The Panic Is Relatively Confined

  • Posted by on August 21st, 2015 at 8:19 pm
  • Comments: 0

Today was the first real fear I’ve seen in the equity market since 2011. Yes we’ve had other pullbacks since 2009, notably the fall of 2014, but this is different, it isn’t due to some macro event half way around the world in Greece that never really played out.

This selling is different. From the looks of it the decline in energy and metals prices has caught many off guard. The selling in energy, materials, and industrials (related to the former, and China) is certainly in panic territory. Crashes happen when risk is not managed and models do not account for certain events. This is starting to feel like one of those.

The gold miner index is trading at its steepest discount to gold prices….EVER. Exxon is down 10% this week alone.

This is a full on panic in these sectors. And this week it finally bled over into everything else. Apple is now 20% off its highs. They even shot Palo Alto Networks, the momentum leader. PMs are selling good stuff to make up for losses in energy, materials, and industrials and things are starting to snowball. The question now is, how much worse is it going to get in the ugly sectors before this is over. How bad and leveraged are the balance sheets of these companies. Are we half way through this, or is this going to be a protracted decimation of those industries.

Crude keeps falling and frankly there’s no reason it shouldn’t trade below $35 here given what’s going on. The Saudis don’t seem to care, Iran wants to pump as fast as possible, and Putin is willing to see everyone in Russia starve before he caves.

The action at the close today didn’t seem like a few people panicking for no reason, it seemed like real PMs coming to the realization that they hadn’t called this correctly and need to significantly adjust. It felt like some funds blew up today.

Here’s the good part. There isn’t a crazy amount of artificial leverage connected to other parts of the economy in the energy sector. Yea, some jobs will be lost, so what. On the other side as well, lower oil prices mean more money in American’s pockets, which is partially why consumer discretionary names are still acting well (until yesterday). The economy is very healthy save for the multi national industrial names selling to China (China is in some seriously trouble here, Chanos was correct). You can expect the A-Shares to give back at least another 20% if not more from here. I wouldn’t be surprised to see us all the way back to where this run started, that’s what happens to bubbles, and boy was this a classic one.

How do you play it?

Well, one of the first rules I was taught was to never buy anything trading below a declining 200 day moving average unless it was for a short term mean reversion trade. Well, everything but the Nasdaq is now in that territory. Indices are like cruise ships, it takes a while to turn one around and once it’s going in that direction it takes a while to turn it again. This action in the slope of the SPX does not bode well for a quick bounce back and run to new highs. I would say we’re in for at least 6 months of chop, at best. The action in late 2011 is probably the best corollary.

I would start to build a shopping list of both momentum leaders that have held up well (think Sketchers) and extremely beaten down energy, material, and industrial names with solid balance sheets. There are going to be some serious values there in the coming weeks/months given everything is getting taken out back and shot right now in those sectors.

Today was Fugly, and it definitely feels panicky in certain places, but it doesn’t feel like there are real structural problems with the other sectors, they are just getting sold because they have to. We’re going to continue to see wide dispersion in returns between industry groups, and even within industry groups, save for days like today.

Build your lists and sit on your hands.


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