It's on now. The markets are in full-blown correction mode.
I hope the truncated trading day on Friday did not escape your attention, because it continued a negative price trend for stocks that began in late-September. The question now is: How low can we go?
That gets to the oft-quoted notion of "support." Does it really exist? Is there a level at which assets are just "too cheap" relative to their intrinsic values and therefore must be bought regardless of prevailing market trends?
The mistake many market observers often make is to attribute all selloffs to gyrations in sentiment and to misunderstand that stock booms are driven by that exact factor -- in reverse. Sentiment will always rule market pricing in the short-term. That was just as true with Apple (AAPL) at $220 per share as it is with Apple at $172 per share, Netflix (NFLX) at $420 and $258 and on and on down the list. Portfolio managers were buying Facebook (FB) above $200 per share and Amazon (AMZN) above $2,000 because they had to, though, not based on innately unquantifiable, voodoo metrics such as "disruption."
I am basing that statement on my regular conversations with fund managers at very large asset managers, and of course no one can definitively take the pulse of every player in the market. That is the great divide between individuals (my clients at Portfolio Guru LLC) and institutions (pension funds, insurance companies, college endowments, sovereign wealth funds, etc.)
Individuals want their portfolio values to rise. Period. Institutions want their portfolios to outperform their carefully selected benchmarks over specific time periods on a risk-adjusted basis.
So, that's what creates high-flying stocks to begin with. Portfolio managers need to overweight the biggest names in the market -- owning more Apple, for instance, than its weighting in the chosen benchmark would require, not simply owning or not owning Apple. In a rising market that has a beneficial effect on valuations of those names.
If every portfolio manager needs to buy more Apple, Apple's share price will go up, making it a larger component of the S&P 500 and Nasdaq 100. As Apple's weighting increases, those fund managers would have to -- you guessed it -- buy more Apple!
The circularity of that logic is undeniable, but I am telling you that's how the market for big-cap stocks works. Please remember the men and women pulling those levers are responsible for much, much larger asset bases than you are. So they will always move the markets, even if history has proven their timing to be poor more often than it is excellent.
Bottom line: High-flying stocks are driven by sentiment in both directions, thus there is no magic valuation level that supports them.
This is quite apparent in the charts of "fallen angel" stocks such as Ford (F) , General Electric (GE) , IBM (IBM) , and AT&T (T) . The market hates those stocks no more the day after Thanksgiving than it did the day after Independence Day, but certainly no less, either. An investor could generate hours of amusement by Googling "this is a bottom for..." and then entering in any of those names. So many pundits, so many bad support level calls.
So, value traps are no way to ride out a market correction, but what about the stocks that brought us into that correction? Are the FAANG names -- Facebook, Amazon, Apple, Netflix, Apple and Alphabet (GOOGL) (parent company of Google) -- destined to end up in the "hate pile" with GE and IBM? God, I hope not. That's the difference between a pullback and a crash and, by implication, the difference between a depression and a recession.
My analysis shows that buying Apple at 13x next year's earnings -- which implies a price of $172.55, slightly above Friday's close -- has been a lucrative strategy in the past three years. That said, I am worried that the steady stream of noise about production cuts from Apple's suppliers implies Wall Street's estimates for Apple's fiscal 2019 earnings are inflated. So I am not buying Apple today.
And so it goes. Chicken and egg. Is the stock market telling us the global economy is slowing or is the global economy slowing driving down prices for assets, especially oil, thus creating an economic slowdown? Crude's decline has spooked the market to no end, but so has Apple's decline. And Netflix's and Facebook's.
At the end of the day, all securities are assets on someone's balance sheet. Gold, oil, stocks, bonds, really anything on your screen except crypto, which is very very difficult to clear and hence to accurately value. Anything that can be physically transferred can be sold, and in a downturn that can be a sobering thought. Don't forget it.