Dow Plunges 1000 Points as Stock Markets Tremble

Dow

Stock markets came down with the coronavirus last month and quickly recovered once the fever broke. New fears have hit the market, and we’re left wondering once again.

There has only been one day in history that the Dow lost more than 1000 points, back on February 6, 2018. That day was one for the ages, as we just didn’t break 1000 for the first time, we were down over 2000 points until a rally later in the day gained back over 1000 of the lost points and still had us with the biggest one-day loss in history points wise.

We now have a second day to add to the records, what happened on Monday, where we broke though the 1000-point barrier to the downside once again. The market tried to put in a little recovery, and when a 200-point move upside is a little recovery, you know you’ve taken a big hit, but this fizzled and we gave this all back by the time the bell rang.

The first thing to always look at when you’re trying to diagnose a fever like this is to see how much fight there is from the bulls. There are some down days that just don’t meet much resistance at all, and even short-term traders who rarely would stick around for an hour can safely ride these things down all day without much of a threat of a reversal causing them to need to bail.

Monday was at least not that sort of day, and although finishing strong would be preferable to trying to recover a little and failing, the trying itself is positive, as it shows that the bears aren’t completely in charge and that there at least is a battle going on.

The battle is being fought between the traders and the big funds, and we don’t just want to see this as investors bailing, because investors simply do not scare so easily. Perhaps some do, but they don’t act on their fears this capriciously, nor should they. Warren Buffet tried to calm investors down by telling them they have no need to worry about such minor and short-term concerns, and that the only people that need to be concerned now are those who are looking to sell.

There is more truth in this statement than it appears though, as there are plenty who are actually looking to sell during these times, and they aren’t investors. Very few investors need to sell at the moment, the ones Buffett is speaking to, but traders sure do, and traders bang a big drum indeed. We just saw some of the banging Monday and got to see how loud this can get.

It is the traders that step to the front of the stage during these times, or more correctly, are always at the front of it but become more prominent once other participants step back more. Understanding how these things play out a little better will at least give us a better understanding of how intraday selling works and what it can mean for the market.

The first thing that happens during an event like this is the news-driven spike. There are computer programs that monitor the news and are armed to respond, for instance with our hearing that the number of coronavirus cases is picking up in other countries like it has, and then putting in big sell orders to respond.

These programs do this not to speculate on where things may be a decade from now, a year from now, or even a month from now, they do so in order to seek to profit from what they see coming. There are two phases to a computer sell program, the initial response where programs are fighting with each other to get in a microsecond before their competitors and get better fills, and the ongoing one as the selling plays out and the programs turn away from the news itself to how it is being traded as the impetus for their further moves.

Casual observers, which includes just about everyone but traders, will look at the results from Monday and think that the Dow dropped 1000 points on Monday. If we are referring to Monday as the regular session on Monday, the Dow actually only lost 146 points, and was up by over 170 points on the day on a couple of occasions before it gave it back.

When we measure the close against last Friday’s close, this is where we get out 1000-point loss. We might think that this means the same thing, but this would be a mistake, as we’re talking two distinct venues, and we certainly need to give the bigger one, the regular market, a little more attention, especially when they are the last to speak.

What happened prior to the open, what we call the off-hours trading that actually goes on not in the stock market but the futures market, is a different animal, and is even more dominated by program trading. We often see off-hours trading overstate concerns, and it’s not that the off-hours traders made a mistake with this, and they actually got more of what they wanted, but once the bigger buyers come to work in the morning in New York, this changes the dynamic, and they can often come to our rescue so to speak to some degree.

There is such a bias among investors that we can say something like “come to our rescue” and everyone will know we mean pushing prices back up, and this is because just about all investors are long only and root for prices to go up only. The market is much like the Earth though, as there is no up or down because space does not have direction, there is only our perspective, looking up at the sky and thinking that this direction is up because that’s how we see it.

The reason why this is important to note is that people see market reversals like this and think that it is people panicking or fleeing stocks and for the most part that’s just not true, not with something like this anyway, although that does happen with the longer pullbacks over months. There’s always some of that going on in the midst of a sell-off like this, Joe Blow waking up and putting in a call to his broker to redeem some mutual funds or put more into bonds, but just about all of this move we’re seeing now is the excitement of traders with dollar signs in their eyes, including both the human and machine variety.

Investors don’t get this though, including the talking heads on TV or a lot of writers in the internet or print media, and see this as investors running scared. We do get those, but a real pullback involves actual investors taking a lot of action, which means the big funds. When they start to sell, this is when this all becomes the real deal, and while there’s always some of that going on, background noise as funds move their money from one stock to another or into another asset, it’s when they team up with the common mission of getting out that we need to worry.

Funds are more like Warren Buffett than traders, and they have to be, because they can’t just be in positions for a little while and be in and out several times a day like traders do. For them, Monday’s selloff is just noise, even though it may be a symphony to traders.

We Beat Indexes Down Too Much During These Times, But Do So on Purpose

Monday’s trading may put a frown on the faces of investors, but it puts a smile on the face of skilled traders, and the more the market goes down, the bigger the smile. As it turned out, those who were really smiling weren’t the ones that just traded the regular session, as it wasn’t anything all that special, it was those who rode with the bears during the trading that led up to the open.

The futures market opens up for the week on Sunday night at 6PM ET, and this is where Monday’s story started. This is where 900 of these 1000 points was “lost,” although in this case a lot of money was made by those on the sell side of things. Overnight trading can be pretty flat and boring at times, and after a flurry of selling at the open, things stayed pretty flat in the Asian part of the session until Europe opened, and then the game was really on.

