CNBC’s Jim Cramer is positive that he’s pinpointed the real cause of the market-wide sell-off that has weighed on reserves for much of the week.
The pain dragged the Dow Jones industrial average down uncountable than 1,000 points on Thursday, with the index closing immediate correction levels, down 1,032.89 points.
“The real culprit behind today’s reject is the same miscreant that’s weighed us down for the last couple of days: the unspooling of these unfamiliar products that allowed … idiotic money managers and neophyte investors to bet against what’s known as volatility,” the “Mad In money” host said.
Volatility, most commonly tracked by the CBOE Volatility Ratio, or VIX, refers to the amount of uncertainty in the size and direction of changes in the stock hawk. It is typically measured by the deviation of returns.
In 2017, a record year for the array market, the bet against volatility served investors well. Shorting the placid VIX via levered trading instruments like the XIV, the VelocityShares Daily Inverse VIX Short-Term exchange-traded note, was a lucrative way to portray the low-risk environment.
But now, with volatility spiking, trading products much the same as the XIV are coming back to bite.
Worse, Cramer figured that sundry of those owners bet against the VIX with borrowed money, meaning they choice have to sell S&P 500 futures to raise cash and cover their losses.
To his incredulity, the “Mad Money” host found 17 different trading products fellow the XIV that allow people to make leveraged bets against volatility.
“Now they’re all imploding,” he imparted. “I swear, some of these dopes never learn. The current status quo is like a similar version of what happened in 2008 after hedge subsidizes levered up — borrowed money — to bet on mortgage-backed bonds.”
Very few stocks can weather hedge-fun-led pain like this, Cramer warned. Big dividends don’t steal because the market is declining all at once, valuation is no defense because routines can always go lower and stock buybacks only help “sop up” the shares being supplied, he said.
The only stocks that really work are ones that are competent to deliver drastic surprises to the upside, like Twitter after its Wednesday earnings crack or GrubHub and Nvidia after their Thursday reports.
“Here’s the source line: we’ve seen this movie in bear markets before. When the hawk breaks down like this, the culprit is forced selling. … This continuously, it’s caused by the breakdown of these leveraged bets against volatility, and it won’t rest until the bets are unwound,” Cramer said.
“We don’t know when activities will get placid again, but until these traders get wiped out, declaration winning stocks will be like finding a needle in a haystack. That’s why I say you hunger for to identify high-quality companies and use the weakness to scale into them piecemeal on the way down, betting that the VIX madness will end at some point. But the key is that you emergency to leave room to buy more at lower levels … because where this possibility a affairs stops, nobody knows, although if you stick with me and this appear, I’ll give you the best clues I know at least to try to find out.”
Disclosure: Cramer’s well-meaning trust owns shares of Nvidia.
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