Down Day in the Market !

[JoeWras]

Hence the snowball. It’s like a game of musical chairs.

Personally I’m glad to see a big shake up and get some of that complacency removed, and get a little fear into those inexperienced investors.

Agree. I've been waiting for this "unstable bottle" to topple over.

Although 2008-09 seem like yesterday to many of us, the fact is that a whole new class of investor has joined in since and they haven't seen a correction or bear. Additionally, many of us have amnesia. We need a booster shot.

This is also the first good test of the new class of robo-adviser investors. Reading about how markets work is different than experiencing it.

For me, it was '87. It was the first time I had recurring money in the market (401k), and I have to say, '87 was quite a shock.

 

[street]

When interest rates get high enough, some folks decide to hang out in bonds instead.

I think there were folks piling in who hadn’t had experience with volatility. They got a little taste of why equities aren’t clear sailing.

Although memories sure are short! That Dec 2015 to Jan 2016 was pretty nasty and scary. Folks sure forgot about it quick though.

True >>> I planned on retiring early 2016 and I did but was some nervous days. Now looking back it was a great time to jump.

 

[JoeWras]

Although memories sure are short! That Dec 2015 to Jan 2016 was pretty nasty and scary. Folks sure forgot about it quick though.

It was, but for some reason this one felt worse. When I look at the chart, the 15-16 slope up to the pullback was lower and there was a bit of chaos before the drop.

For this pullback, it was just a day after day after day slope up and then BAM.

 

[frayne]

I must admit that I do not understand what is driving the violent swings in the market this past week. It seems that a derivative security designed to respond to changes in volatility is actually driving that volatility. And, in an even more bizarre set of circumstances, driving the trading value of actual equities whose changes are the measure of that volatility.

Yes, I know that P/Es have advanced sharply recently and that interest rates have recently spiked. Absent other things, that might drive a correction in the market until we get values more in line with underlying fundamentals. But that still doesn't explain the unprecedented volatility.

Given that I don''t know why things are happening, I do not feel I have adequate knowledge to formulate a response. So I am sitting tight. I am still as rich as I was at Thanksgiving, which was good enough then and still good enough now.

Here you go, Cramer has all the answers; https://www.cnbc.com/2018/02/08/cra...|finance|headline|story|&par=yahoo&yptr=yahoo

 

[Gumby]

What a bizarre positive feedback loop. You sell stocks to cover your losses on the inverse VIX instrument, which drives VIX even higher, which makes your position even worse, so you have to sell more stocks. Who ever thought this was a good idea?

 

[audreyh1]

It was, but for some reason this one felt worse. When I look at the chart, the 15-16 slope up to the pullback was lower and there was a bit of chaos before the drop.

For this pullback, it was just a day after day after day slope up and then BAM.

That felt way worse to me. My portfolio hadn’t recovered from the prior year withdrawal yet, and I had just pulled out another years income, so portfolio had been shrinking. I remember looking at what my income would be if we took another 20% equity hit just to know in case I had to deal with reduced income.

Oil prices had collapsed very suddenly. The economic effects seemed widespread and ominous. Uncertainty was very high.

Our portfolio is so much way higher over the past year that we could give up most of the 2017 gains and I’d still feel OK (knock on wood!).

I guess I’ve been expecting some kind of blow-off top, so I feel some relief that it has finally happened. And would feel better if it went farther.

If 10-year rate gets to 3.25% anytime soon, I’d fell like this phase was pretty much done and expect moves above that to be reversed, at least for the short term. A 10 year yield that high will have an economic effect as it will weigh on housing and corporate financing. Whether that drives things out of balance enough for me torebalance, who knows.

 

[audreyh1]

What a bizarre positive feedback loop. You sell stocks to cover your losses on the inverse VIX instrument, which drives VIX even higher, which makes your position even worse, so you have to sell more stocks. Who ever thought this was a good idea?

Exactly! Absolutely nuts!

Yet people made “easy” money on these inverse VIX vehicles for well over a year. Thus the piling in.

When the markets get overextended, we often find out later how much of it was driven by buying on margin and dangerous investment vehicles.

 

[WestUniversity]

Maybe. Maybe not.

