And so it begins…
I have been talking about the inevitable downturn in the market and woke up this morning to a pre-market slated to be down 600 points (the Dow index that is). Predictions did not disappoint and we got down as low as 800 at some point, a full 2% drop. This “improved” by the end of the day to 1.8% loss (over 2% for the Nasdaq). The mood was glum.
A 2% pullback in a year when we are up about 20% is nothing. There is likely to be more, maybe a lot more. Let me assure you, if we get a 10% correction it will feel a lot worse than today. For those of you who have not lived through a full correction, just stay calm. It is part of the market cycle. In the last few years, pull backs have been small and rebounded quickly. Mostly because people have bought the dip. This one may be bit different. There are loads of negatives on the horizon and most people seem resigned to a further market drop, which makes people hesitant to step in and buy stocks on sale. (Cramer listed 8 negatives about impacting market mood and we broke the 50 day moving average of the market, a technical warning sign).
I don’t like downturns either but I also tend look at the economy realistically. The world is not ending, but Covid will. Sure, there are international tensions, but no major wars being fought. People have money in their pockets and have demonstrated a willingness to spend. Money is cheap. Inflation is edging up, but not in any alarming fashion. Things are OK. We are not on the brink of another Depression.
It was China spooked the market today. Their real estate companies are in trouble and since they are highly leveraged, the banks in China (owned by the government) could be too. There is concern that Chinese bank failures could impact the worldwide financial system. Doubt it. Risks in China have been known for a while now and the smart money has probably cleared out already. This is not a new risk.
I was looking to buy today, but the stocks on my shopping list only slipped a percentage point or two. I need at least a 5% decline before I even begin to pick. I can wait, as everyone should do, until the down turn begins to show a sign of bottoming. A bottom traditionally occurs after a major ‘washout’, that is a flush of selling that sends the market hurtling downward. Once sellers exhaust themselves, buyers begin to creep in and we have a bottom.
Market Today: Down and out. I did 16 options trades, closed seven calls, three puts (two of which I wrote and closed today - MRNA and NVDA). I also sold six puts all of which were solidly negative by the end of the day. I always have calls on my positions, particularly big boring stocks like Blackstone (BX), PacWest (PACW) and Wells Fargo (WFC). When we have a day like today, I close them. I didn’t want to be called on them, but I sell the calls on the positions anyway just to generate income. It also softens the blow of a down day as I was able to pocket some “free” cash. I did buy a little bit of Cleveland Cliffs (CLF) today as it was down 10%. I just checked, stock futures are up - here’s hoping a least a couple of the six options I sold (CVX, FSLR, COIN, SHOP, CRWD and ALB) will come good when the market opens tomorrow.