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This Volatility Wave Could Be a Big One

3 October 2014 in Trading Ideas

Let’s face it: equities investors have, as a whole, been pretty spoiled in 2014. For the last seven-and-a-half months, the market rallied by 15% while the overall volatility of stocks hit multi-year lows.

Those days might be over for a while.

Over the past 10 days, the Dow Industrials have coughed up 500 points, while the VIX soared above its 200-day moving average.

One reason for the past – and possibly future – volatility in stocks, according to the Wall Street Journal’s ES Browning is the result of that very smooth runup seen for most of this year.1

Browning said that stocks are nearing the zone of being “priced for perfection,” which, he noted, does not mean the same thing as being attractive. In short, stocks have reached the point where future gains depend on a very favorable investing environment with strong corporate profits, low interest rates, low inflation, and continued global growth.

Browning said that while many consider the long-term economic outlook good enough to keep stocks rising in the medium term, it’s the next few weeks and months that is worrying some traders.

Cracks are starting to widen in the investing backdrop, and that, combined with pricey stocks, makes traders more likely to sell. Among those widening cracks, according to Browning: next year’s expected interest-rate increases by the Federal Reserve, growing tensions with Russia, and renewed concerns about China’s uncertain economic growth.

Anwiti Bahuguna, a senior portfolio manager at Columbia Management Investment Advisors, told Browning that her firm, which decided to reduce its stock holdings a few weeks ago, is “sitting and waiting to see” whether earnings and the economy continue to perform well.

For Bahuguna, the main problem is “the disruption we expect as the market begins to digest changes in the Fed’s policy.’ She also mentioned uncertainty about how the Ukraine tensions will affect Europe’s economy, which is flirting with recession.

In addition, Browning wrote, she also is concerned about weak US corporate sales growth. While earnings at S&P 500 companies grew nearly 8% over the 12 months through August, sales were up only about 3.5%, she said. Like many money managers, she says stronger sales gains are needed to push earnings ahead.

David Kotok, chairman and chief investment officer of Cumberland Advisors, said he is overweighting large caps in his managed portfolios, as it may be time to flush out companies that stand to be hit by a stronger dollar, for example, those with exposure to commodities.2

Another alternative in volatile times is to seek out stocks that tend to have less fluctuation than the overall market. Our Low Beta motif is one investing alternative.

In the past month, the motif has is down 1.7%. During that same time frame, the S&P 500 is down 2.6%.

So far this year, the motif has increased 9.4%; the S&P 500 has risen 6.9%.

1ES Browning, “Expect More Volatility With Stocks Priced Near Perfection,” wsj.com, Sept. 28, 2014.
2Jeanine Prezioso, “More volatility expected as Fed rate rise looms – Cumberland Advisors’ David Kotock,” reuters.com, Oct. 1, 2014, http://blogs.reuters.com/global-markets-forum/2014/10/01/more-volatility-expected-as-fed-rate-rise-looms-cumberland-advisors-david-kotok/.

Tags: low beta