Stock Market Rollercoaster -- Understanding This Week’s Volatility

Stocks sold off on Friday, leaving the weekend gloomy for most shareholders. On Monday, they were greeted with near panic, as exchanges all over the world saw some of their worst declines since the 2008 financial crisis. And just two days later, they are already enjoying a healthy rebound -- what is driving this wild volatility?

Taking a lower level view of stocks, we will also discuss Best Buy (BBY -0.25%) and its latest earnings release to see if their in-store sales can peacefully coexist with the convenience of online purchases.

A full transcript follows the video.

Sean O'Reilly: The sky is falling and we're just relaxing, on this consumer goods edition of Industry Focus.

Greetings, Fools! I am Sean O'Reilly, your guide through the looking glass of Wall Street insanity. Today, I'm joined by the one and only, the peerless Vincent Shen. How's it going today, Vince?

Vincent Shen: Hey, Sean. Thanks for the new adjective.

O'Reilly: Yeah. I've busted out my thesaurus. I'm going to keep doing this.

Shen: We've got a lot going on in the market the past couple of days.

O'Reilly: For those of you just joining us, we're talking about market insanity. In case you didn't know, the market was down as much as 1,000 points yesterday. As it's so entertaining, we're also looking at everyone's favorite electronics retailer, Best Buy, which seems to be thriving, even today. They reported earnings this morning.

Without further ado, let's dive in. Vince, what's going on with the market?

Shen: Like you said, the S&P, the Dow, markets worldwide have really seen some serious volatility over the past week. S&P 500 shed 9.7% since our last show.

O'Reilly: The crazy thing to me was that its lowest point was right at the open. Right at 9.32 ...

Shen: We will get to that. I think there's a few drivers that created this perfect storm effect to really worsen that situation. The bulk of the loss is that 9.7% I mentioned, since our last show. They've occurred Friday and yesterday.

O'Reilly: Right.

Shen: The Dow has similarly shed about 9.4% over that period. Again, the biggest losses were over the past two days. The VIX, which is the Volatility Index, is something I like to watch. Over the past year, it's been pretty steady. It's generally traded between the low teens and low 20s.

O'Reilly: For our listeners, what is the VIX? We don't need to get too technical. This is The Motley Fool.

Shen: In my last position, we struggled with what the exact unit of measurement was for the VIX.

O'Reilly: Is it in centimeters?

Shen: Generally, I would look at it overall as a proxy for what the volatility in the market is. I've heard some people refer to it as "the fear index." Basically how jittery and concerned investors are about the market right now.

O'Reilly: If the VIX is low, stocks are pretty much just hanging out and going flat. If they're going all over the place, the VIX is high.

Shen: I think that's a close enough description.

O'Reilly: To the laymen, if I were at a dinner party, would that be fair?

Shen: Close enough. If it's on a bull run, the VIX is still going to trade a little lower. For example: It started last week at 13, and then on Friday it spiked to 28. Friday trading was pretty rough. Yesterday, it spiked to 41.

O'Reilly: That's pretty much where it was when Bear Stearns collapsed as I recall.

Shen: It was even higher. It was at insane levels during the financial crisis. If you chart it out, it looks like Mount Everest because of the financial crisis. That's been the past week or so.

O'Reilly: Why is the market spooked? I've heard many theories. We're long-term Foolish investors so we don't really care, but it's fun to talk about. What do you think is going on?

Shen: I think it's still important to get an idea of what's going on in the world and what's driving things. If I had to break it down to a single catalyst, I think a lot of it is due to the really bad situation they have in China right now. If you're an investor in the Chinese stock market, I feel for you. The Shanghai composite has shed 8.5% yesterday, another 7.6% today; the index was on a bull run ...

O'Reilly: Correct me if I'm wrong, but the Shanghai Index fell to around 3,000 from 5,000. This is the lowest level in eight months. It went from three to five in eight months.

Shen: It's important to keep in mind that it had a really strong bull run through the first half of 2015. Then it hit its peak mid-June. Since then, it's fallen about 43%. I think it's negative territory for the year now. The government has tried to stem this free fall. That's a huge drop over a very short period of time. They've cut interest rates multiple times; five times since last November.

O'Reilly: They did that again this morning, I think.

Shen: That is something that I think is driving some of the more positive trading today that we'll get to.

O'Reilly: Shanghai Index is at 2964, in case anyone is curious.

Shen: They're trying to improve liquidity in the market as well, reducing the ratios that the banks need for their holdings.

