Capitulation!

The bottom fell out on Monday - in a classic capitulation move that saw the Dow Jones Industrial Average slump 1,600 points at one point:

• Dow -1,175
• S&P -113
• NASDAQ -273
• Russell -56

Anatomy of Destructive Session

The market spiked lower at the start of trading, and then rallied higher, but smart money wanted to see that early support point tested.  It was tested; it didn’t hold and each wave of selling triggered another wave. It was the confluence of weak hands dumping, computers and algorithms selling and perhaps a few big names getting hammered as well.

It seems as if someone was carried out on a stretcher.  Word on the street is that one of the biggest hedge funds in the industry had a program trade that ran amok.  The computer selling defied the laws of psychics at one point downside clips seem to happen at the speed of light.

Unbound Confidence Emerged

The rally was in full swing and then got even hotter late in 2017. As it got hotter, everyone got complacent as the rally went straight up.

Last September 12th the stock market rally turned sharply higher and gained momentum. Then on November 27^th the rally turned even higher, going straight up. That parabolic move would eventually have to give way to a similarly sharp pullback.  It’s one of those things that when it’s talked about, it sounds reasonable. However, in the midst of it such a pullback, it can feel like being in the eye of a hurricane.

Fed Chair and Rise and Fall of Market

I find it interesting that many are comparing this period of selling to 1987. A new Fed chairman named Alan Greenspan started his new job that faced a market crisis situation.  As the man that would go on to be known as the Maestro, Mr. Greespan took swift action; the selloff was short-lived, and the ensuing rebound lasted more than a dozen years.

Greenspan took swift action by lowering rates and calming the fears of Wall Street. Later, he would be blamed for missteps in management - the market bubble on the upside and the downside.  Of course, Greenspan is best known for his observation of “Irrational exuberance,” a call on the stock market rally, which proved to be prescient four years later (I am writing this with a slightly tongue-in-cheek approach).

Yellen’s Revenge? The New York Post headline says it all: ‘Yellen fears bubble as stock market sees sharp decline’ Former Fed chair Janet Yellen spoke to CBS news and suggested prices for stocks were high, pointing to “price to earnings ratios near the high end of their historical ranges.”  She also commented on the risk in commercial real estate, stopping short of saying the asset class is in a bubble.  Yellen was known for her cautious approach to governing the Fed and speaking to the public that so many see her comments on the heels of a 666-point drubbing of the market as somewhat reckless. Of course, she’s still smarting over not being re-appointed by President Trump, and some think her comments were a little jab. The good news is that Yellen doesn’t see a market pullback harming the economic recovery. Whether deliberate or not, it didn’t help the situation yesterday. It puts more pressure on her successor Jay Powell to articulate a message that brings calmness to the market.

Jay Powell at the Plate

Jay Powell, the new Fed chairman, started his first day on the job yesterday with the biggest single- session point loss in history.  Ironically, his best move may be to telegraph to investors that he won’t be making any moves, or at least fewer moves than the Fed previously signaled.  Investors will also want to hear from the White House very soon with soothing words that will direct attention to the underlying economic fundamentals.

Sector Watch

We were reminded there isn’t any sector to hide in when these swoons occur - even utilities.

S&P 500 Index	-4.10%
Consumer Discretionary (XLY)	-3.37%
Consumer Staples (XLP)	-3.63%
Energy (XLE)	-4.20%
Financials (XLF)	-5.04%
Health Care (XLV)	-4.43%
Industrials (XLI)	-4.54%
Materials (XLB)	-3.82%
Real Estate (XLRE)	-2.58%
Technology (XLK)	-4.18%
Utilities (XLU)	-1.64%

For those unfamiliar with these kinds of market drops, this is gut-wrenching; even for those of us that have been through a few market crashes, it’s not a pleasant ride. While it might sound callous, the fact is this selloff is happening so sharply that it takes us to where we have to be sooner rather than later. 

When to buy?

This is the week to begin building positions in great names that we know that would be much higher based on recent earnings and guidance. 

Sector Focus:

• (XLY) Consumer Discretionary
• (XLI) Industrials
• (XLB) Materials
• (XLK) Technology

How to Buy?

You can’t take full positions in this market, but you can ease in and begin to build them.  I’m watching for the session that spikes lower, rebounds, then drops again to test and hold that support point and then trades up to the high of the session.  

I’m not sure where the near-term bottom is, but I’m confident investors that buy quality names on weakness this week will be up in 2018.  I even think there could be a so-called V-shape bounce in the market, but that doesn’t have to happen.

Stay calm and be ready.

