We got a spate of bad news this week, the market came in a bit and the most egregious offenders in Rallytown got slammed (the S&P Materials sector was off 4.5% or so on the week).
This is how markets are supposed to function. They are digesting and discounting current headlines and the longer-term consequences these headlines portend.
Bill Gross‘s Treasury sale news reminded us all that the end of QE is nigh and that PE multiple compression for equities would be a likely reality – so we sold off. In an unhealthy market, extreme-sounding newsflow like what came from Pimco would be blown completely out of proportion and turned into a meme of mayhem.
In reality, Gross simply feels he’s not being rewarded with enough yield – he expects the 10-year to sell-off back to a 4% yield from its current 3.5%. And we didn’t “collapse” or “implode”, we just rousted some of the bears and lost some bulls. All expected, all healthy market activity.
Earnings-related weakness in the screaming optical names knocked the Nasdaq techs down a peg. Good. Let’s put the Finisar ($FNSR) sell-off in perspective:
- This is a stock that had run from 12 to almost 50 in less than 10 months
- It is a highly-specialized component supplier to a niche vertical
- It has a beta of over 3(!) so volatility is both its race and religion
- It is still up 50% in the last 52 weeks versus a gain of only 13% for the S&P 500
In other words, Frankie Say Relax – so Finisar is is whacked for 40% in three days. They deserved it.
And the discounting mechanism in its peer group worked as well, JDSU gave up a fifth of its market cap because it is guilty by association, the Op Twins, Opnext and Oplink, paid the price as well, down 20% and 12% respectively. In 2008 or 2009 a bludgeoning like that would’ve easily carried over into the semis and software names leading to a nasty cascade.
But we’re not doing the brushfire, cascading thing. We’re doing the stocks-will-be-stocks thing. We’re seeing sectors with the biggest excesses take their medicine, bold moves by strategists be taken with a grain of salt and company-related bad news being contained to the requisite sub-sector.
The markets are healthy and functioning right now, period.