There were people not paying attention today, so this weekend they will have a chance to see what happened to their portfolios.

One group will say, "OMG! I lost a ton and need to get out."
Another group will say, "OMG! Buying opportunity!"

We won't know which is the larger group until next week.

Totally agree. Its been funny hearing the talking heads on TV and even acquaintances at work or elsewhere breathlessly talking about the recent volatility in the market and pontificating on what is driving it. I simply smile, look for more buy opportunities and rebalance if necessary...

 

[JoeWras]

That felt way worse to me. My portfolio hadn’t recovered from the prior year withdrawal yet, and I had just pulled out another years income, so portfolio had been shrinking. I remember looking at what my income would be if we took another 20% equity hit just to know in case I had to deal with reduced income.

Oil prices had collapsed very suddenly. The economic effects seemed widespread and ominous. Uncertainty was very high.

You see, in my little brain, the reduction in gas prices was nice.

I knew WHY oil collapse was bad, but for my little world, it was nice. I know, I know, stupid.

On top of that, I visited Greece at this time, and the dollar exchange was awesome. More "all about me" nice things. And besides, the Greek people were on the whole of the attitude of: whatever, let's sit down, relax, and have some wine.

But, yeah, it wasn't a pleasant time overall when you think about it.

 

[audreyh1]

You see, in my little brain, the reduction in gas prices was nice.

I knew WHY oil collapse was bad, but for my little world, it was nice. I know, I know, stupid.

On top of that, I visited Greece at this time, and the dollar exchange was awesome. More "all about me" nice things. And besides, the Greek people were on the whole of the attitude of: whatever, let's sit down, relax, and have some wine.

But, yeah, it wasn't a pleasant time overall when you think about it.

Oh sure, it was great for my pocket book and also meant inflation would stay low for quite a while. In fact I think the Fed was worried about deflation and thus took a year before resuming their Fed Rate increases.

And the exchange rate was very nice in 2016.

But in terms of my long-term investments, things were looking a bit bleak there in Jan and Feb. I hoped that the economic effect would be muted, but we didn’t find out the answer until later.

 

[gayl]

I was in France and really enjoyed the exchange rate Unless I need to pull it out, it doesn't affect me. It'll matter more in 4 yrs but right now it's like waiting for an impending sale. Never too sure when it'll have 'close out' or 'end of season' pricing. Like a skirt that was $50 marked down 25% then finally 50%.

 

[JoeWras]

I think the point here is that sometimes emotions come into the market-play. We may be a more analytical group than typical. How one feels about things matters, especially when the machines seem to be in control.

DW keeps reminding me about her co-worker who called Fidelity's 401k department once a week and berated them about the stock market. (Early 2000's) This guy also wrote a letter to Alan Greenspan. Yes, emotions sometimes get people going a little crazy.

 

[NW-Bound]

Don't forget that it is those naive people who piled into the stock market that drove the stocks up for us to enjoy, and now we berate them for selling.

Something I read on the Web:

Why is it that when the market is climbing by improbable leaps and bounds month after month we are supposed to take that as a genuine reflection of the fundamentals, but when the market is in a free fall, we are supposed to write that off as momentary fits of irrationality?

The truth is that the market is just as irrational and divorced from fundamentals on the way up as it is on the way down.​

 

[USGrant1962]

This ride was interesting to me because it is the first big downdraft since I shifted to a "retirement" AA of ~55/45. I was essentially 100% equities when I rode down '87, '90, '00, '08, and '11.

So I did the math this morning and my portfolio is down from the [unrealized] peak by only 5.4%. Pretty good with stocks at -10% and bonds down too. I'm liking this AA thing

Also, Yardeni has updated his bull/bear report - I think he does it weekly - showing the current correction https://www.yardeni.com/pub/sp500corrbear.pdf

 

[Gumby]

Exactly! Absolutely nuts!

Yet people made “easy” money on these inverse VIX vehicles for well over a year. Thus the piling in.

When the markets get overextended, we often find out later how much of it was driven by buying on margin and dangerous investment vehicles.

