Talk Of A Fed Rate Hike This Month Sends Stocks Into A Nose Dive; What Happens Next Week — More Selling Of Stocks Likely ; How Do Bears Make Money
September 11, 2001
Will this be a September to remember for investors? Well, it certainly is for America as a whole, as we honor and remember those who lost their lives fifteen years ago today as a result of an Islamic fanatic/militant Osama bin Laden and his band of sick sycophants. Fifteen years after that terrible day, we are still at war with militant Islamist’s – even if some notable politicians and others refuse to identify them as a mortal threat to America and the West. Will we still be fighting this ‘war’ fifteen years hence? One certainly hopes not. As technology continues to become more powerful — it is a given that the darker angels of our nature will likely be able to kill many more innocent souls — perhaps hundreds of millions — in a single day. As the horror writer Stephen King once wrote — “God Punishes Us For What We Cannot Imagine.”
As I reflect on that day and think of those we lost, like my friend Mike Selves who was down the hall and a few corridors away from me when the plane struck the Pentagon — I am reminded of this quote: “We cannot choose our battlefields — God does that for us; but, we can plant a standard where a standard never flew.” Remember……..
Fed-Speak & ‘Bond King’ Jeff Gundalch Spark Selling Frenzy On Wall Street
September is historically the worst month of the year for stocks; and Friday, investors got a reminder of just how cruel September can be. Having said that, during a presidential election year — September actually averages a gain — less than one percent; but, nonetheless, a gain. The selling Friday got underway after Boston Federal Reserve Chairman, Eric Rosengren said in a speech that “lower interest rates are increasing the chance of the U.S. economy overheating (higher inflation). Gradually tightening monetary policy is appropriate to maintaining full employment,” he added. Peter Boockvar, Chief Market Analyst at The Lindsay Group said in a note to clients on Friday: “The bottom line – this is important because here we have a voting member, a dove, someone that is calling for a rate hike — even after the recent string of weak economic data.”
On Thursday, DoubleLine Capital’s Jeff Gundalach — who is certainly influential on Wall Street — warned in a webcast to clients that “financial markets are on the brink of turmoil,” and added — “this is a big, big moment.” Mr. Gundalach wrote that the mood among investors “has shifted,” and that they were increasingly under the perception that central bankers were out of economic bullets and at a loss as to what to do next.
Governor Rosengen and Mr. Gundalach’s comments sent traders into ; a selling frenzy; and, as is often the case, “the baby got thrown out with the bathwater,” and there wasn’t much of anything that was safe. Interest rate sectors like utilities got hammered, the dollar strengthened, and commodities fell.
So, What Happens Tomorrow/Monday, Rest Of Week?
In all likelihood, we are going to see more selling and, Monday could be especially painful. That is one reason I urged last week that you put in stops, or trailing stops on all your equity positions — if you could. It is cheap insurance and does protect or limit your downside. I had stops in on about half my positions and thus my losses on Friday were considerably less than they would have been otherwise. I am about 40 percent in cash heading into this week. I may sell the rest of my positions Monday morning; and, wait for the dust to settle a bit before sticking my toe back into the water. I did some buying Friday afternoon; but, I should have waited, as the market continued to sell off into the close and I lost a little more than I should have. I have to fight the urge to buy too quickly. At least the companies I still own are companies that I feel good about.
As to Friday’s action……..”I think this might be the beginning of a correction,” said Chuck Self, CIO of iSectors. “When you look at sectors, it’s a decently broad decline,” adding that “Monday could be a pretty ugly day as well,” especially as stock indices sold off into the close and at their lows of the day. That kind of selloff/close almost always portends more selling the following Monday. “Intraday support has been violated, which increases the risk of downside follow-through,” next week, said Katie Stockton, Chief Technical Strategist at BTIG, in a note to clients. She added, “we believe September will be characterized by a healthy pullback, true to its seasonal influences.”
Stephanie Landsman, writing on the September 10, 2016 website for CNBC, notes that “two days before the S&P 500 and the NASDAQ Composite dropped by about two percent each, Marko Kolanovic, JP Morgan’s Global Derivatives and Quantitative Research, warned investors in a research note that stocks were on the verge of breaking out of a dead zone — and, volatility was about to surge.”
I suspect Mr. Self, Ms. Stockton, and Mr. Kolanovic are right and we’re in for more selling of stocks to start the week tomorrow. I don’t suggest buying right away tomorrow morning; and, maybe not even all day Monday. Having said that, you only call the bottom if you get lucky. The best approach is to leverage in — buying in portions — i.e., putting 20 percent of your portfolio cash to work over a period of days, or weeks until you are fully invested once again. I also suggest putting in stops in case you guess wrong, to limit your downside exposure and avoid suffering additional notable losses. But, you should take advantage of this selloff to get as footprint in those companies that you like — i.e., Facebook, Amazon, Google, Alibaba, Nvidia, Twilo, or any number of good companies that will get unduly punished in a stampede to the exists as we saw on Friday; and, are likely to see tomorrow. Remember, you have to buy when it makes you uncomfortable and when everyone else is selling; and, sell when everyone is in a jubilant mood. Hard to do sometimes — but, it often pays to be a contrarian.
One thing to keep in mind. The market priced in a Fed rate hike that could come later this month, when the Fed holds its annual two-day meeting September 20/21, Tuesday/Wednesday. Should the Fed decide not to hike rates at that time, what happened on Friday; and, likely continued selling tomorrow — will be reversed.
How Do Bears Make Money?
Lewis Braham, writing in the December 26, 2015 edition of Barron’s, had an article titled, “The Best Bear Funds For Today’s Market.” In it, he wrote, “there are only five, actively managed bear-fund products available for retail investors — four mutual funds; and, one exchange-traded fund (EFT). The remaining 132 bear funds are essentially index funds, all structured to deliver the inverse of various indices. These funds — including the largest, $1.7B ProShares Short S&P 500 (ticker: SH) — are really only suitable for short-term trading.”
“Perhaps the best active bear fund is Grizzly Short (GRZZX),” Mr. Braham wrote. “It has beaten 80 percent of its peers over the past decade, has a low — 1.55 percent expense ratio for the category, and mainly shorts individual stocks instead of index products.
Another bear fund, Federated Prudent Bear (BEARX), “holds some stocks on the long side, in defensive, dividend-paying sectors, like utilities and consumer staples, while always being 50 percent – 100 percent short,” Mr. Braham noted.
“Some index-oriented bears,” he wrote, “have proven their mettle,” with Gamco Mathers (MATRX) being the best performing bear fund in the past decade. “Meanwhile, another Gamco fund, Comstock Value (COMVX),” is also one of the best performing bear funds on the street.
I may get an investment footprint in one, or more of these bear funds to start the week tomorrow. Good luck, whatever you decide. V/R, RCP — Remember September 11, 2001.