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Value Hunters Will Be Picking Over the Bones After this Panic

02/06/2018 11:53 am EST


Robert Savage

Partner & CEO, CCTrack Solutions

Trading a fast, volatile market requires skills most retail folks lack and many trained investors pay for. The next phase will be a calm as cash levels reach safety satisfying the fear need, balancing greed opportunities, writes Bob Savage,CEO of Track Research Tuesday.

Running away from a bear only requires that you run faster than the person next to you.

Overnight the Japan Topix fell more than 6% catching up to the Dow Jones Industrial Average (DJI) drop – a six-year record. Taiwan fell 5%. The MSCI EM was off 6% now off 3.5%.

Bears will always outrun people. The CBOE Volatility Index (VIX) trades over 50% for the first time since August 2015.

There is a difference between a panic and a crisis. Panics happen fast and end fast. The last three days started this panic. A crisis has panics interspersed with moments of hope but weeks of grim reality.

We are in a panic phase so far with many still content to call this a long-overdue correction rather than a trend reversal. Economic fundamentals matter and the global coordinated recovery continues, even as equity markets reprice the riskless rate.

There are a number of factors necessary to reverse the trend – including corporate earnings, global growth, inflation, policy mistakes, deleveraging.

Value hunters will be picking over the bones left after this panic. Growth will follow. Many bearish analysts have been calling for this moment for years. But being “right” for the moment isn’t the same as being useful.

Understanding the dynamics of a panic maybe more to the point today as many signals of a turn about are underway.

1) The short volatility trade has exploded. The XIV and SVXY products are the focus and both mark the end of a phase that supported the market dynamic, but reflect the cost of money and policy certainty more than actual implied market fears.

2) Bonds have rallied sharply. The fear of higher rates drove the stock market to retreat last week. This has been put into reverse. Bonds remain a safe haven and their volatility is cheap compared to equities now. The bond market has put in a temporary yield high and that matters.


3) Alternatives to money are retreating. Cash is king not gold or bitcoin (BTC). That matters as private money hoarding was a key part of inflation, policy and political fears. BTC traded below $6000 overnight.

4) Oil is lower. If inflation is a key part of the fear factor driving rates and policy, then this move matters. Markets are creating a policy feedback loop that will alleviate the need for some speed in the change for central bankers.

5) Credit isn’t yet in trouble. In the crisis of 2008, credit mattered, but in the panic of 2018 it hasn’t yet blown up.

So this isn’t a complete list but the factors are clear that many of the things that would make the panic turn to crisis aren’t yet obvious. Trading a fast and volatile market requires expertise most retail folks lack and many trained investors pay for – leaving it clear that the next phase will be a troubling calm as cash levels reach levels of safety satisfying the fear need, balancing against the greed opportunities.

The barometer to watch remains bonds – as they started this mess.

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