Something rather extraordinary happened on Tuesday, August 25. Yes, something extraordinary also happened on Friday, August 21, Monday, August 24, and frankly all sorts of other days in recent times. By “extraordinary,” the recent market volatility, massive moves in the market (and in recent days this covers huge down days and huge up days), and overall historical levels of point moves, point swings, and intra-day volatility. These are, to be redundant, “extraordinary” times. But the cherry-picked moment of extraordinary I am writing this blog about was the way the market closed on Tuesday, August 25. After being up hundreds of points most of the day, the market reversed hard and closed down 200 points – a 600 point swing in rather quick order. Heavy selling pressure also marked the close on Friday the 21st and Monday the 24th, but I am picking on that Tuesday for the very reason that it came after that infamous Friday and Monday. And what caused this massive market reversal on last Tuesday in the final thirty minutes of trading?
Citi released Friday morning that there were $29.5 BILLION of EQUITY MUTUAL FUND REDEMPTIONS alone last week. You read that correctly. Sell orders for mutual funds, where managers must sell stocks in their funds to make cash available for mutual fund redemption requests, virtually ALL of which come from mom and pop individual retail investors, were at record levels. After the massive sell-off the week prior (over 1,000 points), and after the most volatile day in years to start the week (down 1,000, up 1,000, down 600), the sell volume was so massive, that $30 billion (net) of stocks had to be sold from mutual funds, and those sell tickets hit the tape en masse at the end of the day.
How the traders managed their order flow is not my concern in this blog. It is highlighting the total isolated source of this panic and ill-advised selling. The day before the largest two-day rally in market history, traders were overwhelmed with some of the largest retail panic they have ever seen. Friends, this ought not to be so. The days of emotion-led investors (presumably without professional guidance) selling to very smart and probably already-rich investors must change.
This behavioral guidance is why we at The Bahnsen Group are on planet earth. But it is also the reason market corrections must be better understood, advisors must be better advisors, and clients must receive better counsel. The market could very well have dropped the day after and the day after – that is surely not my point. What we see here is clear indication that the smart money was not selling (even if it is not bullish, it was not panicking), and the space of the market most reserved for smaller and less sophisticated investors – retail mutual fund holders – were selling en masse. This has the anecdotal point of highlighting some concerns in equity mutual funds’ structure, but it reveals the more important point that emotion is not a strategy and panic is not a strategy any more than hope has ever been a strategy.
There is a strategy that trumps all the rest, and to that end, we work.