The market is on thin ice -- at least when it comes to liquidity. Yesterday's market was haunting, because it rolled back a great deal of hard-fought gains in a great deal of places in what was almost a flash-crash setting.
It all started with a sickening 6-point drop in Apple (AAPL), in about four minutes' time right after the open, for no reason whatsoever. It was just a big seller hitting bids, and there was nothing, literally nothing, underneath. It made you realize that Apple had been either jacked up going into the end of last month, or that there was some sort of an algorithmic trading program led by Apple, because within a few minutes every major tech stock got hammered, save for Microsoft (MSFT), which was down last week. It was as if there was a well-orchestrated raid -- and that can't happen if there is any liquidity at all.
It was like a roving selloff, though, because then I saw a whole group of oil-related preferred shares just unravel -- really good pieces of paper, right along with the bad. Then the railroad names just cascaded as if they were all about taking oil to the market. While this is becoming an important business line, believe me: In reality, these rail companies are coal-bound more than they are oil-bound. Didn't matter. The stocks had been up on a spike, and they got spiked badly on the way down.
Then the witch hunt for anything oil-related brought in sellers who seemed to be in such a hurry that they didn't even want bids to build. Did you see the smack-around in United Rentals (URI), a company that rents some equipment to be used in the oil patch? How about the breakdown of General Elecrtric (GE), even as I bet the company's numbers will be just fine?
Then the ETF-related selling just seemed to be everywhere at once.
You know what else tells the tale? How about when one buyer comes in and just decides a stock isn't going down? That's what happened with Hain Celestial (HAIN), a stock I like. The guy just stood there and bought everything $1 higher. You can do that when there's not a lot of volume, and when there is no ETF pressure.
Yep, I thought that the action yesterday showed you that the market had a real roach-motel quality about it for the first time in ages: You could definitely get in, but there was no way to get out.
I think things will reverse and, as I indicated in yesterday's long piece, you have to buy, not sell, these big intraday downturns. But don't do what that Hain buyer was doing. Just bid underneath, on the way down. Let the illiquidity work in favor of you, not against you, and you should get some real good prices on the way down before the markdowns end.
I do know this, though. It will be frightening to buy on these days when shares of the world's largest company can crumple like a cheap Kmart suit, on nothing, no news. Not a single story. It's a be-careful-out-there moment -- and even more of a reason to do call options, and not common stock, and to sell common against the stocks on days when they take 'em up like yesterday's session took them down.