Market Commentary: We’ve now had five weeks of high-volatility markets with no end in sight. That is not to say that the markets will never again have a period of low volatility, in fact, just the opposite is true. The market has entered a period of high volatility, but there will be additional low volatility periods in the future. Like every other aspect of the market, volatility changes. There are bull markets and bear markets. There are times when growth is in favor and times when value is in favor. There are expanding P/E markets and compressing P/E markets. Yes, there are periods of high volatility and periods of low volatility. The stock market experienced a reversal to the upside on August 16, bringing at least a temporary halt to the decline that began in mid-July. Many technical analysts are now calling for a “retest” of the lows, and if you read between the lines, these analysts almost universally assume that any retest will be successful. Of course, that is not always the case. History is littered with examples of retests that failed, commonly called bear markets. For now, the intermediate trend is down, although that has not yet translated into a long-term downward trend.
The historically narrow credit spread of early June is now a thing of the past. In the process of correcting that narrowness, many bond market participants will agree when we say that things probably went too far and too fast the other direction. The Subprime Slime first pushed the yield on lower quality bonds higher. Then the market seized up and few buyers were willing to step forward, leaving many bond yields “unknown” due to lack of transactions. Meanwhile, the other side of the credit spread was also widening as demand for T-Bills and other government-backed securities caused short-term rates to drop to only 2.4% on August 20. Once again we had credit-spreads out of whack. Volatility is not just a stock market phenomena; the bond market has its share too.
Sectors: Energy, Technology, and Consumer Staples occupy the top spots on our sector relative strength rankings. Their absolute intermediate-term trends can be considered flat at best (low negative absolute readings), but they are the best sectors on a relative basis. The Financial and Consumer Discretionary sectors remain the worst from both an absolute and relative basis.
Styles: It has not been a smooth transition, but the regime shift from Value to Growth seems to be taking hold. Growth was the undisputed king of the late 1990s, and Value has been in charge for most of this decade. Each of the past two cycles lasted about seven years, although there is no guarantee that the pattern will repeat.
The historically narrow credit spread of early June is now a thing of the past. In the process of correcting that narrowness, many bond market participants will agree when we say that things probably went too far and too fast the other direction. The Subprime Slime first pushed the yield on lower quality bonds higher. Then the market seized up and few buyers were willing to step forward, leaving many bond yields “unknown” due to lack of transactions. Meanwhile, the other side of the credit spread was also widening as demand for T-Bills and other government-backed securities caused short-term rates to drop to only 2.4% on August 20. Once again we had credit-spreads out of whack. Volatility is not just a stock market phenomena; the bond market has its share too.
Sectors: Energy, Technology, and Consumer Staples occupy the top spots on our sector relative strength rankings. Their absolute intermediate-term trends can be considered flat at best (low negative absolute readings), but they are the best sectors on a relative basis. The Financial and Consumer Discretionary sectors remain the worst from both an absolute and relative basis.
Styles: It has not been a smooth transition, but the regime shift from Value to Growth seems to be taking hold. Growth was the undisputed king of the late 1990s, and Value has been in charge for most of this decade. Each of the past two cycles lasted about seven years, although there is no guarantee that the pattern will repeat.
International: Our global rankings look as though they contain an error. Our sector rankings are all in the red (negative), our style rankings are all in the red, and our global rankings are all in the red with just one exception – and what a huge exception it is. China is registering enormous upside momentum. Some China funds experienced upside surges of 25% to 30% in just seven market days from August 16 through August 27. Intraday-trading numbers exhibited even larger moves. Granted, they have retreated the past couple of days, and perhaps their decline into the August 16 low was overdone, but the intermediate trend is definitely positive. Volatile, but positive.
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