Thursday's market action was like a 400-level college course on volatility, investor psychology, and what can happen when there is great uncertainty all within a single trading day. Against the backdrop of Russia's invasion of Ukraine, the S&P 500 opened down about 1.7%, and at its lowest point was down 2.6%. It closed up 1.5%, a 4.2% gap between the low and close.
As you might expect, the ride was even wilder in small-cap land. The Russell 2000 was down 2.3% five minutes after opening, and closed up about 2.7%. The spread between the daily low and close was about 5.4%.
The Nasdaq embarked on an even bigger roller coaster ride, opening down 3.3%, and closed up 3.4%. The spread between the low and close was 6.9%.
However, it was the ride of many individual names that presented the most-stark representation about what can happen during the course of a single trading day, in uncertain times, and I'll use some names I currently hold and some I don't as examples.
Retailer Fossil Group (FOSL) opened down 4.1%, and closed up 4.4%, with a 9.8% spread between its low and close. Weber (WEBR) opened down 4.3%, closed up 4%, and ended the day with a 13.6% spread between the low and close. eBay (EBAY) opened the day down 8%, closed up 1.6%, and had a 12% spread between low and close.
Some assets went the other way - those seen as hedges against uncertainty. The Sprott Physical Silver Trust (PSLV), for instance, opened up 3.3%, as silver approached a 1-month high, and closed down 1.4%.
Expect to see more of this type of action as several situations play out, the latest of which is war. That could compound inflationary pressures, especially in energy. What the Fed will do next remains to be seen. They may not end up going through with what some expected to be a 50bps rate hike in March, opting for a 25bps instead.
All of this, domestic issues, international issues, will compound the volatility, and daily swings. Dry powder may allow for some bargain shopping, and some opportunities to pounce on "throw the baby out with the bathwater" opportunities. It's a decent environment to find situations where market punishment does not fit the crime. However, putting capital to work now requires a stronger than normal stomach.
What a lot of investors miss - maybe all of us at some point - is the extent to which overall market direction affects their individual holdings. I can't tell you the number of times I've heard an investor wax on about their 20% gain in an individual name, when the broad markets are also up 20%. It is very easy to mistake overall market direction and/or luck for skill. We've all been there.
From a fundamental perspective, here are some questions I'd be seeking answers to in a potential bargain situation in these tumultuous times:
- Is XYC company really worth X% less today than it was yesterday, or is it the innocent victim of a market that has overly punished it?
- What is it about this company that the market is missing?
- What else can go wrong from a company specific perspective?
- What is my time horizon?
- How much more punishment am I willing to take?