April 6, 2018


Fishtailing at 100 miles per hour



Dear BrickStreet Folks:


In our last commentary we asked the question “What happened on January 30?” The market made a quick two day sell off and traded 2,721 points lower after a full year of steady, uninterrupted daily stair steps higher. 


Since the market fell those two days, we have seen extraordinary daily volatility with the market making large intraday moves of 500 plus points several times. As of yesterday, the market has swung over 2% intraday three times since January 30th.


So, like our car in Nancy’s illustration, if the vehicle is traveling 100 miles per hour on a two lane road and begins fishtailing, the car is more likely than not to end up in the ditch.


The indecision, minute to minute reaction to Washington policy, and news headlines has the US markets fishtailing with over reactions on each side of the road. Just before it crashes, the buyers take the wheel and jerk the market higher. And just before it busts through technical upside resistance, the sellers react and sell it back down.


We also wrote last year that the only thing that would take this market down was either bad policy or no policy, as the market had totally ignored everything from missiles flying over Japan, to calls for Presidential impeachment, to the Federal Reserve raising interest rates.


Policy is obviously a market mover.


The debate about if the trade, immigration, or tax policy that is coming out of Washington is good or bad is irrelevant. There is no debate that it has been bad for market stability. Coupled with a market that has risen well beyond all expectations in such a short time, a sell off is not a bad thing… the instability of the markets is a bad thing.


We expect the swings to get more erratic over the next few months as traders and algorithmic trading systems attempt to chase the trades for short term profits. Trading short term has not been profitable for the last two years as the markets were so stable that traders lost money practically every time they sold shares.  For over 15 months every sell seemed to be followed by having to buy the same shares at a higher price a day or so later. Traders were getting hammered.


Morgan Stanley and Goldman Sachs both reported trading revenue for 4th quarter 2017 that was the worst in nine years. There is no doubt that both firms will be publishing excellent revenue numbers from debt and equity trading for the first quarter of 2018.


But for you and me, these market swings are not desirable or comforting as we have a long term perspective and would be fine with calm, steadily rising markets. Even a steady declining market is manageable… but extremism and frantic chaos can be unsettling when it comes to our financial security.


We have been through this a couple of times over the last three decades.


1987, 2000 and 2008 were somewhat similar markets that we have lived through and managed well through. The market environment today is not unique or new to its irrationality. Markets are irrational by nature. Wealth is created when markets are inefficient. When valuations get extreme… either over valued or undervalued… that is when wealth can be created with the most certainty. 


Understanding a company’s fundamental value is paramount to making profit in a down market.


As policy sends this market weaving and swerving towards the ditch, we are prepared to take positions in companies that we know well, that are run by good people, and that have excellent long term valuation prospects. Just when the market will hit the ditch, no one really knows. But the likelihood of it happening has increased since late January.


We are ready.




Matthew Burril


Providing advice to build and maintain wealth.