beginning to recognize is that we are in a bitter adjustment period where we are all trying to figure out if stocks got this high strictly because of the S&P 500 and its correlation to the bond market and therefore are due for a fall no matter what, or did stocks get this high because earnings were improving and we pay more for higher earnings ... and we should still do so as they go down.
If it is the former, then all I can say is that we will experience a substantial decline at every tick higher in the 10-year Treasury until we figure out that we have taken stocks so low that they seem undervalued -- and immune -- against any jump in rates. In other words, if the bond market is totally in control, then we shouldn't bother to even examine the results of individual companies. It's a huge waste of time.
Odds favor us going lower and that makes for a real helplessness to the stock market right now. If you believe that all that matters is the bond market, then buying the dip is suicidal. Tomorrow you could be even more down on your stock, simply because the 10-year has moved to 2.9%. And when it goes to 3.00% you will be down even more. Maybe substantially more.
You get the picture.
But let's say it is the earnings that are in control. Then we could make a case that stocks as an asset class aren't that overvalued and you can buy the weakness, especially because PEs have come down hard these last few days.
Or we could make a more germane case: right now, it doesn't matter; you are doomed because of interest rates, or you are doomed because of the volatility, or you are doomed because of both, even if earnings go higher.
Let's use a real-life example. Let's say you have watched the stock of Texas Instruments (TXN) fall from $120 to $104 in pretty much a straight line in the last 10 sessions after a pretty decent quarter. Seems like that's a decent pullback.
So you put in a buy order in for a stock at 3:43 p.m. If you used a market order, you got the stock at $104.
But it then was brought down by the volatility unwind -- no doubt, another VIX derivative settle at close debacle like the (XIV) , and you were down three bucks 17 minutes later.
We can sit here and say, well, that was because yesterday's 10-year auction went badly. Or we can say that's because some hedge fund blew up because of the VIX craziness, putting pressure on all stocks.
Or we can reach the conclusion that I think the majority of investors will ultimately reach if the volatility instrument crisis deepens and keeps distorting prices: I refuse to be involved with an asset class where I can lose money so fast, so get me out of here.
The latter is what I think is beginning to dawn on people. We are now in a place we have been to a couple of other times before, where you can't trust the prices. They aren't worthy of your trust. We don't care if it is because of bonds, we don't care if it is because of VIX blow-ups. We just know it isn't working right, or if it is working, it is working against us.
It doesn't matter if the price to earnings multiple is high, like for VMWare (VMW) or Adobe (ADBE) , or low, like for Micron (MU) or General Motors (GM) ; if you buy and you are down big the moment you get the report, you aren't going to put another dime into this market. It's not trustworthy.
And when it's not trustworthy, no one buys. They sell. And they keep selling until prices stabilize and/or mean something pertinent to the value of the enterprise underneath.
From the looks of things, we remain caught in a bond/VIX vortex that may be producing bargains at 3:43 that are mistakes 17 minutes later. That's quicksand. You can't stand on quicksand. So people will step aside until the ground hardens no matter what the price, because you can't have a bargain at 3:43 turn into a nightmare at 4 p.m.
Yet that's exactly what's happening right now, and most newer investors won't be able to tolerate what comes next, regardless of the direction, if it can be wiped out just a few minutes later.