Flash Alert: Don’t Panic
The S&P 500 Volatility Index (VIX), a good basic measure of panic, soared from less than 25 at yesterday’s close to over 400–nearly triple where it was a month ago. There have been few occasions when the market has moved that quickly and exhibited that much outright fear. The only vaguely similar period occurred at the height of the 2008 financial crisis, but some of the moves witnessed today look even more extreme.
The selling is not driven by stock-specific news or events and has extended to all asset classes with the obvious exception of US Treasuries. The euro and British pound have also taken a hit, as this particular panic is emanating from Europe. Less liquid recommendations such as Linn Energy (NSDQ: LINE) and Duncan Energy Partners (NYSE: DEP) have suffered more volatility because it doesn’t take much trading volume to move these stocks.
The fundamental root of the panic stems from the situation in Greece and the ongoing fear that the country’s credit troubles will precipitate another global credit crunch. One indicator I monitor is the TED spread, the difference between the London Interbank Offered Rate (LIBOR) and the yield on a three-month US Treasury. The TED spread has risen a bit but remains at extremely low levels and well off highs reached during the financial crisis; there’s no indication that a new credit crunch is on the horizon.
This weakness gained steam as traders’ stops were hit, and the negative action probably triggered some institutional sell programs.
Bottom line: Selling into a panic-driven market is one of the worst and most costly mistakes you can make as an investor. I do not believe the fundamentals justify the downside in my recommended stocks, nor do I see this ballooning into an outright crash or collapse: Panic-driven markets tend to turn quickly and the snapback rallies are typically impressive. That recovery may already be beginning; the market has regained considerable lost ground intraday.
I recommend using this as an opportunity to accumulate buy-rated names at attractive prices. In particular, some of the strongest stocks in my coverage universe such as Linn Energy, Enterprise Products Partners (NYSE: EPD) and Kinder Morgan Energy Partners (NYSE: KMP) have finally pulled back and offer impressive yields. There’s no change to any of my recommendations; I will keep subscribers updated of any fundamental changes via Flash Alert.
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