O'Reilly: Yeah, they're positive.

Shen: I think combining that with some of the more fundamental, economic news -- on Friday there was a manufacturing survey that said China's manufacturing output has fallen at its fastest rate since the financial crisis. The Nikkei Index has fallen 13.4% since last Tuesday; the Hong Kong Hang Seng fell 8.8%; the FTSE, 9.6%. This past week has been bearish for markets everywhere.

O'Reilly: You've had friends and family call you because you're the stock market guy that works at The Motley Fool. How distressed was their tone of voice?

Shen: My last job, even though it was related to equities and banking, it was less tied to day-to-day markets. Now, I'm really watching it just for the articles and keeping track of it much more. I feel like I'm much more qualified, in general, to talk about this stuff. I did have a lot of friends and my brother reach out to me yesterday morning and some of them were a little worried like, "Hey, what's going on? I know weakness in China's economy is kind of driving a lot of this, just from the headlines I read; but what's really going on?"

Others were like, "Oh my gosh, Vince! Should I be liquidating everything right now and buying gold bullion?"

O'Reilly: That's my retirement plan. I have a bunch of gold in my mattress. I don't know if you knew that.

Shen: I basically explained to them that over the weekend there's been a lot of built up worries from the weak Friday trading. I don't think it helps when you end the week on a sour note like that. Combine that with the market trading down so quickly in early trading -- like you said, it goes down 1,000 points in the first few minutes -- that trips a lot of stop-loss orders for retail investors.

That exacerbates the situation. Then you have a lot of bigger, institutional investors selling out of their international exposure like China and the Asian region; it's not looking rosy there right now. A bit longer term, medium term, the Fed interest rate decision is coming. They're meeting in September.

O'Reilly: That in and of itself -- I could do a show about that on its own.

Shen: Previously, people were saying that this might be the meeting where the rates get raised, but with the way things traded the past couple of days, I'm not sure about that.

O'Reilly: This is a side note, and this is the CG show so I'll just say it: One of the things the Fed uses to decide whether or not they increase interest rates is inflation expectations. Oil is at $40 a barrel. There is no consumer inflation at all going on.

Shen: I'm glad you brought up the oil, too. I basically explained that laundry list of things that are going on. This is the investing horizon and vision I try to stick to, as many of us do here at the Fool; I told them that in the end, with this day-to-day stuff, you can't be fretting about it or you'll drive yourself crazy.

O'Reilly: I remember back in 2011 when there was a lot of global growth fear and then there was the hiccup where everyone was worried that the Fed was going to increase interest rates. There was talk in 2011, but that's been going down.

Shen: It's been a game for the market ever since.

O'Reilly: It seemed really bad at the time. I think that's when the Japanese tsunami happened so everyone thought their economy was wrecked. Nobody remembers it now. I don't remember the exact date. I basically just relayed everything to you that I remember. That was four years ago.

Shen: That's another example where, if you take that long term view -- since 2009, 2010, the broad market has done very well. That's not a time you should be selling out. When my friends called asking if they should sell out of their positions, [I thought], "Do you really want to be doing that now? Eating the transaction fees, but also selling at the bottom when the market is really weak? Hold on."

A few of them mentioned Apple specifically. Apple's lowest was $92. Today, it's back up to $102.

O'Reilly: That was so weird. The gyrations on Monday; it was entertaining. It was crazy.

Shen: Last I checked was about an hour into market open, and the volatility index is back in the low 30s; the Dow was up 1.7%; S&P 500 up 1.9%; European exchanges are up 3% to 4%. Trading on the short-term moves doesn't work.

O'Reilly: Thanks for your thoughts. Before we move on, I want to make everybody aware of a very special offer for all of Industry Focus listeners. If you found this discussion informative, and you're looking for more Foolish stock ideas, Stock Advisor may be the service for you. It is our flagship newsletter started more than 10 years ago by Motley Fool co-founders Tom and David Gardner.

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Moving on to Best Buy's results. The stock is up 15% on some pretty good results. Vince, what's going on? Do you shop at Best Buy? Are you a fan? Are you going to buy a washing machine there? What's up?

Shen: It's good that you mentioned a washing machine because the appliances actually ...

O'Reilly: They're crushing it.

Shen: Best Buy really surprised a lot of people this quarter. In general, it seems the company is benefiting from some shifting of consumer demand. The real estate market is improving, home values are going up; bigger-ticket appliances like TVs and things are ultimately what's driving the positive momentum that Best Buy has.

