I have been through many market "sell-offs" over the 35 odd years that I have been participating in financial markets and it amazes me how similar they all are.
For months and months upon months, markets remain over-valued (one extreme) and all of a sudden everyone comes to their collective senses?
Makes me shake my head in wonder.
In the early going, the most exposed traders, those who have gambled using borrowed money (leverage) are the first to liquidate (because they have to) as the assets that provide the collateral for the loan, fall to levels where the lenders demand more money to protect the loans. Traders must then sell more liquid assets to cover the required payment, further driving prices lower.
So we will get (quite quickly) to the other extreme.
Then we will need to assess the "collateral damage", both financially and psychologically on market participants.
There will be some potential for large highly leveraged institutions and hedge funds to suffer significant losses and that may exacerbate the situation, however, lessons learned from 2008 should likely limit this (although, there are many who, overwhelmed by their lack of good sense may get stung again).
There are under-currents in the global economy, as we have been suggesting consistently that have been less than positive and these may become more front and center as the weeks progress.
The S&P 500 will open another 3% (approx.) lower this morning and has blown through most minor support levels. There is strong support at last year's lows at 1820-1840.
It is August, so liquidity levels are less than normal and those traders who wish to capitalize on investor fears will be doing their very best to use the volatility to their advantage.
Have you heard from your advisor?
Traditionally, this is the time when advisors show that they care about you (or they don't). If they aren't calling to discuss your concerns, they don't really care.
Interestingly, it is also a time when discretionary portfolio managers can also add value.
Non-discretionary managers have to call you and ask you if they can place a trade (or even cancel an order). A large, non-discretionary practice has to call hundreds of families.
This can be daunting and leaves some clients (who do not get the first call) at a disadvantage.
In any event, remember that, like the swinging pendulum, we will see extremes, but eventually cooler heads will prevail, finding value and moving markets back to equilibrium.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist