The Finance Gourmet

Personal Financial Advice from a former Certified Financial Planner

Market Falls, But… No Panic… yet?

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So, interesting phenomenon happening in the stock market these last few days with the S&P 500 dropping over 5% (around 1,400 points) and even dipping below its 200-day moving average. In the right circumstances, this might be the trigger of a full-on rout in the stock markets.

Here is what is missing though: panic.

Markets Down – Does Anyone Care?

I’ve been subtly (and not so subtly) hinting for about a year now that I think the Federal Reserve is too set in stone on its course to raise interest rates in the face of little to no inflationary pressure. To me, this recovery, as long as it is, doesn’t seem that strong. As such, one rate hike too many, could spell disaster.

stock market price down facebook

With this week’s market reacting poorly to rising interest rates in the bond markets, I was dusting off my “I Told You So,” posts. But, it looks like I’ll have to wait a bit longer.

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Despite the fairly big numbers in the Wall Street sell off as late, there isn’t much fear associated with it. When it comes to the economy, nothing matters more than how people FEEL about it. That’s why they try so hard to measure those feelings with thinks like sentiment indexes, and the like.

Unfortunately, measuring how one person feels is tricky, you can imagine how it is when you are trying to measure millions of investors and participants in the economy.

For my part, all I can do is measure what I see and hear around me. That’s a bit larger than it once was, thanks to social media, and websites like this one, but it still isn’t statistically valid. That being said, if you get a big enough chunk of the right people, your approximation can be just as good as the real thing.

My approximation right now has everyone looking at this current market downturn as a, “Oh, yeah. We knew that was coming sooner or later.” In other words, long-term investors, and others are shuffling their decks, but are not running for the exits. That means without another push down the hill, this MIGHT be all we see of this little downturn — a few days of market declines (albeit big ones), and then back to normal.

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If, and that is a very big IF, that’s how things go down, then turn 100% of your attention to housing. Rising rates mean rising mortgage rates, and if there is a way to pop this long-term economy, it’s to send everyone back to their bunker mentality regarding real estate.

No-Brainer High Risk Apple Trade Coming Up

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Apple has announced an event on September 12. Traditionally, Apple announces new iPhones and other “gadgets” in September, and expectations are high.

So, what is an investor to do?

If you are a long-term investor, nothing. Absolutely nothing. The event will generate some noise in Apple’s stock price, but the actual effects will take place over the months and years as Apple executes on its strategy, and how well the new phones are received.

apple event stock trade

Short-Term Apple Trade

What about a short-term investor looking for a little trade on Apple’s big event?

In that case, it’s time to look into options and start pricing volatility plays. No matter what Apple announces there will be a reaction. In fact, there is a very good chance that there will be an OVER-reaction. That reaction will show up in a quick rising, or falling stock price.

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Now, if you don’t understand options, and don’t already have an options enabled account, this move is not for you, but if you’ve been to this rodeo once or twice before, there is money to be made here in a good volatility trade, coupled with the usual leverage of stock options.

Buy Apple Stock?

What about just buying (or shorting) some shares of Apple stock?

While that is certainly doable, you should carefully calculate your expectations and risk IN DOLLARS. As always, it’s too easy to get caught up in sexy percentages and forget what you are actually looking at.

As of right now, Apple stock is trading at about $225 per share. To buy 100 shares, you would need $22,500. If the stock price rose, say $10 per share based on the announcement (around 4% to 5%), you would make $1,000 profit on your $22,500 investment. A $20 share increase (almost 10%) would net your $2,000 on your $22,500 investment.

So, is it worth the risk (and trade costs) of dropping $22,500 to buy some stock in order to make $2,000? If the answer is yes, and you can afford to risk the money (no college funds!), then there would be dumber trades out there.

Remember, however, that expectations are HIGH for this event. If Apple disappoints, with a few “incremental upgrades” it might be a long while before you see a $225 share price again. That $2,000 quick profit, could be a $2,000 quick loss just as easily, and the prices will react so quickly, you’ll never get a shot at getting out. Even a stop-loss could send you reeling.

Will I be getting in on this short-term Apple trade?

Nope.

Short-term trades aren’t my style. Easy ones like this don’t come along all that often, and the juice isn’t always worth the squeeze. I do have some Apple stock already. Buying in a while back gives me a nice ongoing dividend, so I’ll be rooting for Apple, but the shares I already own will have to be my skin in this game.

At the time of publication, the author owned shares of Apple stock. That may change at any time, without notice. This is not an offer to buy or sell securities, nor is it financial advice. The author does not hold himself out to be a financial advisor. The author is not a licensed broker. This article is for general informational purposes only and should not be considered financial advice. 

What Is After Hours Trading

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Facebook reported some garish earnings guidance after the market closed today and the reaction was pretty big. In fact, it was so big, that news outlets and other investment analysts started publishing stories about how far down Facebook stock was trading “after hours.”

When this happens, people have questions, mostly, What is After Hours Trading.

After Hours Markets

Although it never really matters to most people, the reality is that isn’t just one stock market. There are actually several different exchanges. A couple of decades ago, accessing these other exchanges wasn’t really the kind of thing that your average trader had much ability to do. Of course, times change.

