Why it’s “an orderly sell-off”

As of the close of trading last night, 98% of S&P 500 stocks have fallen below their 10-day moving averages. That’s as close to a washout as you get.

One week ago today we were making a new record high on the S&P 500. Seven days later and we’ve witnessed over $2 trillion in market cap erased from the board. Overseas it’s worse.

You’re hearing over and over again about how, despite the fact we’re at 4-month lows on the Dow Jones as of this morning, the sell-off thus far has been orderly, as opposed to panicky. And that’s actually, empirically true. Michael Batnick illustrates that “126 stocks, or a quarter of the index, are already more than 20% below their 52-week high. The parts always look worse than the sum, but this looks pretty tame compared to recent selloffs. The average S&P 500 stock is 16% off its 52-week high. (median 13%).”

It’s been swift, and it’s been deep, but we’re not quite at the point where it’s just indiscriminate blood-letting all over the place.

REITs, Utilities and Consumer Staples have acted defensively, their dividend yields becoming more prized as Treasury interest rates decline and money pours into safe havens.

Healthcare sector stocks have held up better than Technology, which is also rational – Tech is disproportionately affected by supply chains and demand across Asia whereas as patients don’t stop treatment because of economic concerns.

Consumer Discretionary has been hit harder than most sectors, and this is also rational – these were some of the most expensive stocks in the market and they rely upon people being out and about, spending money on non-essential purchases and experiences. The travel-related stocks are in this sector. The selling of these names makes sense and is entirely orderly. Airlines too, which are technically considered Industrials.

But why are things still orderly? Why hasn’t panic set in yet?

I think the main reason is that professionals are still more afraid of embarrassing themselves than they are of permanent losses. That’s today, things could be different weeks or months from now.

But today, people have been conditioned in a very Pavlovian sense – every time they’ve sold, they’ve been made to look stupid by a V-shaped recovery shortly afterwards. The Flash Crash in 2010, the European Debt Crisis in 2011, the London Whale in 2012, the Taper Tantrum in 2013, the Ebola Scare in 2014, the overnight fix in the Chinese Yuan in 2015, the Oil Crash in 2016, Brexit in the summer of ’16 and the Trump Whipsaw later that fall, the Trade War’s onset in 2017, the ill-advised Jerome Powell remarks in 2018 – “we have a long way to go” – the assassination of Iran’s terror chief earlier this year – if you had panicked during any of these episodes, the embarrassment came swiftly and absolutely.

Embarrassment has a deeper meaning on Wall Street. It means redemptions and assets leaving your fund. It means career risk. Pros are now petrified of missing the market recovery. That could shift as the losses pile up and enough time goes by. But that’s the sense I get today. It’s been almost impossible being an active manager during the last five years, as trillions of dollars have left the space – either in pursuit of the allegedly greener grass of private equity or defaulting into low-cost / no-cost index tracking. That’s what makes the decision to sell just as terrifying as the decision to buy.

What if you sell, stocks bounce back, and the end clients say “That’s the last straw!” on their way out the door?

Ladies and gentlemen, we might be witnessing the first ever case of “Panic Holding” in the history of the stock market.