Forget QE. The new buzzword is PAIN TRADE
Had I not been in my living room wearing sweatpants while watching "The Blacklist" instead of punching my Bloomberg Terminal at One Bryant Park, I would have thought I was back in 2008. Wednesday's trading seemed like a typical 2008 day. The was down almost 3 percent on Wednesday's lows before a late-day rally. The day had more ups and downs than the Coney Island Cyclone.
If you have been following my columns, I have been calling for a pullback in this market since August — albeit for non-traditional reasons such as the "Wolf of Wall Street" speaking at the 92nd Street Y and the Rose shortage in the Hamptons. If you listened or at least proceeded with caution, then I wish you luck going forward. If you were the ones who sent me disparaging mail and dismissed as some kind of court jester, then I advise you to double down on your long New York Jets Super Bowl futures bet because you deserve to be poor.
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With the stock market skittish and volatile, there are many factors to blame, from crude's decline to Europe's withering economy and Ebola. However, I think the biggest reason for volatility, is the upcoming end of quantitative easing, or QE. Taking the QE out of the market, is like taking a recovering heroin addict off his methadone program and dropping him off in Bangkok. You aren't sure what's going to happen but you know it's going to be a wild ride.
QE has been the buzzword since 2007. Some pundits are calling for QE4 but in my mind we have already seen QE1-69. There have been more QE programs than "Simpsons" episodes. Every time it looks over for the stock market, QE brings the stock market back from the dead, like Jason Voorhees from the Halloween movies.
Now at these levels, be cautious. I think volatility will continue for a while. So what are the new buzzwords you are sure to hear over and over with the upcoming volatility? Here are a few:
The Pain trade
As James "Clubber" Lang (Mr. T) famously answered the following question in Rocky 3:
Announcer: "What is your prediction for this fight?"
Lang: "Prediction??? Pain!!!"
The pain trade is the market's uncanny ability to inflict the most amount of pain to traders when the market gets volatile. You saw it in 2008. You see it in every correction. The most widely held stocks that everyone loves, sell off the most. The underowned "dogs" rally. The pain trade can hurt more than getting kicked below the belt by your girlfriend wearing the $3,000 Louboutins you just bought her.
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Here are some examples of the pain trade that have already happened:
The two sectors with the most stocks in a correction are energy and consumer discretionary. Wait, I bought consumer discretionary stocks because I thought falling oil prices falling were supposed to be good for the consumer sector. PAIN!!!
Gold is at a four-week high. Wait, everybody told me to get short gold. It has no use in my portfolio. PAIN!!!
Buying IWM (Russell 2000 puts) Monday as protection against my long big-cap stock position. The broader market was unchanged but the IWM rallied 1.2%??? PAIN!!!
I am losing money hand over first in this market and my spoiled daughter's birthday is next week. I forgot to buy her front-row tickets for Justin Timberlake's concert, The 20/20 Experience because I have been so busy. Somehow ticket prices have tripled and she is throwing a temper tantrum . PAIN!!!!
Hedges
Whenever the market starts looking shaky, I would always get the question, "What is the best hedge for my portfolio?" The answer: Without a doubt, the best hedges, are the ones that my dog pees on.
Investors and traders inevitably tend to buy puts (an option that appreciates as the stock price goes lower) at the worst times. When they number of puts far outpaces the number of calls bought (aka the put/call ratio), that's when the bottom comes.
The best way to protect your portfolio is not to buy puts but to close or reduce your positions. The problem with hedges, is it can make you lose even more money.
For example, you may have every fundamental reason in the world to like Schlumberger Ltd. (SLB). You think SLB should rally, even if trades crude oil at $40. So you go short crude oil vs. your long SLB position and you see oil rally to $100 and SLB trade lower. What happened to my hedge?
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Or SLB stock is at $89 and you buy an $85 strike put. You pay a price for that put. At expiration, the stock closes at $85.50. You lost money on the stock and the premium you paid for the put because it finishes out of the money.
I think the reason people don't sell stocks they love is because it's admitting failure. Selling SLB is admitting you are wrong. You will find any excuse you can not to get rid of SLB, because it's your baby. It's like those parents who think their kids can do no wrong.
If you have a child, you will find every excuse for why they didn't do better on the SAT. He has a learning disability and needs Adderral. The test is culturally biased. He was unprepared because his SAT tutor smokes too much weed. Or maybe, he actually did his best but at least the world needs ditch diggers, too.
Bad breadth
When I say bad breadth, I am not talking about the morning breath I woke up with this morning (which consisted of pepperoni and garlic pizza with 12 shots of tequila mixed in). Market breadth is a technical gauge that measures the number of companies advancing vs. declining.
As of the last few weeks, the Russell 2000 index of small- and mid-cap stocks is sporting some serious bad breadth. The overall strength of the market will be strong when beaten down sectors are the leaders. So beware of bad breadth and always carry a pack of Mentos.
Puke point
Puke point is very similar to real life when you just drank your tenth shot of Jameson. This is the point where you can no longer stomach the losses. You puke everything. Clean out the system and start over.
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Watching loss after loss with volatility can make you become physically ill. Watching your Bloombergs go red and giving you heart palpitations means you have reached your puke point. You have no choice but to unload your portfolio and whatever you ate for lunch, or else it will literally kill you.
Swag
For those don't know the term "swag", it's the new generation's alternative word for cool. However, it has become one of the most overused words among douchebags. The new generation used to use swag to describe someone like Jay-Z. Now swag is more appropriate to describe someone like Mark Z(uckerberg).
If you hear a CEO say that he got his company through tough times because he has swag, or, if he says his company is the next Alibaba because it has more swag than its competitors, then the first thing to do is short that company.
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SWAG should really be an acronym for "Secretly, we are geriatric. "
You know who had swag? Blockbuster.
Twerking
My vote for the next big Wall Street term is twerking. Twerking in pop culture means shaking, wobbling and bouncing your butt like crazy, and used mostly to describe women dancing in rap videos and strip clubs.
I think twerking is an appropriate term for a market with extreme volatility, that is moving up and down with no rhyme or reason, just like Miley Cyrus's career. When the stock market begins twerking, pay attention and put on your helmets. Someone is going to get hurt. However, somewhere in that twerking, the stock market will find a bottom. No pun intended.
I think CNBC's "Mad Money" should change its theme song to "Anaconda" by Nicky Minaj. If you see Jim Cramer dancing and twerking for the first 30 seconds of the show, put every dollar you have into buying stocks!
Commentary by Raj Malhotra (Raj Mahal is his stage name), a former Wall Street trader-turned-stand-up-comedian. He has worked at Wall Street firms covering three continents, including at Bank of America, BNP Paribas and Nomura. He draws from his unique ethnic background and Wall Street career to entertain audiences nightly, highlighting the struggles of the 1 percent. He can be seen at Gotham Comedy Club, Broadway Comedy Club, NY Comedy Club, Greenwich Village Comedy Club, and the Tribeca Comedy Lounge. Follow him on Twitter @RajMahalTweets.