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Wall Street Enters Into Profit Taking Phase
by John M. Curtis
(310) 204-8700
Copyright
October 1, 2014
All Rights Reserved.
Wall
Street’s clever spin machine blamed today’s sell-off on pro-Democracy
demonstrations in Hong Kong and the latest unrest in the Middle East. Anyone following Wall Street closely
knows that after spectacular run-ups, where price-to-earnings ratios get
disproportionately high, it’s time for the nation’s biggest mutual, private
equity and hedge funds to take profits.
When a sell off happens at the same time, you know either great minds
think alike or the major funds put in sell orders at the same time, the latter
makes more sense. Redefining
insider trading, the major funds all seem to know when to sell or when to buy. Today’s sell-off proves that the
same sell signals were given to the lion’s share of mutual, private equity and
hedge funds. Dropping 238 points or
1.4%, the Dow Jones Industrial Average ended the day at 16,804, down 356 point
from its all-time Sept. 14 high of 17,156.
Wall Street knows that 68-year-old Federal Reserved Board Chairman Janet
Yellen remains committed to a low interest rate policy, despite ending the third
round of quantitative easing [QE3] or Treasury bond purchases later this month. With the Fed poised to keep money
markets, certificates of deposit and bond yield’s low, there’s no place to make
hay other than the stock market.
While everyone’s nervous about a major market correction, there’s nothing on the
horizon signaling a new recession or expected economic calamity. “In the here and now, there are too
many global-macro concerns for investors to have confidence,” said Art Hogan,
chief market strategist for Memphis, TN-based Wunderlich Securities, citing
worries about ISIS, Hong Kong,
Russia, Ukraine. Ebola, etc., for the latest sell-off. Hogan’s either sadly misguided or
covering up Wall Street’s latest round of profit taking.
Calling Wall Street’s bull market during the Clinton Administration
“irrational exuberance,” former Fed Chairman Alan Greenspan caused markets to
sell-off March 5, 1996 but only briefly.
Markets continued to rise until March 2000 when Clinton and his Treasury
Secretary Bob Rubin’s bull market came crashing down in what became knows as the
“tech bubble.” Not only is there no
tech bubble today, there’s no real estate bubble either to accelerate the same
kind of slide that took Clinton’s bull market down from 11,772 Jan. 14, 2000 to
7,227 Oct. 9, 2002. Where investors
really got rocked was in the tech-rich Nasdaq that peaked March 10, 2000 at
5,408, taking the average down to just below 1,100 Oct. 9, 2009. It’s taken twelve years, including
the last five-year bull market, to bring the Nasdaq to it’s recent high Aug. 18
or 4,508, still over 500 under its March 10, 2000 5,132 close.
Only Wall Street’s biggest bears like New York University Stern School
economist Nouriel Roubini, Wells Fargo’s Gina Martin Adams or Deutsche Bank’s
David Bianco believe the markets in for another historic correction. When markets corrected in 2007 in
what’s know as the “Great Recession,” the Dow dropped from 14,164 Oct. 9, 2007
to its bottom March 9, 2009 6,547.
If markets drop this October 20%, it would drop the Dow down to roughly 13,725. Under the Fed’s loose monetary
policy, a 10% or less correction is more likely, dropping the Dow down to around
15,000 before funds decide to buy back in.
Naked profit-taking become the most politically incorrect excuse for
selling off and dropping stock valuations back to more affordable levels. Wall Street doesn’t like to admit
mutual, private equity and hedge funds take profits after hefty run-ups in share
prices.
Looking at the Chicago Board of Options [CBOE] volatility index or VIX
rise over 36% usually sparks fear in the markets, prompting selling. “Your opportunities are when
you see these VIX spike in an up-trend, and looking at the VIX, it’s currently
about 16. We could look at a area
around 18 or 20 as a good opportunity to buy stocks. We’re not there yet,” said Ari Wald,
technical analyst at New York’s Oppenheimer.
Whatever the index, inflated share prices must come down to more
affordable levels before funds decide to buy back in. Months-and-years of share price
increases require steep discounting before it’s worthwhile for funds to buy back
stocks. Speaking more honestly,
Gina Sanchez, founder of West Hollywood-based Chantico Global, formerly with
Wall Street bear Roubini & Associates, sees the current sell-off as driven by
excessively high stock valuations.
Before small investors follow the big funds to the exits, they should
listen to more honest analysts like Sanchez.
“A lot of people are very concerned about where we are and where
valuations are, myself included,” said Sanchez.
“Right now, stocks are well above their skis,” warning small investors
that there’s more selling ahead.
Talking about earnings, ISIS, Hong Kong or the price of tea in China only
distracts investors from understanding how funds make money. Selling off stock or short-selling
allows funds to lock in profits, and, at the same time, wait patiently until
inflated share prices are brought down to more reasonable levels. “Would I use a significant
correction to get into the market? Probably. I do actually think that’s where
you want to be for 2015,” said Sanchez.
As big funds sell stocks, rotate into bonds or money markets, small
investors should stay put and wait out the profit taking.
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