Stay Cool, Trade Smartly: Ignore the Futures, Yield Curve Craziness

Think about it. We wake up each morning, tune on the financial news and listen for where the futures are trading. If they're up big, we believe our stocks will go up in value. When they're plunging, we wince, knowing our account values are likely to do the same. Why do the futures effect the opening prices so much? Arbitrage. If futures sell for more than fair value huge computer-generated programs buy billions in stocks while shorting futures, pocketing risk-free profits. That drives shares up. The reverse is also true. If futures sell for a discount to fair value, computer-driven programs sell huge amounts of shares, while buying up futures. That makes stocks go lower. While it can make money for those ultra-high frequency traders, the often large percentage moves caused by the trades have absolutely nothing to do with the true values of any of the underlying shares. The Wednesday night to Thursday morning action illustrates how absurd this phenomenon can get. Following the Dow Jones industrial average's 800-point bloodbath on Wednesday, Dow futures had been drifting higher from after the close through about 3 a.m. the next day. Then all hell broke loose. From 3 a.m. through around 7:20 a.m. futures dropped by the equivalent of more than 400 Dow points. If you woke up then you'd have envisioned another horrible day on tap. Instead, the futures pulled a 180-degree turn. By 8 a.m. they were firmly in positive territory, regaining over 400-points. That took the Dow's implied opening to around plus 100-points. Making buy/sell decisions based on fickle indicators like the futures only makes sense if you are presented with chances to sell, or buy, at what would otherwise be, unavailable prices. The other big driver of investor anxiety this week was talk of the inverted yield curve. That typically occurs when coupons on the 10-year Treasury notes exceed the interest level on 3-month treasury bills. Media commentators like to scare people, as bad news sells, driving ratings up. Recessions sometimes follow inverted-yield curves. The problem is that even economists can't predict how far down the road that might take place. Typically, if they play out, it's one or two years afterwards. Are you really going to sell all your stocks now, because of something that might take place that far into the future? If you did so in the past, based on the inverted yield curve indicator, it ended up costing you money, not helping. See the Wall Street Journal's information below to see the facts about how markets performed following news like we heard this week's. Trying to call the market is an impossible task. Use sharp sell-offs like this one to accumulate shares in companies you like, at prices that are incredibly cheap. Here are some that I've been actively buying this week. Discounts ranged from 22.4% to 61.5% from their 52-week highs. All but Atlas Air Worldwide provide well-covered and attractive dividend income. If rates are, indeed, headed back towards zero, good-yielding shares should have even greater appeal to investors. If nothing else, use turbulent times like this to review all your current holdings. Trading out of less attractive holdings into more exciting ones might just provide a nice boost to future performance while potentially cutting your tax bill when you file for 2019 next winter.

Stay Cool, Trade Smartly: Ignore the Futures, Yield Curve Craziness

When you hear hysteria over the inverted-yield curve recession fears, ask whether you are really going to sell all your stocks now, because of something that might happen far in the future?

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