Markets had a very volatile open yesterday morning with the Dow Jones Industrial Average jumping from up 25 points to down 25 points in rapid order.
After the third attempt to move up, the average moved steadily and deliberately lower.
At 2:25pm, the Dow was down 230 points and seemed to be building another down day in a recent series of down days.
As I write at 7:30 edt, we still don’t know what led to the 750 point drop that occurred over the next 21 minutes reaching its nadir of 9872.57 at 2:46pm. Business reporters are suggesting “fat fingers” on a Citigroup keyboard as the explanation of supposedly misprinted trades. Procter and Gamble, Accenture, and Altria (Philip Morris) each had significantly lower, aberrational prints. These lower prints, we suppose, may have triggered computerized program selling.
As the market dropped our team was watching. A car wreck is a much too pleasant analogy. I was at my desk in 1987, 1989, 9/11, 2008, and I’ve never witnessed what I witnessed yesterday. Often significant drops or climbs involve a gap: a big price adjustment between trades. A stock may be trading at $25 when such overwhelming buy orders are entered that the next trade will be at $32, and prices will go higher from there.
There were no gaps yesterday. The decline was steady and relentless.
Panic hit Wall Street for 21 minutes yesterday, and we aren’t sure why. It’s disturbing to see that a “glitch” could cause a drop of this magnitude but reassuring that recovery followed and cool heads prevailed. The 21 minutes have served to camouflage a market that was down 230 points already. While we don’t see any need for panic, it strikes us that a pull-back after an 80% rise from the March 2009 lows is in order.
A pull-back would be normal.
Traders hate weekends because their capital commitments have to be left unadjusted until trading resumes on Monday. Traders will likely be more nervous about this weekend and will want to be “flat” (neither long nor short) before markets close. This could add to volatility today. Yesterday’s volatility was not surprisingly high. The plunge violated several technical support levels, but without understanding if the drop was in error, we can’t know how trustworthy the technical messages may be.
It is vital to focus on balance sheets, cash flow, debt to equity ratios, returns on equity, and management strength.
Portfolios should be defensive and always anticipatory.
While unexpected, our portfolios were well positioned for yesterday’s debacle. We wrote a few weeks ago about the importance of having and following a clear, articulate investment discipline. We hope you listened, and we hope it helped you through yesterday. Our dogged research continues this morning as we try to understand yesterday’s wild-ride. Be assured that we will continue to adhere to our discipline in pursuit of our clients’ interests and goals.
Take deep breaths; this too shall pass.
Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C. Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.