Markets in Turmoil. But let’s put this in perspective…Everybody take a deep breath…

Year-To-Date, The Dow is now off 9.7%, the S&P is down 7.8%, the Nasdaq lower by 4.5% and the Rus- sell is lower by 10%. Yes, it doesn’t feel very good, but it is not the end of the world. It may now be the one-day largest point drop (1190 pts or 4.4%) but it is nowhere near the largest one day percentage drop on October 19, 1987 – 584 pts or 22.6%!

Now from the HIGHS of 2020 – the Dow is off 12.8%, The S&P is off 12.2%, the Nasdaq is lower by 13% and the Russell is down 12.6%… and that feels even uglier… as all the indexes are now in correction ter- ritory.

Let’s remember, when the ball dropped and the new year began, the markets continued the surge that began in the fourth quarter of 2019 – a surge that saw the Dow advance by 11%, the S&P 14%, the Nasdaq by 17% all because we made a trade deal with China which was going to set the path forward – and that was all good. But then the surge continued, with not nearly one day of retreat, going up in a straight line as if there was never going to be a down day on Wall St again. On January 20th, Goldman Sachs publishes a piece with this headline:

“Goldman Says Fast Money All-In and Stocks Can Go Higher.” (It was an encouraging piece of research)

And at Davos, Ray Dalio, CEO Bridgewater Associates, one of the largest hedge funds in the world took to the stage to say that “Cash is Trash.”

Central banks around the world continued to feed the beast with negative to low interest rates and talk of further negative and lower interest rates were just on the horizon. And this gave the momo (momentum) guys the “green light” to continue to buy stocks with reckless abandon. (I mean where else would they go?). ETFs that give you exposure to “everything” at the same time in any part of the world are all the rage and Complex ETF’s that use 2X and 3X leverage coupled with derivatives only added to the “risk on” trade and as long as the market is going up. No one cares, and finally the ease at which the retail investor can buy stocks is amplified now because all of the retail outlets cut commissions to ZERO encour- aging bad behavior. Why? Because it “doesn’t cost anything to trade stocks.” How’s that working out for you?

The Black Swan – (revisited)

How many times have we been down this road? How many times have we seen a black swan event (and the COVID19 is a black swan event) disrupt the markets? How many times have we seen complex, highly leveraged ETF products disrupt the markets? And how many times have we seen those same products FAIL when the market comes under pressure and those guys can’t “unwind” the trades due to stresses in the broader market? Need I remind you of those three days in August 2015? Do you recall how China (again) caught the world by surprise and devalued the Yuan? Do you remember what happened in the fol- lowing 72 hours? The S&P crashed – falling 11% in three days, the Dow fell 12% the Nasdaq lost 15%. Do you remember that on the first day of this debacle – the Dow opened DOWN 1000 pts and some stocks were delayed and the ETF providers were screaming bloody murder? Do you recall how they blamed the “human beings” at the NYSE for not opening the stocks on time and that created a disaster for them and for the markets? (total BS). In fact, the human beings at the NYSE did the RIGHT thing – and slowed the process down to avoid panic – BUT the complex ETF products did the exact opposite and cre- ated more panic. Don’t even get me started!

Do I need to remind you of February 2019? Do you recall when another complex ETF product imploded and caused the markets to shudder? The Short Vol Trade? Do you remember what happened next? The Dow plunged 1175 pts in one day – the “worst ever one-day point decline in history” – that was until yesterday!

So fast forward. 49 calendar days into the new year, the Nasdaq was already up ANOTHER 10% on top of the 39% gain in 2019, the S&P was ahead by an additional 5.6% on top of the +29% move in 2019 and the Dow was up 4.5% on top of the 24% move in 2019. But what had really changed? Nothing actually, we made the Phase One deal with China, US economic data remained robust, the Fed and every other cen- tral bank remained accommodative with hints of even more accommodation. Europe remained in a strug- gle to break out of its economic malaise, the UK was breaking away from the EU, China was slowing down (a bit), Japan still had negative interest rates, etc… It was the same story. Nothing had changed, yet the momo guys kept taking the market higher and higher assisted by the passive ETF products driven by algorithms. And it’s all good – until it isn’t.

