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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School For Bums
Posted by Leigh Drogen on August 8th, 2015 at 11:17 pm, Comments: 0
It’s a beautiful day here in NYC and I was sitting in Washington Square Park listening to this guy rock a piano like I’ve never seen before. He was playing a mix of his own stuff and other artists, narrating what he was playing between pieces with stories. This guy is seriously rocking this piano […]
Estimize Raises Series B Led By WorldQuant Ventures
Posted by Leigh Drogen on April 9th, 2015 at 1:33 pm, Comments: 0
I’m stoked to announce that we’ve raised $3M in Series B funding from an incredible group of investors led by the venture arm of our first client, WorldQuant Ventures. I’m currently writing this from my new private yacht cruising with the rest of the team off the magnificent coast of…. just kidding! Back in 2012, […]
Will Automation Make Africa The Lost Continent
Posted by Leigh Drogen on January 4th, 2015 at 5:03 pm, Comments: 0
There’s a race taking place right now between economic development in Africa and automation. In my opinion this race will weigh heavily on whether or not Africa becomes the lost continent. The classical model of economic development goes something like this, and you can see it currently taking place in various stages throughout South East Asia. […]
My 2015 Stock Picks and Big Trends
Posted by Leigh Drogen on December 31st, 2014 at 5:08 pm, Comments: 0
Before we get into the 2015 picks, below are the 2012, 2013, and 2014 picks with their associated review posts. 2012 picks – 2012 review 2013 picks – 2013 review 2014 picks – 2014 review As always, a small caveat regarding my 10 stocks picks for the year. Nowhere outside of these yearly posts would I ever pick a […]
Is Israel In Danger of Being Destroyed?
Posted by Leigh Drogen on December 31st, 2014 at 12:03 am, Comments: 0
If you believed what you read in the global press you’d think that Israel was on the precipice of being wiped off the face of the earth. The drum beat of sensational alarmist press these past few years especially has been incredible to watch. I’ve been thinking about why that drum beat has become so loud. […]
Review Of My 2014 Picks and Trends
Posted by Leigh Drogen on December 28th, 2014 at 8:58 pm, Comments: 0
Ho-ly-bejesus, what a year. 2014 ranks up there with some of the hardest years ever for long/short equity traders (markets that go straight down are easy). There were land mines everywhere, a massive high beta meltdown for 2 months, the whole energy complex gets taken to the woodshed, the economy is on fire but traders […]
The Most Powerful 27 Year Old In Finance?
Posted by Leigh Drogen on July 3rd, 2014 at 9:49 pm, Comments: 0
According to someone at Business Insider I’m the most powerful 27 year old in the financial world, ok, I guess they had to give it to someone ¯\_(ツ)_/¯ The Most Powerful Person In Finance at Every Age – Business Insider By the way, a few notes and some background on that picture. The stats on there […]
You Won’t Believe What This Asshole Said About Yo
Posted by Leigh Drogen on June 24th, 2014 at 12:22 pm, Comments: 0
Unless you’ve been hiding under a rock this past week, you’re familiar with the Yo app and the cacophony of nonsense spewing forth from the internet since attempting to assign meaning to its meteoric rise (by the way that idiom makes no sense). Everything from, this is the inevitable result of technology being so cheap […]
Deltix Publishes Quant Strategy Using Estimize Data Producing 28.5% Cumulative Market Neutral Returns
Posted by Leigh Drogen on June 20th, 2014 at 6:50 pm, Comments: 0
At Estimize we love when research firms, academics, and financial infrastructure providers take our data and produce insightful research with it. We use some very orthogonal philosophies to collect our data at Estimize, and while we can attempt to explain how we do that all day, trust is really built by third parties validating its […]
Leigh Drogen is the founder and chief investment officer of Surfview Capital, LLC, a New York based investment management firm employing an intermediate term long/short momentum strategy. More »
- The Panic Is Relatively Confined
- School For Bums
- Estimize Raises Series B Led By WorldQuant Ventures
- Will Automation Make Africa The Lost Continent
- My 2015 Stock Picks and Big Trends
- Is Israel In Danger of Being Destroyed?
- Review Of My 2014 Picks and Trends
- The Most Powerful 27 Year Old In Finance?
- You Won’t Believe What This Asshole Said About Yo
- Deltix Publishes Quant Strategy Using Estimize Data Producing 28.5% Cumulative Market Neutral Returns
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