The dust is beginning to settle from the Daisy Cutter that erupted in the stock market on May 6. That extra 700-point drop turned a good day into one of the most fun days I’ve had at work in a long time.
As I continue to enjoy the effects of the aftershocks of the explosion, I know a lot of you have more questions than you know how to ask. Feel free to use this column as your FAQ guide to what happened that day and what you might expect over coming months.
The rapid drop that began around 2:40 p.m. May 6 cannot simply be explained away by saying a trader at a bank typed a “b” when he should have typed an “m” when he was selling some stock. There are all kinds of safeguards that should have caught that, and I believe some of the safeguards probably kicked in. But not all of them, and it was enough to set off a selling panic.
Keep in mind that the market was in a mood to sell, as the Dow Jones industrial average was down more than 300 points before the “situation.” The rest of the explanation can be found in the growing wrongly placed regulations that market makers have had to contend with over the last 15 years.
When I started in this business in late 1994, the spread between the bid and the ask, or the difference between the buy and the sell price, was higher than today. Our government forced market makers to narrow the spreads on stocks, which has had the effect of taking some of their profits away. As their profits have disappeared, so has their willingness to stick their necks out when a day like May 6 comes around. Another change has been the quest for transparency, which has manifested itself with large holders of stock not willing to show more than a few shares at a time. The market makers, which bigger holders used to depend on for representation, now have no idea if there are some big players interested in buying big chunks if stock prices fall. These government-mandated changes are resulting in a not-so-orderly market.
Another question I hear a lot is, “Doesn’t the situation in Greece and Spain have the ability to spread around the world quickly and pound every surviving bank into the ground?” The answer is maybe, but probably not yet. The global weakness we are seeing today is why I warned against buying foreign stocks back in early February. I specifically talked about staying away from China, which now looks like it is in a confirmed bear market. What I said then is true today. Stay away from foreign markets.
U.S. markets look like they have at least one more rally on the way at some point in the next few months. When the Standard & Poor’s 500 hit the last high on April 26, there was no evidence of the internal deterioration that has always been seen at every major stock market peak going back to 1933. That tells me there is a high probability the S&P is going to surpass that April high at some point in the next four or five months, which is a good thing, because that is 8 percent higher than current levels.
In addition to avoiding overseas investing for the time being, I would concentrate on liquid, large-cap growth stocks, and buy them only in the dips; don’t chase the rallies. Companies like IBM and Microsoft look good, and so do older names such as Phillip Morris and Procter & Gamble. Goldman Sachs might have a decent bounce left in it, but it will do it without my money.
A few more big names that may have already rolled into bear markets are Pfizer and Google. Most likely, this is the stage of the bull market where you want to ditch your underperforming stocks and send that cash to the better-performing areas.•
Hauke is the CEO of Samex Capital Advisors, a locally based money manager. His column appears every other week. Views expressed here are the writer’s. Hauke can be reached at 203-3365 or at firstname.lastname@example.org.