These days, with the advent of electronic trading, and online brokerages, it’s actually pretty easy to access the other exchanges, even if you don’t know you are doing it.

After the standard trading markets — NYSE, NASDAQ, and AMEX – close at 4:00 PM Eastern, those other markets fire up offering After Hours Trading, sometimes referred to as Extended Hours trading. Most major brokerages offer their clients the ability to access those extra trading hours, although you usually have to sign some forms saying that you understand the risks.

Basically, the way it works is that a stock, like Facebook has a final trade right around 4:00 PM ET. The price that this last trade gets executed at becomes the closing price. If someone asks what Facebook was “at” on a certain day, most people will reply with the closing price. Look at a standard stock quote, and the price is frozen at the closing price, until the following morning.

stock market price down facebook

However, at 4:01, Facebook could trade again, on an after hours exchange.

On your average day, the after hours trading markets are usually just a continuation of the previous trading day, or in the case of pre-market trading, a preview of what the market open will look like. So, if FB closes at $200.00, then the trade at 4:01 will be right around that price, maybe $200.05, or something.

On days like today, when a company reports big news, or on days where a big finance news item comes out, things get a little livelier.

So, today, traders are using after-hours trading to sell Facebook stock. Since Facebook is a big stock, and a well known household name, there is more interest than normal. Couple this with the fact that the stock is down big (over 20% while I’m writing this), and people get interested.

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Trading After Hours

Generally speaking, trading after hours is not this dramatic. While many stocks have a price change between the previous day’s close and the following day’s open, it’s often just a few cents for less volatile companies, and usually just a dollar or two for a high-priced, high-volatility stock like Facebook.

So, what happens now?

After hours markets are notoriously thin, that means there are way fewer traders than during the market open. That means that it can be easier for a small group of panicked investors to move a stock price. That being said, the company’s earnings call was pretty bad, and the price will open much lower tomorrow. How much lower, and how that will compare to the price during after hours trading will depend a lot upon whether the sentiment tomorrow is that cooler heads will prevail, or it’s only going down from here.

Either way, before you run out and fire up your after hours trading menu, remember the stock price is already down 20%. You missed the big move. Make sure whatever trades you make, you are thinking about what happens NEXT, now what already happened.

Stock Market Correction

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After Monday’s stock market fall, there was a run up yesterday on Tuesday, then a little drop on Wednesday, and now a 1000+ point market drop again today. So, let’s get a headcount before we proceed.

Stock Market Results Last Few Days

  • Monday: -1175
  • Tuesday: +567
  • Wednesday: -19
  • Thursday: -1033

Add it all up, and you get -1,660 for the week. Oh, and by the way, the market was down 666 points last Friday. From the market’s high point, this equates to a drop of a little over 10% putting us into correction territory. (A correction is usually defined as a drop of 10%.)

Do We Panic Now?

Take a look at what I wrote about Monday’s big stock market drop. Although the market has dipped even further, the result remains the same. For long-term investors with a well diversified portfolio, the best course of action is to ignore all short-term market moves. Even if this is the beginning of a recession (We are totally due for one) the long-term scenario is still the same. The ever higher march of inflation, plus a U.S. economy that always comes back eventually means that holding on, and continuing to invest is the best solution for long-term investing such as retirement, or even college savings for children 7 to 10 years out.

For shorter-term investors, it is time to look at what is going on.

The markets are reacting to a few different things.

First, the stock market has gone up and up, with almost no pullbacks for a very long time now. That really makes no sense considering the overall economy is not racing ahead that quickly. The overall optimism that business and consumers have is real, but this isn’t some boom times. As a result, a correction here is very healthy, and perhaps even necessary.

Second, the Fed has been consistently overplaying it’s hand regarding inflation in order to look like inflation hawks. The reality is that there is no need to keep marching forward with regular rate hikes to keep inflation below 2%, when inflation has never really approached 2 percent. Couple that with the fact that the Fed can remove liquidity (and inflationary pressure) from the market just by unwinding its balance sheet, and one can’t help but wonder if the Fed has finally tried too hard to be tough, and ended up actually breaking the economy. After all, this is right about the time that December rate hike should actually be hitting the economy.

Third, the bond markets (which are also very concerned about the second point above) have started getting skittish. There is a new Federal Reserve Chairman coming in. Trump has proven very erratic, and Congress is looking to pass a new budget that while politically savvy, is — economically speaking — the equivalent of passing a stimulus package of domestic and defense spending just while people are starting to wonder about inflation.

Add it all up, and the markets don’t like the upcoming scenario where the Fed is thrust into a position where it will likely confront inflation either too strongly (and upset the economy) or too softly (and get behind on booming inflation), unless it exactly threads the needle.

Who Crashed The Market

Of course, these days, the daily action of the markets is highly influenced by machine, or computer, trading. It’s no secret to the people programming these machines that the market is overvalued, and that the economy may be tipping, and that the Fed may be killing the whole thing, or inflation may kick in. While the machines themselves have no fear, the same cannot be said for those who program them.

It is likely that the safeties, and sell triggers have been ratcheted up, and these kinds of big moves are the result of one program after another running for safety, or cashing in profits.

Either way, expect a volatile February, at least.

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