Today’s Session

The dominoes kept falling overnight, as global equity markets took it on the chin, bringing it full-circle back to the United States this morning.   At this point, charting work, which can be helpful during market swoons as a point to measure past levels of fear and greed, won’t work this morning.  This discovery process will find fresh technical levels and turning points.

Imperfect Machines

A just machine to make big decisions

Programmed by fellows with compassion and vision

Donald Fagan IGY

On that note, so much of the action is being driven by machines that presuppose the ability to remove the emotions of humankind, but in fact, they are programmed by people with certain biases.  These machines, and their fancy algorithms, simply carry out the emotions of their programmers at a much faster pace. 

This is adding an intangible factor, creating flash declines, and it makes picking a bottom a wild guess at best.

The good news is great stocks are already oversold, and investors that can handle the gyrations will be rewarded, and those that can buy during the turmoil will be richly rewarded.

For the moment, we are keeping our powder dry.  We are reevaluating all positions and making new assumptions on the macro economic impact of this pullback, which historians will look back on and say was overdue and actually “rational.”

Comments

Charles, Wow, I went to the grocery in that hour the market took a severe nose dive!!!! I didnt even try to look at the point loss on my account the positions i am in i am staying. I am looking for some good buys for the cash I did have free. I am confident this is only temporary and will rebound quickly as the market always seems to be very resilient and bounces back quickly. I got my powder on lets GO... Elizabeth Medley on 2/6/2018 7:36:53 AM

Charles, It was great to have your hand holding through this. The others on Fox kept wanting to get everybody to panic. You would say the "fundamentals are still strong" and when you went away they would say but so and so is afraid. John S Perry on 2/6/2018 9:27:18 AM

Market Correction Thanks John Everyone has an opinion and its smart to listen to all sides but investors have to decide whom they will believe or trust. I suggest past history and track record. It's kind of disingenuous for people that never liked the rally to scream to people to get out (there should be a disclaimer or asterisk saying I missed 19,000 point rally so understand I'm always bearish) or take losses. I've been saying for a couple of weeks there were signs of an attempt to shake out the weaker hands and you could see the internals deteriorating but unless you are a good trader (can take losses without fretting and changing your approach inducing buying weakness) there are times to take hits and paper losses/pullbacks. You can buy these periods for out-sized gains. Hysteria has no place in investing. Charles Payne on 2/6/2018 9:33:18 AM

Charles for income investors I've got to think there are real opportunities here right now in CEF funds and utilities. Also many REITS. James S Carpenter on 2/6/2018 10:38:18 AM

Thank God for "a voice crying out in the wilderness" to bring some perspective to this current market. I tune in to your show "Making Money" each night so I can get a perspective from someone I've trusted for years. I'm just waiting for the rest of this market to find its support so I can put new money to work. The last time this happened I sold but missed the first part of the upside move. This time I have pulled about 35% of my portfolio out into cash about a week ago just before the big move. I'm eager to put it back to work. My wife and I will be watching you tonight. Thank you Charles. Scottie Gillespie on 2/6/2018 10:54:05 AM

Billy Joel had a successful song called "And So It Goes," which kind of reminds all of us that a market that goes UP must (normally) also come DOWN...and "So It Goes." My wife asked me this morning..."So? What should we do NOW?" I said, "Stay The Course," as the economy is sound, unemployment (in many cases, Black, Hispanic) is at an all time LOW and the Fed has a new set of eyes & ears. "We're not going ANYWHERE, hon. Going to ride THIS one OUT just like we did in the past and take advantage of the 'dip' to ADD to our portfolio." This is not easy to say, Charles, because we are now both in our "retirement years" and have been looking forward to enjoying the "fruits of our labor." However, your wise counsel (and the experiences of PAST "corrections") gives me/us the confidence to know...the "Bull Market" has NOT seen its end. James Warlin on 2/6/2018 12:04:46 PM

Thanks James I wish you and your wife a long and fruitful retirement and hope its aided by gains int he stock market because there is no other way to generate income at your age and the fact of the matter is I would love to let management at Caterpillar, Amazon and other companies work for you rather than you trying to penny-pinch. You are wise enough to understand the wild gyrations versus the real foundation of the nation. America became so accustomed to celebrating mediocrity the first signs of greatness scares people. Its nuts to think there should be long term damage to the stock market now that people are finally earning more money (and keeping more of that they earn). CP Charles Payne on 2/6/2018 12:40:19 PM

How well you Charles & James Warlin said it for us retirees ! Kindest regards Sandra Ferguson on 2/6/2018 12:57:28 PM

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