Cramer's piece intrigued me, so I did some more digging and found this https://www.bloomberg.com/view/articles/2018-02-09/inverse-volatility-products-almost-worked

In short, it seems no one who held these instruments could tell with certainty what the price really was or how it would react to events in motion. If you think that a certain market move should make your instrument go up and it makes it go down instead, I'd say you don't understand enough to be invested in that instrument in the first place. What a mess these people are making.

 

[NW-Bound]

Earlier, I saw after the fact that XIV was at $99 when its trading stopped for quite a while. When it reopened, it was at $7. I did not know the reason. The above piece explains it.

Hopefully I am a contrary indicator and we go back to the parabolic rise.

I don't need parabolas.

A nice 6% slope would be fine...

I don't think anyone would expect parabolas now. Not after they bail out of their 401k and the S&P SPDR index fund en masse.

I would be happy with a boring 6% year-in-year-out, but the market does not work that way.

Some people tune out all the news, either because they are not interested or are scared. I find it fascinating, and always look for ways to profit. Most of the time, I did not even dare, or just made some feeble attempts, but I could not help it. I hate the crazy crowd, and want to bet against them.

 

[kcowan]

I think it was Ben Graham who said that long term, the market acts like a weighing machine, while in the short term, it acts as a voting machine.

I think his point was that we should focus on the long term.

 

[NW-Bound]

Also, Yardeni has updated his bull/bear report - I think he does it weekly - showing the current correction https://www.yardeni.com/pub/sp500corrbear.pdf

Just a quick look at his very first chart reveals the low volatility we had until 5 days ago. Starting from 2016, the wiggly little day-to-day variations were a lot less in magnitude than were there earlier. This did not go unnoticed by people. Indeed, because it was taken for granted that these derivatives blew up.

So, it happened, but has anyone seen any explanation for how or why we have such low volatility the last 2 years?

 

[REWahoo]

So, it happened, but has anyone seen any explanation for how or why we have such low volatility the last 2 years?

My theory is the market was on Valium and the prescription ran out.

 

[frayne]

Stupid question but does anyone actually track the metric of how many points up and down the market went past week. Basically total travel differentials, not just point differences from/at openings and closings.

 

[NW-Bound]

I saw someone actually did that. The total travel was something like 22,000 on the Dow, if I remember correctly.

Man, some good day traders could have captured a sizable portion of that. Hello, Lamborghini and Rimac. At the expense of the other parties of course.

Heck, they got my Lamborghini too. The one that I left unrealized.

PS. Ah, shucks! I still have more fancy cars left unrealized in my accounts. I hope the market will leave them alone.

 

[audreyh1]

My theory is the market was on Valium and the prescription ran out.

Yeah. Interest rates stayed low even though the Fed was raising the Fed Funds rate and inflation stayed below Fed targets. But a lot of people were drinking some rah-rah koolaid.

But the uber low volatility period did have a lot of market veterans scratching their head. So I don't think anybody knows really.

 

[audreyh1]

Stupid question but does anyone actually track the metric of how many points up and down the market went past week. Basically total travel differentials, not just point differences from/at openings and closings.

Well if was over 20,000 points on the Dow according to a CNBC headline yesterday.

 

[NW-Bound]

Ever since I used Quicken to track expenses, I was amazed at the money that I spent, living the non-luxurious life that we do. It's a lot more than I initially thought. I think people who are still working do not sit down to count the money that they spend. Why, a professional couple make hundreds of K's a year, and so they spend millions a decade. Where does that money go, and do they have anything left to show for it?

I digress, sorry. What I wanted to say was that I spent a few Lamborghinis since I retired, and that's only 6 years ago. All from the market. Gotta love the market despite its temperament.

 

[JoeWras]

NW-Bound: you are digressing ... or maybe not.

This is a lot of what drives markets. A lot of people found they had a few Civics in their pocket last year, and started spending. The wealth effect, if you will.

Some of this was consumer goods, some was investing, maybe even bitcoin.

I know I "blew that dough" last month feeling good to buy my retirement laptop that should serve me a few years. Honestly, today I might think twice.

So, getting back to the rest of the USA, many people spend, spend, spend per paycheck. No investment at all. There are plenty of professionals who get a raise, and get a new car lease up to the next level. Or get into the country club.

Is this bad? I don't know, maybe not. It does drive certain sectors of the economy. It certainly is bad for their retirement!