The new worry -- the new concern -- is the overwhelming collection of ETFs that people now use to invest in or short stocks, and how intensive sell orders in these could easily cascade into a crash. The theory is that concentrated selling of ETFs would overwhelm the underlying stocks within the ETFs, so the market would come tumbling down.
Well guess what? We actually saw this happen during the Great Recession. Even though the U.S. Securities and Exchange Commission put in rules against shorting 700 bank stocks in September 2008 when the Financial Select Sector SPDR ETF (XLF) was at $11, that ETF nonetheless went down to $5 by March when the market bottomed.
We can directly attribute a lot of that decline to investors shorting banks using XLF, which seemed like a lay-up at the time given all of the problems that the sector was having. The turn began when then-Federal Reserve Chairman Ben Bernanke said on 60 Minutes that he wouldn't let any more banks fail. We now remember that as a great buying opportunity.
But let me ask you a question: If stocks plummet now because of ETF pressure (particularly ETF-selling pressure) and we have no systemic risk, what's likely to happen? I think that after stocks go down, buyers will come in because there's nothing fundamentally wrong with the stock classes that are diving.
Consider the market's recent February decline. We figured at the time that everything was going down because Treasuries were about to take out 3%. Of course, they didn't.
And more importantly, we saw a few days into that rout that a lot of selling was coming from the VIX pit and the VIX futures and instruments that lots of traders (particularly rookie ones) were using to bet that placid times would continue. As much as the fundamental analysts kept squawking about bond risk, the real risk came from the long S&P 500/short VIX futures trade that had to be unwound. Billions and billions and billions of dollars of S&P 500 stocks had to be unwound.
The damage: The S&P 500 went from 2,876 to 2,578. However, once we recognized that this trade had compromised the market's underpinnings, the S&P 500 quickly bounced back to 2,779.
Now, technicians will tell us that the failure to take out the highs during that run have doomed this market. I get that. Stocks do trade in lock-step, and it's hard to make money when the prevailing thought is that everyone is going to get crushed.
But then again, think of Monday morning. It turns out that it was a great trade to buy the close on Friday provided that you sell everything at the opening on Monday.
So, being nimble when things get oversold can be terrific. You just have to be willing to tread where cowards and those who blindly follow charts could never go, as not a single chartist I follow told you to buy at Friday's bell.
More importantly, what matters here is that as long as there's no systemic risk, there will be things to buy. Sometimes it'll seem like a needle in a haystack, as in: "Why didn't I buy Finish Line (FINL) given that the mall suddenly has some pep in its step?"
Other times it'll feel like an emboldened buy, as is the case with JP Morgan Chase (JPM) . You can scalp that one, or hold on and buy more into the ETF-selling knowing that JPMorgan's earnings estimates are going up, not down into the morass. Compare that to 2008.
Finally, there's the issue of Facebook (FB) , as there are 10 ETFs that include it along with other members of the FANG. You have to decide not about Facebook (which is an animal unto itself), but whether you can use it to buy Netflix (NFLX) and Amazon (AMZN) , where earnings estimates might prove to be too low.
Can Facebook pull down the lot? Yes, in the short term. But once again, if the fundamentals are good, how is that not the most obvious of opportunities?
I say: "Sweat issues like trade wars and real wars, but not ETF-selling." Accept that the latter can cause a landslide as it did in February -- but that without systemic risk, landslides are made to be bought, not sold.