'Sell everything' is lousy advice "Sell everything." So said RBS analyst Andrew Roberts last week, and his warning that 2016 would prove "cataclysmic" was gleefully lapped up by the media, which was quick to highlight this apparent warning of a 2008-style stock market crash.
Investors might be spooked by the RBS message, but they shouldn’t be. Financial markets may well suffer a terrible year, but it would be naive to credit RBS with any great prescience. “We cannot stress enough how strongly we believe that a cliff-edge may be around the corner,” the same analyst said in mid-2010; investors should “think the unthinkable”.
Another money-losing call came two years later, when Roberts said “we are in a much worse shape than the Great Depression”.
Second, although this latest note was hyperbolic, RBS did not actually warn stocks would crash.
“Negative returns in 2016 are probable,” said RBS, “though without a recession they should be manageable, think 10-20 per cent”.
Corrections and bear markets are a common and unavoidable feature of financial markets, not a sign the world is ending.
Advising people to "sell everything" makes for good headlines but bad investing. Buy the dips or sell the rips Although the S&P 500 tripled between March 2009 and the end of 2015, stocks didn't go up in a straight line.
In that time, they suffered nine pullbacks of 6 per cent or more, including a number of double-digit corrections.
Is this time different? Is it finally time for traders to sell the rallies rather than buying the dips?
Perhaps. Certainly it has not been an ordinary retreat. Less than a quarter of stocks last week traded above their 200-day moving averages, a level seldom seen since 2009.
Additionally, Traderfeed blogger Brett Steenbarger notes fewer than 10 per cent of stocks were trading above their short-term and intermediate-term moving averages. Since 2006, such selling has only been registered on a handful of occasions – during the savage bear market of late 2008 and in May-June 2010 and August 2011, when stocks suffered their biggest corrections of the current bull market. On each occasion, stocks bounced only for further price lows to set in over the coming months.
Furthermore, last August’s double-digit correction was the first in four years; now there have been two in just six months, indicating fears regarding the global economy are growing.
Finally, despite the heavy selling, the Vix, or fear index, is nowhere near levels seen during past market crises; the current market is not characterised by the panic one associates with market bottoms.
Down markets can see furious rallies as well as rapid declines. For now, rallies should be viewed with suspicion; to use Wall Street parlance, traders may sell the rips rather than buy the dips. Google to seize Apple's crown? Will Apple lose its crown as the world's most valuable company in the coming weeks?
Such a proposition seemed unthinkable last summer, when Apple was valued at almost $800 billion – more than twice its nearest rival at the time, Exxon Mobil.
However, fears regarding slowing iPhone sales have hit Apple hard, resulting in its market capitalisation falling to $550 billion last week – not much above second-placed Google, which is now worth some $500 billion having seen its shares advance 40 per cent over the last year.
A gap of $50 billion isn't exactly small change, but nor is it a yawning gulf. Both companies will report earnings over the next fortnight; any surprises could cause a change at the top of the table. Odey's quick change of mind StockTake has noted in the past that investors should take the pronouncements of hedge fund managers with a pinch of salt.
In 2013, for example, billionaire Dan Loeb described nutritional firm Herbalife as a "compelling long-term investment" only to dump all his shares at a nice profit two months later.
Others are even quicker to change their mind. On Friday, January 8th, high-profile London hedge fund manager Crispin Odey told the Telegraph he had slashed his stake in embattled retailer Sports Direct because he had "seen the writing on the wall", adding that the recent share price collapse "has indicated the direction of travel".
Shares continued to sink over the coming days, only for Odey to do an about-turn; last Thursday, it emerged he had bought 21.5 million Sports Direct shares.
It is, it seems, a hedge fund manager’s prerogative to change his mind.
