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My Gut Feeling for Today, June 21, 2013

I have two confessions to make. First, I did not watch the markets yesterday. Rather, I was watching an NSYNCH concert because it appeared that every asset class was move in synchronization. I could swear that was Joey Fatone on CNBC yesterday.Secondly, I have to admit that when charting out my expectations for yesterday’s market, I neglected to factor in the impact of the quarterly mega derivative expiration which is taking place today. That likely accounted for the massive put buying in the early going which then resulted in a volatility spike and a gamma breakdown later in the session. The index expiration effect will likely be negated after the open today but single stock option expiration could linger till the closing bell.

Let me also explain another reason behind the big sell-off. Many investors who have exited the bond or money markets in favor of the equity market did so by deploying assets into 70/30 funds as a less risky alternative to jumping straight into equities. Those funds have an allocation of 70% equity and 30% debt. The stampede to exit bonds ignited by the Bernanke press conference caused investors to exit 70/30 funds. Hence, there was a magnified spillover effect in the equity markets.

Remember, in bull markets, pullbacks are sudden, unexpected and volatile. There was nothing in the last two days of trading that was out of the ordinary. There is nothing in the sell-off in the equity markets the last two days which was fundamental in nature. Emotional, yes. Technical, perhaps. Derivative, likely. Fundamental no way. The fundamental test will come next month when earnings are released for the second quarter.

In days like yesterday, it is important to note which stocks or sectors were positive or outperformed. These are the ones that will likely lead us higher. Some examples are financials, technology, consumer discretionary and energy. The dividend heavy stock such as consumer staples, telcos and utilities are to be avoided but you will get a bounce to sell into. The hybrid stocks, such as Master Limited Partnership (MLPs) also had an good day, absolutely and relatively. Such stocks are more economically sensitive than interest rate sensitive and should be used to fill the void left by staples, telcos and utilities. However, not all MLPs are the same as some did stink up the house yesterday. So, do your homework and select wisely. Here are two suggestions – Boardwalk Pipeline (BWP), and Energy Transfer (ETP), both which sport a 7.2% current payout. My strategy though is always to take on MLPs off of secondary offerings.

By the way, Facebook (FB) made another “big announcement” yesterday. Does anyone care? Not me.

Today is the first day of summer and the beginning of the weekend. So despite the tumult in the financial markets, remember that there is more to life than trading stocks, so don’t forget to kiss the wife (spouse), hug the kids and enjoy.

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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long BWP and ETP— although positions can change at any time.                                                                                        

Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant and agricultural stocks. You can subscribe at www.restaurantstox.com 

Interact all day with Scott all day in with your Platinum subscription to Wall Street All-Stars.

You can email Scott at scottallstars@gmail.com

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