Volatility Hits Extremes as Asia Fights Back Against Sellers

Market Roundup Dow -239.11 to 16,253.57 S&P -27.37 to 1,942.04 NASDAQ -55.40 to 4,756.53 10-YR Yield -0.013 to 2.181 Gold -$14.10 to $1,106.90 Oil -$1.58 to $44.36

Now THAT’s what I call volatility. After tanking for weeks on end, Japan’s Nikkei 225 Index reversed course and soared almost 8% overnight.

We’re talking about a two-day rally of more than 1,350 points from low to high – for an index that closed at 18,770. That marked the largest point rise since 1994, and the biggest percentage gain since October 2008.

The rally in Japan stemmed from a combination of bargain-hunting and talk of a possible corporate tax rate cut in 2016, one aimed at boosting the moribund Japanese economy. Talk of more potential stimulus in China, including a slight boost in infrastructure spending and small business tax cuts, also helped.

Optimism spilled over into our market in the past 36 hours, too. The Dow Industrials jumped 390 points yesterday, then another 150 more points in the early going today. That naturally had many pundits asking: “Is that it? Is the sell off behind us?” … questions that looked pretty silly when the Dow ended up tanking all the way to minus-239 by the close.

A wild rally in Japanese stocks helped spur markets worldwide overnight.

Let me start by saying that wild fluctuations like this are NOT normal. The last time we saw anything similar was the fall of 2008, when the credit markets were imploding, Lehman Brothers was going under, and the economy was slipping into its deepest recession in decades.

But here’s the thing: Back then, U.S. stocks had already spent more than a year falling – and not by a small amount. This time, we’re barely in correction territory here in the U.S.

We have barely begun to play “catch down” to foreign markets that have plunged by more than 50%. We have barely begun to play catch down to foreign currencies that are trading at their lowest levels since as far back as the late-1990s (or ever). We have barely begun to see stocks catch down to commodities or credit or interest rate markets.

In other words, there are no GUARANTEES in life or in markets. There’s no 100% hard and fast rule that says stocks have to fall as much as other markets suggest they “should.” But many of the other peripheral markets I follow like a hawk suggest stocks are still the odd man out.

One other thing I’d note: We had some tremendous one- or two- or three-day rallies in the fall of 2008. They stemmed from things like the TARP vote, which followed then-Treasury Secretary Hank Paulson literally getting down on his knees and begging for hundreds of billions of dollars in bank bailout money.

But the market didn’t ultimately bottom until March 2009. The Dow shed an additional 3,000-plus-points from its post-TARP, post-Fed-intervention high of 9,655 to its ultimate low.

“We have barely begun to play ‘catch down’ to foreign markets.”

So from where I sit, chasing stocks here still doesn’t look like a good bet. I’d rather miss out on some potential upside in the name of prudence, and in light of the fact several of my fundamental and technical indicators suggest we’re far from being out of the woods.

How about you? Do you think countries like China and Japan are getting their arms around the problems there? Or is the worst yet to come? Are there particular stocks and sectors you still like here, despite the broad market volatility? Or do you believe almost all equities will get spanked in this kind of market? Tell me over at the Money and Markets website.

Our Readers Speak

The two biggest topics over at the website, predictable given recent events, remain the European migrant crisis and the incredibly volatile stock market action of late.

On the first topic, Reader Bud W. said: “A person might realize that government people cause a lot of dislocations in a country’s economy. Government people, typically, tend to be collectivists. Hence, there are trends which are supportive of collectivist errors.

“The errors are usually unintended, but those errors result in the same as any destructive errors. Of course, we all are shocked to see images of dead infants and toddlers. Such does not have to be the costs of governments, but is more usual than we should expect.”

Reader Edw C. added: “The refugee situation is horrible in many ways. But in the middle of this global problem, where is the all-knowing U.N.? This crisis will not end well.”

Finally, Reader Dave said: “People should think twice about criticizing Germany for taking in so many refugees. First and foremost, under the circumstances, it’s the right thing to do. Aside from that, however, is a benefit to Germany itself that is not so apparent.

“The fact is, Germany, like many developed economies, is headed for a demographic crisis with its aging population. If nothing else, taking in the young and vulnerable is one marvelous way out of this dilemma. And no, this shouldn’t be seen as exploitative: The best solutions are those that serve the interests of all parties.”

As far as the markets, Reader Tommr said: “Just a couple of months ago, it seemed like everyone was sort of complaining about such a rangebound market. Many were saying that a good correction was overdue and needed. Okay, now we have that longed-for correction and these same people are hysterical over the ‘volatility!’ Go figure.”

Reader Robert P. added: “As best as I can tell, the forecast calls for more whipsaw action. Might pay for us to fasten the seat belts.

“One reason the market’s action seems so extreme to us now is the fact that our markets have never been this high before. Percentage-wise, it’s not that much different than at other times in the past.”

I appreciate everyone’s feedback. Some kind of Pan-European or even U.N. program(s) will be needed given the scale of migration that we’re talking about here. Building fences in a few small countries won’t solve anything, not when there are so many ways for immigrants to reach European shores – and such a strong desire to get away from war and instability back home.

As for stocks – like I said earlier – I continue to believe that the extreme volatility we’re seeing points to an underlying sickness. There’s no telling whether today, tomorrow, or the next day we will be up 200 points or down 300. But the bigger-picture trend doesn’t look encouraging to me. That’s why I got so cautious this summer before stocks melted down, and why I remain so today.

Anything else you want to add? Then here’s the link to the Money and Markets website where you can.

Other Developments of the Day

The CEO of United Continental Holdings (UAL), Jeff Smisek, stepped down late yesterday. Two of his lieutenants also left the company amid a federal probe into the airline’s relations with the Port Authority of New York and New Jersey. Investigators are trying to establish if the head of the Port Authority and United officials negotiated special benefits in exchange for giving United favorable treatment.

European Commission officials are trying to come up with an emergency settlement plan to deal with as many as 160,000 migrants fleeing to the Continent. The idea is to have several nations grant asylum to the immigrants, rather than leave them to linger in Greece, Hungary, Italy and other land-and-sea entry points. But resistance among some countries remains serious amid concerns about the financial and social burdens associated with allowing more migrants to stay.

Investing in early-stage biotech companies always involves risk, and when things don’t go right, it can wipe you out. That’s what shareholders in Tetraphase Pharmaceuticals (TTPH) learned today. The stock plunged a whopping 80% after a study determined its antibiotic didn’t perform any better than a cheaper generic version.

So are these extremely volatile global market moves giving you indigestion? Do they signal a market that’s putting in a lasting bottom, or one that’s getting sicker? What about the latest European plan for dealing with the immigration crisis, or the corruption investigation at United? If you have any thoughts, be sure to share them at the website.

Until next time,

Mike Larson