The Current Market: Investors Lack Fear

Apple (AAPL) took a beating yesterday, due mostly to its association with Research In Motion (RIMM), as one of the leaders of Tech. RIMM broke a perfect record with earnings that missed consensus by just 1 penny, but it was the poor guidance for the next two quarters that got investors reeling. The street thinking is, if the darling of Tech can report poorly, then what does that say for the lesser performers? AAPL finished at 168.26, down a huge 9.13 (5.15%)! I’m pleased to say, that Investor in the Wilderness followers have benefitted from our guidance, as we recommended an all cash position well ahead of the recent decline.

Yesterday’s monumental fall was the result of a perfect confluence of events. Each event played off another event. Let’s start with the Fed policy statement. The Fed statement was a master rhetorical piece that contained a lot of nothing for everyone. The end result, interest rates remained at 2.00%. The Fed is caught between a rock and hard place. They want and need the economy to keep humming along and a rate increase may have slowed that growth, yet inflation is rearing it’s ugly head, a rate increase would have helped curb inflation. Apparently the premium was put on growth.

And what’s the principle cause of our inflation? High Oil and Gas prices. The effects of which trickle down to every corner of our economy. Oil has an inverse relationship with the dollar, and if there ever was a sector that needed help, it’s the falling dollar. A raise in the Fed rate would have helped slow the dollar’s slide into obscurity. It seems to me that a stronger dollar would help curb Oil prices, which would in turn lessen inflation and encourage growth. But what do I know?

The real kick in the pants was after hours earnings from Research in Motion (RIMM), Oracle (ORCL) and Nike (NKE). All three disappointed, but the most important of the three, and the biggest surprise was RIMM, with poor guidance for the next two quarters that reeled the markets. RIMM took a beating in after hours trading, which spilled over to AAPL dropping $2 in after hours trading, then in the morning RIMM gapped down on the open and ended the session in the negative, down a whopping 13.26%!

click to enlarge

All this after hours news just killed futures, which caused a gap down in every index. Then, like a monster set of dominos, Oil spiked, and the dollar plummeted. Once the Dow lost major support, falling below March lows (11,731), the breached January lows (11,635), the Bears were in complete control, the Bulls stepped aside and the market was dragged down right into the close. The Dow closed the session at 11453.42, down a whopping 358.41 (3.03%)! Now 11,635 represents major resistance fro the Dow, and it will be difficult for it to break above that level anytime soon. The S&P 500 closed at 1283.15, down 38.82 (2.94%) and just above major price support at 1275.

So, will we see a bounce? Very likely, but I’m not so sure that it will happen on Thursday, because the MACDs are pointing straight down on every index, including the Naz. The problem is that there is NO FEAR in the market! That’s a scary thought, after such a huge gap down and Bear attack! That means there’s still room for more selling.

The $VIX, the standard for gauging market sentiment/fear, closed just below 24, where in March it had reached almost 36 when fear back then was rampant. And the put-call ratio, another indicator of fear, is pretty low as well. It barely got over 1.10 yesterday, when in the worst of times this past March it got as high as 1.80. So, if the market is relatively complacent, and the momentum is straight down, it looks like we have a good deal of selling to do before the Fear Factor kicks in. And as we know, we need fear to peak, so as to cause the supply-demand equation to flip, providing a trend reversal.

So if there is a bounce, I would use it to set up day trade shorts or to get out of any long positions you errantly entered. But in general, Bear markets are extremely difficult to navigate, so it’s best to play things light. We’ll need positive divergences before we can consider any longs, and that seems to be a bit away from here. 

Disclosure: All cash

Comments

[Toni]

AAPL under 165 today ? Maybe with some good news, maybe an upgrade we can reach 160.

[bluecat]

Still a lot of room on the downside for tech with this lack of fear and high PE ratios. No room for these in a bear market!

[icandoitdon]

"It seems to me that a stronger dollar would help curb Oil prices, which would in turn lessen inflation and encourage growth. But what do I know?"

you know more than most fed officials.

a half point increase in rates would go a long way toward strengthening the dollar, killing speculative fever in oil and sending the message that the fed will back up its ridiculous talk with meaningful action. as for those who think it will hurt banks and overleveraged consumers, let em bleed. leverage is what damaged the financial system and it will not heal unless and until this leverage is unwound....the faster the better. banks must recapitalize and the relentless pressure on their stock prices are sending that message. they can't do it on the back of low interest rates alone. BAC yielding 10% is laughable....let them cut it to build capital.

as for lack of fear, i beg to differ. look at financial stocks....people are so jaded by the virtual collapse of the financial system and housing prices and the run up in oil prices, who cares what else comes down the pike. what doesn't kill me makes me stronger.
that's not to say prices won't drift lower...but a capitulation sell-off? where is it written that it must occur before the market puts in a bottom? we could drift toward a bottom for a long time....as we did in the 1970s.

my strategy is simple...sell half-position puts on stocks i'd like to own at lower prices and be prepared to buy if exercised. cover at a loss if the facts have changed. don't take on too large a position in either a single stock or aggregate position.

there are many great stocks that will likely get cheaper.

[kotika98]

No kidding, lack of fear! Somehow that does not ring true... when people are driving stocks down 4-5-6% in day on top of a 20-30-40% decline if it isnt fear i'm not sure what it is.

BTW, The fact that people are dumping individual stocks, even those without any obvious problem, rather than buying protection on the index via options and driving up the VIX is perfectly consistent with extreme level of fear. In other words, when people are just getting pessimistic they may buy index put options, but when they are panicking they will be dumping the stocks in their portfolio (in mass). I think we are seeing just that.

[icandoitdon]

kotika98.....

makes sense to me.

[Will Rahal]

Investors should be fearful.
The recent action of the markets with the DJIA and breadth making new low, confirm the weak economic data I have been posting for over a year. Even after the tax rebate , consumption is concentrating in essential items as Food & Energy vs Discretionary items.
The ratio of these two series continue to rise indicating more economic weakness.

[adan]

interesting question and topic, relation of fear levels to bottoms, etc -

plus how does one measure fear accurately in relation to market action (i hadn't even thought of that, just figured you guys had the indexes / charts to measure that all figured out :-)

certainly something to be aware of

more certainly, something i need to learn more about

[cynic69]

All this talk about the market "bottoming" entertains me. It seems so obvious that we have passed "peak oil" for cheap, light sweet crude. Oil is a declining resource like gold and the price will increase for the rest of time. The American stock market cannot survive with the price of oil at these levels. The entire auto complex is going to be cut in half. This is going to put millions of people out of work. Ditto for the airline industry. I think most stock prices need to be cut in half for them to make sense in a world built on $30 oil which is being force to live on $130 oil.

[User 218405]

The best advise I can give is to buy stocks and add more to your portfolio while the price is cheap. You know, Buy when everyone else is selling and sell when everyone else buying.