When we reach a tipping point like this, traders and computers alike will see the trend and then put more and more pressure on the market. Non-traders might call this a panic but it’s nothing of the sort, more like an expectation. The expectation was that we’re in for a big move, and we sure got one, as big as they come with off-hours index trading. It’s actually even more fun and profitable to be in on a big down move, and there were lots of both with this one.

We need a bit of understanding about how futures markets work to get the full perspective here. This is as far from investing as you can get, as there’s no one in this for anything but the short term, and these contracts themselves don’t even run beyond three months.

We are at the level of pure short-term price speculation, and while the stock market is like this for the most part, it’s a battle between short-term traders and longer-term investors. Traders have this market all to themselves though. When we see momentum like this, and all of the active participants are on the edge of their seats and not in the next room having a nap like investors would, you can see a lot of action that may only be relevant to the current session, having nothing to do with what might happen next Friday or even Monday morning.

You hear the opening bell on Monday, and you think that the market is in panic mode. Instead, it’s just been some people who have made a lot of money and are looking to make even more depending on how it goes. They will be looking to make more if the sell-off continues, but are even more excited at this point to make money from a rebound, once the regular players, the funds, weigh in on the matter.

This is where actual investors enter the game and decide whether they want to buy these dips or stand aside and wait for better bargains should things continue. We did see a decent amount of this, but this comes down to whether or not they believe this is over for now, and having this stuff still in the news can serve to turn them off.

The traders on the sell side ended up winning the day, but not by much, as the long side was ahead for the better part of the day and it was only the sellers taking back control in the last hour that had them ahead in the end. The last hour is a period where we very often see reversals, and you could make a good living just trading a reversal of the previous trend in the last hour, so this wasn’t unusual.

When the regular session closes, this turns the ball over to the futures traders who will trade this from 6PM ET that evening, straight through until the regular session joins them at 9:30 AM ET the next morning.

The important thing to realize if you are worried about this particular event is that this is not investors panicking or anything close to it. It is normal to have these news events oversold, even though oversold isn’t even the right word here, and we only think of it that way because of our long side bias. With futures, moves like this are better understood as strength to the downside, and people are getting in here not to avoid losses but on the expectation of significant profits, making this more a manifestation of positive excitement rather than fear.

This still serves as a reference to the stock market though as we need to see what the investors will do in the face of such things. Investors are more patient though and it can take a few days for them to get their bearings, as it did during the last coronavirus “scare.”

This Particular Scare Isn’t So Scary

We are considerably less concerned about this one than we were with the first one. The first one was a lot like the first fall with Bitcoin, as far as there being so much that was unknown. The main concern with this was the threat of investors seeing this as an excuse to take a lot of money off the table, which people had been speaking about for quite a while.

The market overestimates their ongoing fears of this with their foolish valuation concerns and such, but the market has not cared about these things and was likely to continue not to care in the way that so many think they should, but it’s always up to the market and not the peanut gallery. We were concerned somewhat about this, but not because we saw anything coming of any great duration, but we felt this might create more short-term downside momentum than actually materialized.

We passed this test with flying colors as it turned out, and more, as our appetite to push stock prices higher not only did not yield to coronavirus fears, it actually ended up trumping them, as we hit yet another all-time high with stocks in the face of this. The economic effects of this started to trickle in, but we’re aware of that and just don’t care, and that was a major bullish sign if there ever was one.

There may have been some reasons to be concerned about these economic effects, as they will end up putting down GDP and earnings for a time, but the stock market doesn’t need to care about this even though so many people think it should. If you are actually investing, your focus is not just on next quarter, or even 2020 necessarily, and seeing earnings and GDP tick down a trivial amount for a trivial amount of time is just all trivia.

When you see a sell-off that is supposed to be driven by a trivial amount of new infections, at a time where the overall infection rate has been declining for a while, this is really what you call worrying about trivial matters. This might provide some interesting entertainment to some, but whether a few hundred people in South Korea or Italy get infected is just not meaningful at all and especially not meaningful enough to see stocks lose a trillion dollars collectively in a single day as we just saw.

We don’t agree with Warren Buffett on many things, but this is one time where he is right in saying that this is not a time for investors to sell stocks, it is a time to add. The exuberance of the futures traders who drove us down so far in the early hours of Monday was just a matter of their doing what they do, looking to profit from trading momentum.

The investors haven’t had their say yet, but it’s a better bet than not to think that they will be willing to step up to the plate again, like they did last time, and take us from the very short-term world of futures to the longer focus of expecting stocks to go up over time and then making it happen, the same way that the futures traders expected things to go down a lot and made that happen. We need to know what team we play on and then view things from our side of the ball.

If we are on the trading team, we’re looking to profit from this on the long side as investors correct this misalignment with the overall trend. If we are investors, we should at least be comforted by having none of this matter to the timeframe we are investing on and stay the course for now.

We never know for certain how things will play out, but this is certainly nothing that investors should be too concerned about. We still need to pay attention to what the big money is doing though, and if we are indeed looking to step aside at some point, how funds handle the reductions in earnings that the coronavirus causes, a temporary but real effect, will tell the bigger story here, as well as the changing dynamics of the threats from the coming election.

A temporary decline in earnings isn’t a big deal though and nothing to pay much attention to anyway for those who are in it for longer than the next few quarters, and these new coronavirus fears don’t amount to anything for these investors as this is just nonsense, but things like Bernie Sanders elected president is another matter as this will bring on a real war in the markets that everyone needs to pay attention to, but we’ll be dealing with that in good time.

For now, we really haven’t deviated from our course very much, other than presenting an opportunity for investors to buy some more stock at last December’s prices, and get a piece of that trillion dollars that disappeared Monday but is likely to be added back soon.

Ken Stephens

Chief Editor, MarketReview.com

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.

Contact Ken: ken@marketreview.com

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