To paraphrase the founder of Fubu clothing company Daymond John, “The financial and commodities markets are a cruel teacher. They love to give you the test first and the lesson later.”
This past week has seen some of the largest percentage daily moves in stock market recorded history and daily volatility that is unprecedented. The Dow Jones Industrial Index (DJIA) had the largest open price-to-close range, or intraday fall, of 588 points. That day also saw the largest daily swing from the high to the low of over 1,000 points. Because of that huge swing, the DJIA futures contracts trade a 4,500-point whip around through the day.
But it was not just the stock markets. Crude-oil futures fell by 5 percent, breaking below the critical $40- a-barrel price. But since that drop, the price has recovered 14 percent for more than a 20-percent movement in just a few days. The same type of volatile trading occurred in the currency markets, with the US dollar index losing 3 percent and then gaining all of it back. The Japanese yen made even a larger move.
The gloom-and-doom crowd went from Zero to Hero and back to Zero in a very few days, with markets recovering from their crashes almost as if nothing happened. The “Don’t Worry, Be Happy” crowd went nuts when the DJIA was down 1,000 points on Monday, and then considered itself the smartest group on the planet when the market ended down only 588 points.
This kind of volatility usually “whipsaws” traders, and the smart ones stay on the sidelines watching all the action while drinking a bottle of fine wine.
The Philippine Stock Exchange (PSE) was not an exception, losing 6.7 percent this past Monday and another 2.7 percent early in the day on Tuesday. But by the close of Tuesday’s trading, the PSE reversed and finished 0.58 percent higher for the day.
The fact that the global markets fell was not a surprise, as virtually everyone has been expecting a decline. This included the “bubble-maniacs” looking for financial-market Armageddon to those thinking a small correction was necessary. But the key is that virtually no one expected the extreme volatility and reversal.
I have been talking about extreme volatility for some time, but that does not make me any sort of an “expert.” It is just that the economic-cycle change coming at the end of September calls for this time of financial and asset-price volatility that has been seen every time the cycle has changed up or down in the past. It is just that we all have short memories.
Here is something else to consider. This past week on the PSE is not even the greatest percentage or point move from weekly top to weekly bottom. There were two weeks in 2013 that saw greater volatility in both points and percentage. Back then, the US Federal Reserve (the Fed) was to blame because everyone “knew” that a catastrophic and stock market-killing US interest-rate hike was absolutely imminent.
This time around, that interest- rate hike is still imminent and is still market-killing, but now it is all China’s fault. Interestingly, US Treasury Secretary Jack Lew said this a month ago: “I will say that China’s markets still are pretty much separated from world markets.” And speaking about a decline in the Chinese stock market and the effect on global markets, Mr. Lew continued, “So you’re not going to, I don’t think, see the direct linkage there.”
When it comes to the financial and asset markets, “Who are you going to trust? Who are you going to call?” Barely a week ago, the global stock markets were destined to fall another 50 percent, wiping out the global banking system and reducing us all to buying and selling goods using seashells. The US dollar was going to collapse, as Europeans rushed back to their own currency and everyone else sought a safe haven in Japan. The Chinese government would be forced to close the stock markets and declare martial law, as millions of investors march toward Tiananmen Square. The members of the Fed would probably all disappear and meet up with their European counterparts on a South Pacific island bunker to ride out the next episode of Mad Max.
Of course, all those predictions might come true in the coming week—or they might not—and that is the point. Just when you think you have it all figured out, the markets slap you on the side of the head, and then teach you the lesson that forecasting is for fools. It is the longer-term trends and cycles that will eventually win the day.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.