Striking Out: A Market Crash, or Another Buying Opportunity?

If you’re like most folks, you probably looked at the somber headlines this morning and got worried.

And nobody who can read would blame you… Just look at this garbage.

Source: CNBC

Don’t get me wrong, the media is doing what it’s supposed to do — say stuff that gets your attention.

But while I would agree 350 points sounds like a great big number, is it really that big in context?

The Dow Jones Industrial Index started off this morning at 34,681 and it’s now at 34,347… That’s less than 1% of its overall value.

In contrast, just before COVID-19 swept through the country last February, the Dow had closed around 29,000.

When the downturn began, the Dow went immediately to 28,000.

Then to 27,000… then 26,000… all the way down to 18,213, a drawdown of over 37%.

Now compare that to the market’s decline since Monday at 1.8%. Here, I’ll even show you…

Source: Bloomberg

A rational person might then ask, “OK, Mr. Smartypants, well what about those other headlines — the Delta Variant, the Chinese stock delistings, the fact that they even typed the word ‘sell-off’?”

And I get it — those are all scary words.

But they all have one sentence answers.

First, vaccines are very effective against the Delta Variant, and the U.S. is 67% vaccinated.

Second, there will still be broad foreign equity ETF’s to trade, and in fact, until Tuesday, Venture Society was SHORT Chinese stocks anyway.

And third, they typed the word “sell-off” to get you to click on the article.

Moreover, we have written extensively — and often — about all the market indicators that tell anyone who pays attention whether the market is crashing or correcting.

If the market is crashing, the plan would be to sell growth stocks and buy utilities, gold and U.S. Treasuries.

If the market is correcting, the plan would be to BUY THE DAMN DIP!

Let’s see what the plan is.

Always Start With the ‘Three V’s’

When prices move down, the first thing I look at is volume.

Prices moving down on accelerating volume is bad.

Prices moving down on decelerating volume, however… is a blip.

So did volumes go up today?

Source: Bloomberg

Strike one!

Usually, I’d stop there, but for the sake of thoroughness, let’s look at the next “V” — volatility.

Did the CBOE Volatility Index (or the VIX, in parlance) hit a new high?

Source: Bloomberg

Strike two!

In fact, it even made a lower high than the spike a couple of weeks ago.

For me, the first check is enough, and all this double-check does is confirm it.

But again, just for thoroughness, let’s check the third “V” — the volatility of volatility.

Did the CBOE Volatility of VIX — or VVIX, in parlance — hit a new high?

Source: Bloomberg

Steeeerrrriiiiiiike threeeeeeeee…hee…hee…hee!

If you can’t tell yet, Thursday’s price action looks like a blip to me rather than the start of some sort of crash.

In order to change my mind, the first thing I would need to see would be the VVIX breaking above previous highs — somewhere around 128-130.

Then, I’d need to see the VIX break through previous highs on increased volume.

And finally, I would need to see volatility increase not just in stocks, but also in other asset classes — particularly bonds and currencies.

That’s not happening here, at all.

But just in case anyone out there is still on the fence about what to do, I made this handy little diagram for myself.

Source: Bloomberg

We’ll see on Monday whether or not this blip has hair on it, but until then…

Buy stonks!

All the best,

Matt Warder