Another Rout. The Dow has lost 1200 points since July 21, 500 points today alone. The S&P 500 closed down 4.8% and the NASDAQ down 5.1%. Yesterday we were looking for a bounce in the market that did not occur in the least. We are in the midst of a liquidity crisis originating from Europe. The stock markets around the world are one of the few liquid markets and investors are selling indiscriminately to raise cash.
The damage was great today but the selling was still not intense enough to call it a panic, a necessary ingredient to capitulation. It is ominous to have such a sharp sell-off prior to a Friday and Monday, historically the days crashes happen on. We are not calling a crash but it is not out of the realm of possibility with a deleveraging world lacking liquidity. When there is a lack of liquidity, not only from the crisis but from summer trading, ranges of price can be very wide.
The last week we have had what we call price loosening, meaning ranges are getting wider and wider. This development can lead to large price moves in either direction. The further this move lower goes the larger the snap back will be. It is this mechanism that makes hedging large price drops such as this tough to succeed at. We are looking for the snap back; it will be an opportunity to lighten up on positions. The timing of the snap back is almost impossible to predict and we hope it’s not more than a day or two away. Many stocks that are the most extended to the downside are likely to have the biggest move up. The reason we mention this is not because we want to buy those stocks but because we are looking to capitalize on those moves for the stocks we own. Selling into the panic is almost never the right move and we want to wait for the rally to do so. Easier said than done.