The ‘Mel Brooks’ Stock Market
Did you let emotion cost you big bucks last week?
Thirty-eight years ago, screenwriter, actor and director Mel Brooks put out "High Anxiety", his parody tribute to Alfred Hitchcock.
The week of Aug. 24 to 28, 2015, might go down in history as the epitome of that scary state of mind as expressed in stock market sentiment and actions.
A horrible option expiration Friday on Aug. 14 left people in a fearful state which was then allowed to percolate and strengthen over the weekend. Talking heads had a field day on Saturday and Sunday, painting negative scenarios that could explain the previous week’s very negative close.
Then, at about 9:30 PM, on what would normally have been a very quiet summer Sunday evening, a bear raid took place in the futures market.
That futures action smacked of intentional manipulation. From about a negative 110 DJIA points, some intense selling, when almost nobody was around to counter-trade, drove Monday’s implied opening to one greater than negative 800 points.
As more and more media sources reported on that story, it fed on itself. By 9:35 AM the next day, the DJIA had shed almost 1,100 points on absolutely zero new economic news here in America. After a tumultuous session, Monday closed down about 588 points.
Tuesday saw an early 455-point rebound dissolve in late afternoon. By 4:00 pm, the DJIA had reversed by 660 points in about an hour, torpedoing dreams of a quick recovery.
Traders that are scared to death often run out to buy put insurance against worries that things could get even worse. By Aug. 28, the equity-only put to call ratio had gone wild to the upside.
As of Friday afternoon, it registered above its level from mid-October 2014, when the DJIA had just finished plunging. Option buyers never seem to learn from the past.
Stocks turned on a dime after Oct. 15 last year and started a V-shaped run to new all-time highs. The next three relatively rich put/call ratios all took place only after pull-backs had occurred. Each one was followed within days by substantial market appreciation.
The press, and the pain of dramatically lower prices, turned many of even the most optimistic people into crazed, “This must be the next 2008”, bears. On the same Monday that the DJIA plummeted, the ironically named Investors’ Intelligence survey of bearish sentiment jumped to its highest reading since August 2013. Compare for yourselves the four previous similar high anxiety moments and note how the broad market went on to perform afterwards.
By the end of the day on Aug. 28, the market had already made those who panic sold regret their emotion-based decisions. Much carnage persisted in lesser names but, at week’s end, over the full five days the DJIA was up 1.11%, the S&P 500 clocked a 0.91% increase and the NASDAQ Composite rose by 2.60%.
As a weekly publication, Bloomberg Businessweek magazine had a tough chore.
Their editors needed to decide on a theme plus a cover image a few days ahead of their new issue’s release date. As it turns out, their “100% Bears” Aug. 31 edition may wind up as just another fabulous contrarian indicator.
I’m proud to say I wrote the following article on Monday Aug. 24, and had it published here on GuruFocus in time for people to act on it.
http://www.gurufocus.com/news/355893
It is normal and natural to feel the same emotions as everybody else. It is not okay, though, to act as they do.
Make your buy/sell decisions based on value. Your CPA, IRA and 401k will thank you later.
