If you went away this week you're probably thinking, jeez, I missed nothing. In fact, you might have missed the most monumental week in years, a week that showed unprecedented volatility and, perhaps more importantly, eye-popping frailty of the entire equity asset class.
We traveled about 10,000 Dow points up and down for the week in total, a roller coaster that simply isn't healthy, no matter if it ended pretty much where it began.
Amazingly, each day packed a punch and each day yielded lessons that must be learned if you are going to be able to take advantage of opportunity and protect yourself from both the vicissitudes of the market and the weakness of mechanisms that control stock trading.
Monday, in many ways, shocked me and I am a pretty grizzled veteran. I certainly expected weakness at the opening given that China reported a hideous industrial number over the weekend. We have been in the grips of the Chinese bear, given that the second most important economy on earth is experiencing a remarkable slowdown and the stock market, after rallying furiously for almost nine months, has simply fallen apart.
We were still reeling from the end of last week where the Dow fell more than 5% in two days with Friday's 3% decline caused in large part because St. Louis Federal Reserve President James Bullard's oddly-timed interview on Sirius radio where he said he was sanguine about the financial markets and that rate hikes were required, regardless of Chinese turmoil.
Given that many professionals are frightened to death that the Fed is blind to what's happening in Japan and many individuals were shocked by the gigantic losses they had experienced the week before, we expected selling at the opening.
But we didn't get just selling, we got a flash crash with the Dow opening down 1,089 points, reminiscent of the flash crash of 2010 where the Dow dropped 998 points in 36 minutes, although that plummet came from around the 10,000 level so it was a much bigger deal than the 16,459 perch we fell from Monday.
But it was just as scary. I saw CVS (CVS) open down 25 points, Celgene (CELG) declining about 25%, GE (GE) losing a fifth of its value and Apple (AAPL) at $92, down $13 from $105, a very big deal for the world's biggest company, just to name a few of the travesties that popped up on our screens.
It was unnerving to say the least and so clearly a breakdown that it shouldn't have just been called off and all trades broken. But if you used a market sell order you got those horrendous prices, horrendous because they all snapped back to within a couple of percent from where they went out Friday. So, first lesson, never use market orders. A sell order with a limit could have kept you from getting those nasty reports. A buy order with a limit put a couple of points above those prices and you would have crushed it with some terrific buys. You need to see both ways.
Not only that, had you been paying attention to CNBC you might have heard a story I broke about how, unlike much of the conventional wisdom, Apple's iPhone business in China has been very strong since the last quarter ended and had accelerated in the last two weeks. Apple typically doesn't give a mid-quarter update, so the news took the stock from deep red to the black, an amazing 17-point increase, again, something that every trader had a possibility of getting if you just paid attention to the news.
But then the market just plain gave up the ghost with an incredible wave of sell orders upon sell orders overwhelming the system, causing five different firms to have to suspend their businesses. Lesson two? Get a back-up brokerage account because these days you just have to accept that the mechanisms that control stocks just can't handle heightened activity without cracking.
We ended up down 588 points, or 3.5%, which, given the incredibly bad performance from the end of the week, it would have been reassuring to hear from Fed Chief Janet Yellen that it's going to be thoughtful, not ideological, repudiating the non-voting Bullard's irresponsible Friday afternoon fire-yelling in the market's crowded theater.
Despite that horrendous beatdown, the Dow roared at the opening Tuesday, bolting up 350 points and then continued to go higher, adding another 80 points by mid-morning. That run yields another lesson: no one ever made a dime panicking. Had you sat tight through Monday's ugliness you got a fabulous exit point on Tuesday. This is not unusual and reminds you that acting on emotions is often the wrong thing to do.
Unfortunately for the bulls, the rally didn't last as we got closer to when brokers demand that those who have borrowed money from them demand that more money be sent in given the decline in value of their collateral, the stocks themselves. Having worked in what's known as the margin clerk's office, I can tell you that if you don't wire money in by 1 p.m., the brokers liquidate your positions.
Here's another lesson: after very big declines you have to recognize that there are many hurting speculators and if the market doesn't stay up past 2 p.m., when the last of the margin orders are executed, you can expect aggressive selling to return. That's exactly what happened and selling accelerated at about 3 p.m. when word leaked out that there were many big market on close sell orders coming in from large mutual funds. The rumors turned out to be true and the market just collapsed, ending down 1.29%, or more than 600 points from peak to trough. It was a deeply discouraging day and left the averages in correction territory down more than 10%.
You had to figure that Wednesday could be even worse with the Chinese index losing about a percent and tons of red ink overnight. But you would be wrong. Incredibly, the Dow rallied 350 points at the open, reminiscent of the action the day before, except there was a big difference. At a little after 10 a.m., Bill Dudley, a far more influential Federal Reserve official, expressed a pragmatic view of whether the Fed might raise rates in September or not, letting the information determine a possible change, the first in nine years, toward tightening. That more nuanced view, so different from Bullard's bludgeon, brought out buyers who flooded the market with orders and drove the stock market right through the day, allowing the averaged to finish up 619 points, or 3.95%.
Two lessons here: one is that we need to be ready for a Fed increase if stock markets globally get calmer because the economy in the U.S. is very strong, something confirmed by the gross domestic product number of up 3.7% reported Thursday. Second, though, is that regardless of what the Fed does, there's plenty of money on the sidelines waiting for bargains and after a 10% decline for the year there were many bargains to be found. We had a stunning change in mindset where many stocks suddenly yielded twice what the Treasuries gave you. At the same time, we saw tech, which actually stayed fairly strong in Tuesday's decline be joined by the financials in leading the market. That's always a bullish sign. Next lesson? Stocks get cheaper as they go down and you can use market volatility to buy stocks of high-quality companies at your prices.
Wednesday's rally produced an all-clear that brought out buyers worldwide; even China rallied going into Thursday's session. We jumped almost 300 Dow points from the get-go and we stayed higher bolstered by a remarkable run in oil, of all things. That's right, we got the biggest one-day gain in oil, 10%, in six years and that ignited the sorriest, most damaged part of the stock and bond markets -- energy securities.
I know it seems counterintuitive, but we always must be on the lookout for what we call a credit event, some firm or firms going bust because they've been betting the wrong way. We never know who's going bust until it is usually too late, as we saw with the demise of the hedge fund Long Term Capital in 1998, which produced about a 20% decline in the averages. If there's going to be an event now it would be in commodities because of their relentless decline. The big oil gain ameliorated those fears, hence another lesson: in times of stress remember that wrong bets from gigantic firms can produced such giant losses that they can bring the house down. When the stress gets relieved, you can rally on even something that makes no sense in the real world: higher gasoline, which acts as a tax on individuals.
Today, logically, we are meandering, as traders square off knowing that the Fed's Stanley Fischer told CNBC's Steve Liesman basically what Dudley said on Wednesday, which is that the Fed's sensitive to market turmoil and will take it into account when it figures whether to raise rates in September. The reaction was swift. The market went lower. But then again, why shouldn't it have? Dudley's comments came after a 10% decline. Fischer's? When we were back to even and the turmoil, for the moment, seems to be behind us.