O'Reilly: In retail, it all comes down to same-store sales results because you don't have bodies in the stores. That's it. It's almost more important in any given quarter than net income. It's really important. They did really well there with 3.8% year-over-year same-store sales growth. Domestic they had $7.878 billion in revenues versus $7.585 last year. Earnings per share were $0.46 per share from continuing operations. What else stuck out to you? I just did the headline numbers.

Shen: You have to applaud the CEO. Hubert Joly took over in 2012. Back in 2012, I remember people were saying it was the end for Best Buy.

O'Reilly: "It's going the way of RadioShack."

Shen: Exactly. Circuit City, for example; one of its main competitors is no longer around. It's stuck through. He's done a really good job cutting costs, increasing training for the sales associates, cutting down the delivery times for their e-commerce -- which I'll get back to later because that also saw a lot of improvement this quarter.

In general, I think he's made the shopping experience for people going into Best Buy stores really nice. He's dedicated a lot of floor space to the best products. We're talking about appliances that are coming up as the Internet of Things, smart home technology; that's been a big driver this quarter.

Also, the whole "store in a store" concept, which has worked for a lot of other retailers as well.

O'Reilly: A lot of them are doing that.

Shen: On the earnings call, and in general, the CEO has been really positive about Apple. He's saying that he's going to be rolling out the Apple Watch to all of his stores by September for the holiday season, they're going to be pushing the Apple 'store in a store' concept to all of the locations as soon as possible and increasing the amount of table display space for the best-selling products.

O'Reilly: My wife and I bought an iPad Mini a year ago and we went to Best Buy. It's not as good as an Apple store in terms of trying the products because they also have the huge computers, but as you know, Apple Stores get kind of crazy and packed. I wanted a little more room to play with the iPad and see what I liked. Best Buy is a pretty good alternative. This is the most successful electronics creator in the United States right now, arguably, so I bought my iPad at Best Buy.

Shen: There you go. They basically dedicate these portions of their floor space to these individual brains.

O'Reilly: Yeah, they were two huge tables and they had Apple divider things between them.

Shen: Going forward, if you go again, you'll probably see that growing even more. More tables, more display space, more areas where you can try out those products.

O'Reilly: I'm very interested to get your opinion on something. On the call, the CEO said "We believe that these better than expected second quarter results are an affirmation of our strategy of offering advice, service and convenience at competitive prices paying off." He basically pointed out their competitive advantage.

At the end of the day, though, it is a retailer. Do you think they actually have a competitive advantage? Is it just the advice and being better? Where are they?

Shen: First, to give everybody the baseline, Sean covered the earnings per share numbers. Analysts were expecting $0.34 per share for earnings. They beat that handedly. They were also expecting $8.3 billion in revenue.

O'Reilly: Crushed that.

Shen: This is for a company that has actually seen revenue declines over the past few years. In terms of competitive advantages and what they've been doing well, I think the focus on the right products ...

O'Reilly: Online sales is the other. Comparable online sales percentage change quarter over quarter was 17%. They sold more online by 17% this quarter compared to the same quarter last year.

Shen: Again, this is a huge trend for a lot of the big-box stores. They're basically saying that e-commerce has become way more important, and they're dedicating more resources to that. For example, Joly is using stores as their hubs. Faster shipping times, and if Amazon Prime hasn't proved it to you yet, people want convenience and they want it fast.

O'Reilly: I read an article that said, "Don't buy an electronic that costs over $100 on Amazon. At the end of the day, you can't go talk to a human or return it quickly." You can do that with Best Buy. If I go buy a computer, I can order it online, a little HP, $300 or $400 thing and if it breaks and I want to return it quickly and swap it out for something else, I can just pop over to Best Buy. That's an interesting ...

Shen: That's a reversal of the trend that people used to talk about -- the showrooming. You go into a Best Buy or Wal-Mart, you play with the product that you want, and then you go online. Well, now these big-box stores are getting more competitive on their price and with some of their shipping options and offering that value and experience with the well-trained sales associates; people are making that purchase in the store and that's benefiting companies like this.

O'Reilly: Very good. Thank you for your thoughts, Vince.

Shen: Thank you, Sean.

O'Reilly: Have a great day. If you are a loyal listener and have questions or comments, we would love to hear from you. Just email us at [email protected]. Again, that's [email protected].

As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear on this program. For Vincent Shen, I'm Sean O'Reilly. Thanks for listening, and Fool on!