China (which seems to be in the middle of all the most recent black swan type events) gets hit with this vi- rus (origins still unknown and very suspect I might add) in December but kept it under wraps. Not really telling the world about it. That was until people started getting sick and dying. But by then it was late Janu- ary 2020 and the number of infected people grew exponentially because of the 14-day incubation period. That allowed infected people to travel freely spreading the virus without knowledge. Suddenly it was all the trains, planes, boats and automobiles, as the virus started showing up across Asia. The markets pay- ing little attention to this virus as the algos took us to new HIGHS only last week!

And then suddenly last weekend, when the markets were closed, news that the virus has spread to Italy and that the Italians had quarantined 10 towns led to this week’s slaughter. Now Europe was in the line of sight and before you knew it, the virus was in France, Austria, Spain, Croatia, Denmark, Switzerland and even in the Mid-East, spreading like wildfire across the globe, with the US next. Suddenly the market be- gins to pay attention. Other big multinationals followed in Apple’s footsteps and began to ramp DOWN quarterly expectations, with NO guidance, saying that they can’t quantify the hit! (not very encouraging). And BOOOOOOOMMMMM! The bottom falls out.

Global markets came under attack on Monday and have continued to fall all week, falling victim to the same momo guys and ETF providers that took it up like drunken sailors. The technology (algos) operating in pico seconds, change the very tone of how the markets operate, in both directions. But when it goes up 12% or so, no one makes a fuss. It’s when it goes down 12% with such force that everyone now thinks the world is over. It is not. Let’s be clear – COVID19 is NOT the bubonic plague that killed 30% of the Europe- an population in 1347. (But it did originate in Asia – just sayin’)

And then as if that is not enough, Goldman Sachs comes out with a new piece yesterday morning before the opening, calling for ZERO growth in all of 2020 and a lower short term S&P target. That’s a far cry from their January 20th report when they encouraged everyone to “go all in.” That helped to ignite yesterday’s round of selling. Selling that so far has appeared to be controlled but felt more panicky as the clock ap- proached 4 pm. Much of that due to the “technical breaks” in the markets, meaning breaks in trend line supports that trigger more selling once breached.

The S&P 500 is just the latest perfect example. I noted that we needed to hold at 3045 yesterday. If not, the algos would kick into high gear and sell more aggressively. Did you see what happened when we breached that level yesterday? BOOOMM! down another 40 pts before you knew it. And while they at- tempted to rally the market, there has been so much internal damage done that it will take time to recoup. The afternoon rally was met with renewed selling on speculation of more US cases to come. Headlines that California is “monitoring 8000 people” did not help and there is the belief that the US is not equipped to deal with this at all. I agree, I don’t think we are, no one else was either. But that does not mean that stocks are suddenly worthless – quite the contrary.

Overnight the panic driven selling continued. Asian markets all lower by better than 3%. In Europe this morning, those markets are under attack, falling by 4% +, bringing those markets into correction territory as well.

US futures are not showing any signs of strength. This morning, as the rout continues, at 5 am Dow futures are suggesting a 700 pt decline on the opening, the S&P’s -45 pts, Nasdaq – 155 pts and the Russell lower by 18 pts putting us further into correction territory. And at 5:40 am the Dow rallies a bit and is only down 259 pts, the S&P off by 28 pts, Nasdaq down by 90 pts and the Russell off by 7 pts.

90% of the S&P companies are in correction territory as well. Trend line support is personal to each techni- cian and analyst. They will draw trend lines based on their analysis and so we can expect to get many dif- ferent views on what the next stop is. We are only back to levels last seen in late September 2019 before the fourth quarter surge. Keep that in mind.

What we will see (if we haven’t yet) is real indiscriminate selling! Throw out the kitchen sink type selling! And that is the opportunity. It is every time. Companies that have NO exposure to the virus getting clocked as asset managers just need to raise cash to meet withdrawal requests. That is when you know it’s gone off the rails: when people sell things that they shouldn’t.

Look, it is reminiscent of December 2018, selling begets more selling, weakness creates margin calls and that creates more selling, technical breaks create more selling. A spike in volatility creates more angst. Remember, if you are a short term trader, you should be worried, but if you are a long term investor, someone with a plan and a design and have a wealth manager that has anticipated these types of events, then you should not be worried.

In fact, again, this pullback does create fantastic opportunities for the strong long term buyer. Take a look at some of the best in class US firms that have gotten unnecessarily clobbered. Are they really going away? And while there has been some real technical damage, it is showing signs of being well oversold. You just need to have a strong stomach.

Take good care.