So wrote the sagacious Jason Goepfert in his Tuesday missive, which by our pencil is a pretty interesting comment. Interesting because, by our work, investors are paying way too much for the safety of low volatility stocks, a thought recently rendered by a portfolio manager friend.
To be sure, most investors don’t believe this current rally, and why not? Surely, it is because of the recent volatility, where the D-J Industrials goes up triple-digits one day and down triple-digits the next! I must admit, the past 19 months have been the most difficult stock market I have ever experienced in more than 50 years of investing. Verily, in 1973 – 1974, 1980 – 1982, 2000 – 2002/03, and late 2007 into March 2009, at least in those downturns we knew stocks were going to go down. However, over the past 19 months the up one session, and down the next, has been extraordinarily frustrating. This week has been no different. For example, Monday saw the D-J Industrials gain triple digits, while Tuesday saw a 180-point loss. Tuesday’s Tumble was clearly about some of the Fed members’ “chest beating” on increasing interest rates. The result was a pop in the 10-year’s yield (+10 bp), while the odds of a rate increase by year-end leaped some 54% (from 56% to 86%). Of course this did not go unnoticed by the U.S. dollar (higher), or the equity market (lower).
All of this has many market technical analysts suggesting, “The S&P 500 is threatening to confirm an intermediate-term top.” While it is true that markets can do anything, overall this lengthy upside consolidation has bullish implications, at least by my pencil. Moreover, the stock market’s “internal energy,” during this non-linear environment (trendless), has rebuilt said energy to about as high a level I have ever seen. While our model does not tell us which way the energy is going to be released (either up or down), it does tell us that once the move starts, it should be a sustainable “trend” probably into the July/August timeframe. So what did yesterday tell us? The answer is absolutely nothing as the S&P 500 (SPX/2047.63) zigzagged its way through the session only to close at the flatline and slightly below its 50-Day Exponential Moving Average at 2048.38 (see chart at right). Yesterday was also the +3 day variance our timing model uses, since that model was looking for a low last week. Consequently, if the SPX is going to bottom, and rally, time has run out; therefore, the next two sessions should be telling. This morning, the S&P futures are lower again (-7 points) as the headline reads, “Fed Signals Interest Rate Hike Firmly On The Table For June.”
“Low-volatility stocks have been handily beating their high-volatility peers. Over the past 12 months, returns in low-beta stocks have been good, while high-beta stocks have been horrid. The difference in returns is the largest since 2002 and historically when low-beta stocks have so greatly outperformed high-beta ones, it led to trouble for stocks in general. It didn't pay to focus on high-beta stocks until they started to outperform again.”
. . . Jason Goepfert, SentimentTrader (5-17-16)
Jeffrey D. Saut is chief investment strategist at Raymond James.