Sunday, June 14, 2020

Markets take the stairs up and the elevator down

I have a colleague, who is my soundboard on investing. We had an interesting Whatsapp conversation on Friday about the strange dichotomy between the stock market's impressive rally and the economy in the dumps right now.

One observation was the Chicago Board Options Exchange (CBOE) Volatility Index, or VIX for short, started to spike again to a level of 40, after retreating steadily from a high of 66 during the market crash in March.

The CBOE Volatility Index, Source: Yahoo! Finance

The VIX is derived from prices transacted for the S&P 500 Index options, and is used as a proxy of investors' fear and uncertainty in the market. The higher the index, the greater the implied uncertainty.

Indeed, if you flip through financial news websites, there is no lack of articles quoting professional money managers on their hesitation of investing in the current market.

And we are talking about people who make buy and sell decisions in the quantum of billions of dollars for a living.

So if the pros aren't the ones chasing the momentum, there can only be one logical conclusion - this present rally is being driven by retail investors, notably newcomers whom had never thought of plonking money down on a stock before.

In the past, it was almost a hassle to go long on a stock. You would have to dial up your dealer, hoping he is around, check the current bid and ask quotes, and tell him (I presume it was mostly guys then) to buy 1,000 shares of Keppel for you.

Then came the Teletext, which was an improvement because you could stare at the television screen all day long to get the prices.

ST File Photo by The Straits Times

Nowadays, with the prevalence of the Internet and smartphones, buying and selling a stock is just a few clicks away. Mobile applications ("apps") such as Robinhood has made investing so simple and so cheap, it is almost game-like.

Login, select ticker, enter quantity and price, hit Buy and presto! It's game on.

But making investing easy has its dangers. This means the stock market is seeing an influx of new investors (or day traders) whom may have no idea of basic risk management, and no fear of failure. The 1997 Asian Financial Crisis and the 2008 Global Financial Crisis are a distant memory.

We are seeing proof of this naivete in the market. Bankrupt car rental company Hertz Global Holdings had just won judge's approval to sell as much as USD 1 billion dollars worth of shares to the market [news]. This comes after the stock climbed tenfold from a low of 56 US cents on May 26 to a high of US$5.53 last Monday.

Seriously?

If local water treatment firm Hyflux can perform the same magic trick, plenty of Hyflux PnP holders will be thrilled.

So it has become a game of musical chairs - Novice traders latch on a languished stock (with zero interest in the company turnaround) and wait for a bigger fool to take it off their hands at a higher price.

My own fear is this will become a vicious cycle - Millennials see their friend made a quick buck trading on Robinhood [news], decide to open an account, buy an airline stock from a hot tip, sell at a profit, boast on social media. Rinse, repeat.

And the stock market bubble blows bigger.

Till it pops.

An old investing proverb comes to mind, which may be worth remembering:

"Markets take the stairs up and the elevator down."

When every investor heads for the fire exit, there is bound to be a stampede. It is probable we will see big market swings in the weeks ahead, if the spike in VIX is any guide.

Hope you are buckled up for the ride.




Enjoyed this post? Never miss out new posts by subscribing here.

No comments:

Post a Comment