Yesterday in this space (MorningWord 04/30/15: You Are Here) we discussed the cheapness of index volatility, and for good reason. Large cap US stocks measured by the S&P500 (SPX) have been grinding in a tight range, with 10 day realized vol fast approaching the lows of the year. But past performance is not indicative of future results.
There is a case to be made that some of the extreme price movement of late in single stocks could be a precursor to broader downward equity volatility. This week alone we have seen declines of at least 20% in TWTR, SSYS, HAR, YELP, LL & WYNN, all very stock specific situations, but reflective of the fact that investors are shooting first and asking questions later. And this morning the disaster du jour is LinkedIn (LNKD), down 20% on a miss and guide down. The problem that I have with this action is that in the cases of TWTR and LNKD the moves this week are more than reversing upward moves of a similar magnitude just 3 months ago on perceived better than expected results.
Do these company really have such poor visibility for their own businesses that they can not smooth out the guidance for their results? Or do these managements just have their heads up their asses and are merely winging it because they believe that they are in a very forgiving investment environment? In the case of TWTR it’s clear their heads are somewhere unsavory (disclosure long).
As for stocks like SSYS, YELP and WYNN, I find it interesting that the stocks had massive declines to 52 week lows after the stocks were already down more than 50% from the 52 week highs. This reflects investors just giving up.
So the combination of taking positive sentiment stories out to the woodshed when they disappoint, and hate selling once loved, now out of favor stories is far from healthy action as the SPX is only a couple percent off the all time highs. It could be a cruel summer for your favorite cult stocks.