Putting the Panic in Perspective

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Global stock markets recovered somewhat during the past week, even with yesterday’s sharp sell-off in U.S. markets.

The Dow Jones was up 2.50%, the S&P 500 gained 2.48% and the NASDAQ rose 2.88%. In addition, the MCSI Emerging Markets Index jumped 2.55%.

Big gainers in your Alpha Investor Letter portfolio included Markel Corp. (MKL), up 4.17%; The Walt Disney Company (DIS), rising 3.78%; the AdvisorShares TrimTabs Float Shrink ETF (TTFS), gaining 2.88%; and Google Inc. (GOOGL), adding 2.79%.

Despite its gains, Google Inc. (GOOGL) fell below its 50-day moving average and changed to a HOLD.

With all the volatility in the markets, I know that many investors are on the verge of panic.

As difficult at as it may seem, there are many reasons to think that the panic is unwarranted and that stocks are due for a strong bounce back. I highlighted some of these in last week’s update.

Sure enough, we had a very strong bounce in the stock market last week before another pullback in the past two days.

Here’s why I think this is all part of a “normal” bottoming process.

When we see panics like last week, the typical pattern is to see a short-term bounce, then a test of the panic low.

Since 1928, the S&P 500 has set a 52-week high in the prior six months, dropped at least 10% to a three-month low then bounced at least 3% over the next three days on 21 separate occasions.

Out of the 21 precedents, there were 15 successes and 6 failures. But even half of the failures still generated positive returns over the intermediate term.

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Of the 15 successes, stocks tested the panic low a median of 13 trading days later. That’s almost three trading weeks and would put us to Sept. 11.

Remember that September is historically the worst month going back to 1928. It is down 1.04% on average and is one of only three months to sport a negative return. With weak seasonality still an issue, it is likely that stocks will remain volatile as we head toward the Fed meeting on Sept. 16.

That said, there is little reason to think that this bout of uncertainty will end any more badly than the last similar bout in August and September of 2011.

Portfolio Update

Berkshire Hathaway (BRK-B) gained 2.09% last week. I recently highlighted that Berkshire Hathaway sold off a $100 million position in National Oilwell Varco (NOV) and a $600 million position in Phillips 66 (PSX) last quarter — despite the current low oil prices. Berkshire Hathaway disclosed late Friday that it now has a $4.5 billion stake in Phillips 66 (PSX) — a 10% stake at 58 million shares. It turns out that Buffett was actually buying shares under a confidentiality agreement with the Securities and Exchange Commission (SEC) so others would not copy his moves. BRK-B is a HOLD.

Allergan plc (AGN) rose 1.23%. Allergan recovered quite well early last week, even breaching above the 50-day moving average (MA) intraday on Thursday, only to give back some ground early this week. AGN announced Monday completion of its acquisition of Naurex Inc. Naurex is focused on therapies that combat complex central nervous system disorders such as depression. AGN is a HOLD.

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Google Inc. (GOOGL) added 2.79%. Google unveiled a new corporate logo yesterday to signify yet another chapter in its evolution. The company also posted a short YouTube video highlighting the logo changes, as well as a nice trip through some of Google’s major historical accomplishments. One can only wonder what they will bring into the world next, but rest assured it will be something we’ve likely not seen before. GOOGL is at its 50-day MA and is a HOLD.

First Trust US IPO ETF (FPX) gained 2.34% over the past five trading days. This bet on stock initial public offerings (IPOs) has moved along with the broader markets since the spike in volatility just over two weeks ago. However, the IPO market has remained strong, as reflected over the past three months of activity. June saw 35 IPOs come to market, July ushered in 15 and August notched 10 (as of Aug. 26). FPX is a HOLD.

The Walt Disney Company (DIS) rose 3.78% last week. Disney will release the next Star Wars blockbuster motion picture in December, and it will be a significant boost to Disney’s bottom line. However, Disney is not content to wait until Christmas to open its presents. DIS announced Monday that it will begin selling its new line of Star Wars merchandise this week, allowing action figures and everything else one can imagine to be in 2015 Christmas stockings. It is notable that Disney toys for the movie “Frozen” made $531 million last year, and Star Wars is sure to sell more than that. Star Wars toy sales have topped $12 billion, looking back to the franchise’s debut in 1978 and through 2011. DIS is a BUY.

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Nicholas Vardy

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