Hype met reality on Tuesday, and the results weren’t pretty. Investors weren’t impressed with the new product debuts from Apple (AAPL), including the iPhone 6 (in two sizes!) and the Apple Watch (with a scroll knob!). Not even a live performance from U2 could save the day.
As result, the S&P 500 lost 0.7%, dropped below the all-important 2,000 level, and suffered its worst two-day selloff since early August. Apple dropped 0.4% after testing its 50-day moving average in a way that hasn’t been seen since April.
Moreover, high-yield junk bonds continue their weak streak, with the Barclays High Yield Bond ETF (JNK) down another 0.5% to breach its lower Bollinger Band for the first time since July as concerns over rising rates and the end of the Federal Reserve’s QE3 bond purchase program next month rattle the fixed-income market.
Volatility in general has been on the rise this week — ending the smooth-and-easy summertime conditions that investors had gotten used to. Some of this has been caused by turbulence in the currency markets, which have been driving the minute-to-minute ticks in the stock market for years. The U.S. Dollar has been on a tear against the yen, the euro, and the pound sterling — rattling many FX positions.
As a result, the CBOE Volatility Index (VIX) — known as Wall Street’s “fear gauge” — has tested above its 200-day moving average on Tuesday as options traders look for put option protection against additional stock market losses.
And at this point, additional losses look likely despite elevated investor confidence and aggressive portfolio positioning. For example, the share of bearish investors in the Investors Intelligence survey has dropped to levels last seen in 1987. So the pessimists are something of an endangered species at the moment.
The recent run of low volatility and general lack of drama has a lot to do with this. In fact, Monday’s relatively small loss on the S&P 500 was still enough to quality as the largest decline in a month. Since 1928, there have only been 8 other times the index has suffered its largest monthly loss on a decline of less than 0.35%. According to the folks at SentimenTrader, the last occurrence was 18 years ago.
Historically, the market tended to show weakness in the days that followed.
I response, I’ve recommended Edge subscribers move into defensive positions such as the leveraged inverse ProShares UltraShort Oil & Gas (DUG) to profit from the general market’s newfound weakness as well as the specific selling pressure hitting energy stocks.
The disappointment with Apple’s unveiling hit the market so hard because the company, by virtue of its massive market capitalization, pulls the major indexes around by the scruff of the neck — and also because it deflated the dot-com 2.0 bubble that’s been in play lately with wave upon wave of money-losing IPOs coming to market to great fanfare with an intensity not seen since the height of the first dot-com bubble.
The realization that a $350 smart watch isn’t the killer app so many believed it would be or that it wouldn’t be the gateway to the “internet of things” we’ve been hearing so much about sent a forgotten emotion down the spines of many investors: Fear.
Disclosure: Anthony has recommended DUG to his clients.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
