Staging a furious rally with the nation’s biggest funds buying back the same shares they sold off last week taking the Dow Jones Industrials down 2,600 point or 10% of market value, shows how Wall Street does busines. Whether admitted to or not, when markets rise too-much-and-too-quickly, major funds take profits, dumping shares not because of underlying fundamentals but purely because of profits. Rebounding over 500 points, the small investor must take heed of how investment and retirement accounts can drop like a rock when the big funds decide it’s time to take profits. With today’s rebound, it looks like concerns over rising interest rates, liquidity problems at Exchange Traded Funds [ETFs] and growing budget deficits not take a backseat to funds retaking positions after a profitable sell-off. No one really knows if or when the sell-off morphs into a bear market.
Whatever the GOP’s new tax plan and budget eventually does to the economy is anyone’s guess. If interest rates rise too quickly it could throw cold water on the current positive outlook, that, like the stock market, can sour quickly. For now, markets look poised to regain lost ground during last week’s profit-taking session, correcting the Dow, Nasdaq Composite and S&P 500 by about 10%. “I think the market was way, way oversold, way too fast and therefore there’s this natural bounce,” said Ken Polcari, director of floor trading at New York City-based O’Neil Securities. When you talk about oversold for fund manager, it’s simply a matter of making profit on the buy-and-the-sell. There’s no ceiling on how much fund managers like to take in profits, knowing that it’s difficult to make quarterly goals without periodic profit-taking. Stock values are purely based on what investors are willing to pay.
Old metrics to determine value based on how much shares cost relative to multiples on earnings-per-share no longer seem all that relevant in rising markets. Tesla, for instance, trades a $315 per share but the company has zero earnings per share, making the metric useless. Crypto-currencies like BitCoin, hitting its record high Dec. 17, 2017 at 20,000 then selling off to today’s $8,868. “There’s news coming out about the budget, fiscal stimulus and infrastructure plan that is adding fuel to the fire. People are very positive about it,” said Polcari, forgetting that last week’s “news” was equally negative. What Wall Street analysts don’t like to talk about is the “news” follows either frenzied buying-or-selling. When markets rise, the news du jour is positive. When markets, sell-off the news is negative, proving that Wall Street’s PR departments feeds news outlets whatever fits the buying-or-selling pattern.
Small investors have no clue whether to put-or-take-money off the table, especially during market volatility. Watching the market drop over 1,000 points last week in one trading session creates panic in investors, not know whether or not to stay in or bail out. “There are some open doors left, notably, where interest rates are and where they are heading. “So while there has been some relieve in some assets we don’t think the “all clear’ has been sounded just yet,” said Eric Freedman, chief investment officer of U.S. Bank Wealth Management. Freedman reminds bottom feeders looking for bargains, the sell-off might not be over quite yet. Small and large investors have a hard time picking bottoms or peaks, pushing most investors to a buy-and-hold strategy. Large funds don’t take that position, periodically taking profits when share prices get overly bloated based on market fundamentals.
Concerns about the 10-year-treasury hitting a four-year high mirror the Federal Reserve Board’s change in monetary policy, continuing to hike rates in 2018. Then the 10-year and one-year treasury converged, it raised concerns about a flattened or inverted yield curve, where differences between the one-and-ten-year-bond approached zero. Flattening or inverting of the yield curve has been correlated with bear markets and recessions. With the 10-year treasury bond spiking to 2.857, it gives investors reason to be cautious due to rising interest rates. If rising mortgage rates kills the real estate recovery, it’s going to reflect in First Quarter Gross Domestic Product. Real estate purchases add to the nation’s GDP, especially when consumer spending tends to be weak. Rising energy prices also don’t help consumers, paying more at the pump, unable to spend more in the consumer economy.
Watching dramatic market sell-offs frightens off small investors, concerned about falling portfolios, especially seniors with short time-horizons. Wall Street analysts urge small investors to buy-and-hold, when the major funds routinely move in-or-out of various equity positions. After last weeks $32 billion exodus from stocks, advancing issues outpaced decliners on the New York Stock Exchange by 2,034 to 849. On the Nasdaq 1,194 stocks rose and only 927 fell, confirming today’s buy signal. Before small investors swoop up bargains and jump back in, they should wait-and-see where things go from here. Even the Dow’s 410 point gain, was off set by a 150 point sell-off at the last minute of trading. High frequency momentum traders still dominate the market, making it difficult for small investors to figure things out. Sell-offs may be good for big fund traders but bad for small investors.