It was beautiful to behold. Stocks could do no wrong for seven straight days. The markets soared with the S&P 500 gaining 7% and the NASDAQ rising even more. That is until Friday.
“In one day they erased the entire week’s worth of profits,” moaned a Wall Street day trader I talked to late that day.
I was tempted to say ‘I told you so’ since we disagree on the market’s direction, but he is a lot bigger then I.
As I expected, markets pulled back on Friday despite some good earnings reports from several big market-moving companies. There was also the passage of the long-debated financial reform bill in Congress as well as a proposed settlement between Goldman Sachs and the Securities and Exchange Commission over its conduct in selling mortgage-backed securities to investors during the housing crisis. These last two issues have been weighing on the markets for most of the year. Still, it made no difference.
I commended my day trader friend’s ability to hang in there given that retail investors overall are abandoning the markets in droves. Who wouldn’t in a market that in the last 16 days has dropped 10% and then climbed 7 %? There was a time when it would take two years or more for markets to move that much.
But it’s not only the market volatility that has changed. The Wall Street Journal this week pointed out that since the 1986 market crash, stocks increasingly move together in the same direction at the same time.
I grew up picking stocks. Back in the day, if you did your homework, visited with company management, kicked the tires on their businesses and bought a stock at the right price and then held it, the markets would ultimately recognize that value and reward you for the effort, no longer. Today, big institutions with multi-billions to invest buy baskets of stocks. They want exposure fast so they buy broad indexes—the S&P 500, the NASDAQ 100, the Russell 2000 and so on. To them, it’s all about getting in (or out) of the market in size, not whether an individual stock is going to have reasonable earnings this year and next.
Stocks have become the boy toys of massive proprietary trading desks who manipulate the price of any individual stock they choose for short term profit. That’s why a perfectly good company with great prospects can suddenly be down 30% in a week on no news. The big guys are shorting it and woe to the individual investor who is in the way. In my opinion, stocks today are simply too risky for the little guy.
I switched to investing in exchange traded funds (ETFs) years ago for that reason. It is also much easier to select a sector or country that I believe will outperform the overall market then it is to pick that one special stock. Sure, there are still periods when individual stocks outperform the indexes, but those days are becoming few and far between as over 70% of the market is taken over by flash trading and computer generated buys and sells.
Right now, as I’ve warned readers, is not the time for new purchases of stocks, ETFs or mutual funds unless it is in an extremely defensive area. This is a time to protect your capital, not squander it chasing markets that will ultimately repeat Friday’s performance to your dismay. I maintain my 950 target on the S& P 500, which is a good 120 points lower than where it is today. In the meantime, have some patience, take a vacation and let the markets do their thing.