Manias, Panics, and All-Time Highs
We’ve seen a lot in the last two weeks: Manias, Panics, and All-Time Highs.
Dry Ships Inc. (a shipping company) went from $4 to $102 in 4 trading days following the election, an astounding gain of over 2,000%. There were a wide variety of reasons attributed to the advance (Trump is bullish for growth/shipping, a positive debt restructuring, a rally in the Baltic Dry Index, an epic short squeeze, etc.). The reasons doesn’t matter so much except that they create a fundamental rationalization for the mania to take place.
As Dry Ships was approaching $100, I conducted a poll on twitter asking where it was headed next ($200 or $50). This was the response…
Interesting. Most said lower but 37% said it would double yet again.
What happened next? Dry Ships was halted on the 16th and when it reopened on the 17th it proceeded to fall 85%, giving back almost all of the gains.
- As long as human beings have emotions, there will be manias.
- We are not rational in our decisions, which is why the markets are not entirely efficient.
- We are induced to buy through a fear of missing out, among the greatest fears in investing.
- Manias are possible because people buy into to the greater fool theory, where they’ll be able to sell at a higher price to a “greater fool.”
- No one believes they are the greater fool.
- The price you are paying during the mania becomes irrelevant: “buy high and sell higher” is the maxim.
- The odds of you timing a mania successfully are not high. This suggests most would be better off watching as a spectator and letting the greater fools trade among themselves.
Following the election, we saw a good old-fashioned panic in global markets. At one point, S&P 500 futures went “limit down,” a 5% decline. Gold was up over 4%, 30-year Treasuries were up 1% (yields down), and the Dollar Index was down 2%.
Did it stick?
No. Literally everything would soon reverse course, except for the sharp decline in the Mexican Peso. U.S. Stocks rallied, the Dollar surged, Gold declined, and Treasuries sold off (yields spiked).
By the next morning, S&P 500 futures were flat. The market opened as if the overnight panic never happened.
- Panic selling is rarely rewarded in the short-term and never in the long-term.
- Panic should be embraced because fear tends to create opportunity.
- If you are going to sell, better to do so calmly and with a plan before the panic sell-off than with emotion during it.
- If you were panicking on election night based on a 5% decline, you need to reevaluate your risk tolerance. You are likely holding too much stock as the S&P 500 has historically had at least a 5% correction 3-4 times per year.
- The markets and their initial reactions to events are not always right, far from it. They can be very wrong because investors are acting not on information but emotion. We learned that back in June after Brexit and again after the election.
The S&P 500 hit an all-time high today (total return). Does that mean anything?
Perma bears are saying it does: “this is a sign of a frothy market; it will not end well.” They have being saying so since April 2012 when the S&P 500 first hit a total return high following the worst bear market since the Great Depression. Since then we have seen 176 more all-time highs, including today.
The truth is that all-time highs, by themselves, are signaling nothing other than a market that has been going up. Just because every bear market has started from an all-time high doesn’t mean that every all-time high is followed by a bear market. Far from it.
The S&P 500 (total return) is at an all-time high roughly 8% of the time since 1928. The forward returns following all-time highs are actually slightly above average from 1-month through 5-years (exception: 3 years). The percentage of positive forward returns is above average from 1-month through 1-year and slightly below average at 3 years and 5 years forward.
- All-time highs generate many emotions that run contrary to reality.
- There is nothing inherently bearish about all-time highs based on the data. They are like most other days which tend to see positive returns going forward.
- All-time highs tend to be followed by more all-time highs.
- “Tend to” is far from always. There will be an all-time high in the future that will be “the top” before a 5% correction, 10% correction, or bear market ensues. That day could be tomorrow. Neither you, nor I, nor anyone else is good at predicting such things.
- Making wholesale changes in your portfolio based solely on an “all-time high” probably isn’t the best idea.
- You don’t need to have an opinion or take action on all-time highs to make money as an investor.
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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
CHARLIE BILELLO, CMT
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
You can follow Charlie on twitter here.
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