Wed Feb 24, 2016 9:17am ESTComments Off on Bollocks! Brexit Barmy Sends Stocks Lower
Brexit fears and oil yadda yadda yadda are weighing on stocks, sending the S&P500 back into the dystopian hellscape that is Correction Territory.
I love the English. As an insomniac on social media I work the same hours as UK Finance Twitter (smart, aggressive, super analytical and presumably violent drunks after hours).
I say this directly to the English people with whom I share this budding love affair: if you guys don’t get your shit together Trump will Brexit your asses right out of NATO next January. I’m serious. He’s nuts and we’re going to elect him anyway. It started as a joke and things just kind of spiraled out of control. None of us have any idea what’s going to happen. Not even him.
We were there for you through that Nazi King and the whole Diana mess. Now we need you to pick up some slack.
There is a ton of cool research on this topic. The studies have names like the Clustering Illusion and the awesomely graphic Texas Sharpshooter Fallacy. They all say essentially the same thing: Humans underestimate randomness. We miss obvious clues and find patterns where they don’t exist, especially when doing so fits our existing beliefs.
This glitch in our mental Matrix explains the appeal of charts like this one making the rounds yesterday:
It’s the S&P500 chart from two different time periods. The blue line is the index from 2015 through yesterday. The red line is the S&P 500 during 2008 and 2009.
In the off chance the bright red “You Are Here” arrow wasn’t clear, the suggestion is the stock market is on the cusp of a total collapse. The S&P500 fell more than 38% in 2008. Bad times.
This is great charting in the sense that it’s a nice visual and viral as hell. It punches all the right emotional buttons (fear, recency, the desire to not feel stupid about missing the 4 day rally). It’s a shot of dopamine in graph form. That’s what makes these things so popular.
A few years ago we were on the verge of “another 1929”. According that Doomsday chart the early stages of 2014 were the summer of 1929: the last exit ramp before hell:
The prediction turned out to be bullshit. Stocks have yet to repeat the 90% decline following the 29 crash. (Remember… I said “yet”.)
We don’t need to work this hard to be scared.
You want a frightening and far more likely trading analog? Today could be another Groundhog Day. Again:
From January 20th to February 1st stocks rallied more than 7%. 8 trading days later (last freaking Thursday in case you just got here) stocks made new intraday lows then reversed once again.
In fact, the action near the lows in January and February was so similar I used the same basic graph twice:
I wasn’t being lazy but ironical. I was making fun of the fact that the job of financial punditry is to watch basically the same things happen over and over again and pretend like it always matters. It was also gallows humor; a personal favorite and staple of market crashes throughout time.
It’s a clickable story to compare this period to 2008 but a far better, scarier, explanation is sitting right front of us. Last week’s rally left us near the top of a mean-ass range and are about to plunge back to 1800.
Stocks are falling. You know that. We’re going into a 3 day weekend. If you are very uncomfortable at the moment the feeling will most likely get worse between now and Tuesday.
I don’t believe in worst case scenarios. The sun will explode someday but it’s a lousy trade. That said, I do believe in market panic. I understand the animal spirits. I respect the power of the collective mood. There is nothing on earth that will dislocate a market quite like major currency problems. The basic assumption in any financial model is that valuation is based on a stable underlying currency. In the absence of said stability the numbers are gibberish.
There is no fundamental case to be made because who the hell knows what the Chinese are going to do if/when the Shanghai Comp burns like a wooden shed on Monday. Would a Chinese crash cause a recession here? I don’t know but the closer the $SSEC gets to zero the less I like our chances. Most stocks are worth more than zero but true value is not calculable. If you have no idea what a company will earn you can’t even create a PE ratio.
Under such conditions, doing nothing makes a ton of sense.
If the S&P500 drops to 1788 today we will have a genuine US Circuit Breaker. Presumably the Chinese would find this hysterical but, trust me, it won’t be funny here.
The last time the US markets triggered trading circuit breakers was 1998. The cause was “Impossible” currency fluctuations exacerbating the losing positions of a hyper-levered hedge fund called Long Term Capital Management. Most of you know the story. For those who don’t here’s a relatively lively academic overview.
On the topic of emotion being timeless, I’ve been reading up on the Panic of 1857 today. The trigger then was the end of artificially easy lending to fund the buildout of the the American rail infrastructure. Thank God nothing could happen like that today…
As I’ve said before, we’ve always known intervention doesn’t work. Governments simply can’t help themselves.
Why would I link you to these things when the stock market is obviously crashing? Because 20yrs of experience tells me the best way to burn off your fight or flight energy is to study, rather than trade. Analogies are not a gameplan. This time is ALWAYS different in critical ways. But humans never change.
Your trading opportunity will come from other people panicking. Your job is to be the smart money. Pick away at your favorite longs. Slowly. And do some reading. The crisis will still be here when you get back.