Who knows what the next hour will bring in the market these days, let alone the next week, but as I write this, the S&P 500 is doing something it hasn't done since the first trading day of October: declining by more than 1%. At the same time, the CBOE Volatility Index or (VIX) is bouncing sharply off a 6-week low of $31 and clawing its way higher, making up for lost time like a sailor with a shore pass!
It's more "Groundhog Day" than deja vu since, as I first discussed with John Bogle two weeks ago, this directional madness appears to be entering it's 9th leg in as many weeks where rallies are sold and valleys are bought. At issue, famed investor Doug Kass tells me, is not that it makes it harder to make money, but rather that the volatility saps already weakened investor confidence.
"That's the problem," says Kass, the president and founder of Seabreeze Partners Management, "it (volatility) is serving to dissipate confidence on the part of market participants."
In the attached video, which we shot at The Big Picture Conference, I asked Kass to elaborate on statements he made to the New York Times, where he likened the market to a "casino on steroids" and warned of "the new weapons of financial mass destruction."
In classic Kassian fashion, he offers a metaphor, "we're in a trading sardine market, not an eating sardine market," to describe the current climate as one where investors have no great love for what they buy or intention of holding on to it.
"Unfortunately," he says, "high-frequency trading strategies, coupled with leveraged ETFs, have reduced the confidence of both retail and institutional investors."
While falling short of calling for an outright ban, Kass does think restoring the uptick rule would help. In the meantime, he says, the inexplicable market moves that tend to occur in the final hour of trading have become just part of the game, and need to be kept in context.
"It's serving to exaggerate the moves, both up and down," Kays says, "so as a result we have to be mindful that these moves are outsized and that we will get a lot of mean regression" - which is the market's tendency to revert to long-term averages.
As I wrote yesterday, Kass feels the lows of last week and August will hold but as for identifying support, resistance or attractive levels at which to buy or sell, Kass is mercilessly blunt about the work of Wall Street's legion of chartists.
"There are numerous fundamental investors in the Forbes 400 list," Kass points out, "but not one technical analyst. I really don't pay much attention to that voodoo."
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