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Feeling Dizzy? Another Volatility Spike May Be Coming

28 March 2014 in Trading Ideas

You may have noticed that 2014’s stock market bears little resemblance to the one we saw in 2013.

As 361 Capital Research analyst Blaine Rollins maintains, “2013 was easy.” Rollins says last year that most sectors gained on a weekly or monthly basis, with most of the movement positively correlated.1

This year – not so much. Each week or month, Rollins wrote recently, a different sector tries to show off at the detriment of others. One week, health care is crushing cyclicals, then utilities are beating up on technology, followed by materials trouncing utilities.

Last week, he noted, financials rallied, while health care and utilities slumped. While this might be a good time for short-term investors to hunt for momentum plays, for longer-term investors the queasiness could be overwhelming.

And while overall volatility has been relatively stable over the past six weeks, the consolidation has been at a higher level than where things leveled off in last year’s last quarter. In addition, we’ve seen three spikes above the Volatility Index’s 200-day moving average since the beginning of December.


Meanwhile, as the first quarter comes to an end, the flat performance of the S&P 500 vs. the 30% run-up in stocks in 2013, may become harder for investors to reconcile.

As Jon Ogg noted on 24/7 Wall St., “investors have to start asking themselves if it is time to start getting defensive.” For starters, he cites the market’s recent tendency to sell off after hitting new highs. Then you throw in the uncertainty in China and Russia, the selloff in speculative (according to Ogg) biotech stocks, and the rate of initial public offerings being “off the charts.”2

And last but not least, the rally in small-cap stocks has hardly let up. Ogg puts it simply: “This is generally the climate that equity investors who want to maintain exposure to stocks tend to become more defensive.”

Also in that camp is IVA Worldwide fund manager Charles de Vaulx, who told the Wall Street Journal earlier this month that the past two years of gains in US stocks were “rational exuberance.” Interest rates in developed economies have been extremely low, pushing investors into riskier investments, he said. Among US companies, profit margins are near record, while corporate bonds aren’t offering enough returns to offset their risks.3

But de Vaulx said those trends aren’t sustainable. Within the next three years, he expects major central banks to start raising rates, at which time “equities should be in trouble.” Also, profit margins are unlikely to stay at such lofty levels, in part as labor costs finally start to rise.

If this vision of the near-term investing world resonates for you, one defensive-investing alternative is the Low Beta motif, which includes a portfolio of individual stocks that have tended to move less –either way – in relation to the broader market’s swings.

The motif has gained 1.4% over the past month; the S&P 500 is flat during that same time period. Over the last 12 months, the motif is up 9.3%. The S&P 500, in that time, has gained 21%.

1Blaine Rollins, 361 Capital Weekly Research Briefing, March 24, 2014, http://www.361capital.com/weekly-briefings/feeling-dizzy/, (accessed March 26, 2014.

2Jon C. Ogg, “Four Defensive Stocks for Cautious Investors,” 247wallst.com, March 24, 2014, http://247wallst.com/investing/2014/03/24/four-defensive-stocks-for-cautious-investors/, (accessed March 26, 2014).

3Tom Lauricella, “Defensive Investors See Warning Signs,” WSJ.com, March 3, 2014.

Tags: low beta