Just When You Thought It Was Safe To Go Back In The Water…
Over the last several days, scores of financial media pundits and financial advisors have been recommending investors “buy the dip”, based on the “assumption” the market is in the midst of a bull market correction, and the correction is already over, and the “bottom is in”.
Assumption is a derivation of the word assume, and we all also know the old adage about the word ASS-U-ME. My departed parents, especially my Mother, frequently reminded me about the ramifications of the word in my teenage years.
If anything is certain at this point in time, Wednesday afternoon, post-close, August 26th, 2015 after the last seven days of equity market action; is that no one, no matter how smart, insightful, experienced, and understanding about financial markets, can truthfully tell you whether this is a bull market correction, or if it is over, or if this is the beginning of something much worse, like a bear market. And if this is the beginning of a bear market, we are just getting started.
Perhaps the worst part is many of these pundits and financial advisors are recommending that investors buy the stocks they missed; you know, those high flyers with those still atmospheric price/earnings ratios, like Netflix, Facebook, Tesla, Chipolte, and Amazon, currently down 10-20% from their all time highs.
So if anyone is compelled to buy anything, whether the stocks above, or an extremely beat up energy or mining stock or Apple, it is prudent to cover the long position with a stock specific put of some significant duration (minimum 120 days). That applies to everything, yes everything. For those investors, investing in Exchange Traded Funds (“ETF”) or Exchange Traded Notes (“ETN”), these long positions can be hedged with index puts.
As many on our subscription list know, after the decline began, we recommended to not yet commit new funds to equities. We want to wait a few days to see if the real “bottom” is in. For the “love of Pete”, we have not even retested the new low reached just yesterday. This is basic short-term technical requirement for a confirmation of a bottom for anyone who has ever analyzed a stock chart. An old finance professor of mine always said, “Do your fundamental analysis, but always trust your technicals”. We are “trusting our technicals”.
Beyond that, our “viscera” is telling us that something worse may be afoot here. At this point, we do not know, but we will keep you apprised as things unfold. The world economy has changed dramatically, and we remain concerned about a number of market and economic metrics.
So in conclusion… Do not assume the shark is gone, because you can no longer see the dorsal fin, or you could end up becoming the “seal” in this picture.