Displaying items by tag: volatility
Markets are ugly right now, but one of the important questions is whether the bottom is really going to fall out. Well, one measure suggests the market is steadier than it seems. Both the put-call ratio and the TRIN ration (ratio of advancing versus declining stocks) both suggest investors aren’t panicking. The put-call ratio is only at 1.04, or 104 puts for every 100 calls, a very modest reading. Additionally, the TRIN is only 1.27, not drastic.
FINSUM: One institutional investor made a good point about the market right now—that it might take some hard economic data to show the market that its fears are real, and thus set the stage for a recovery. In other words, the specter of a recession may be worse for investors than the downturn itself.
This is quite a market storm investors are facing. The rolling bear market has blossomed into a widespread rout with few hopeful signs. One of the scary parts for investors is that the old places to ride out such market storms are not collapsing. In other words, even safe havens aren’t safe. Consumer staples, healthcare, and utilities, all typically bastions of protection during downturns, fell to being this week. Utilities, for instance, fell over 3%, their worst tumble since the 2016 election day.
FINSUM: One analyst sees a silver lining in this. Their argument is that since this is becoming a broad pullback (instead of a rolling bear), it may indicate the worst is near to being over.
Small caps are in a major rut. The Russell 2000 peaked in August and is now on the verge of a bear market since then. Interestingly, small caps have fallen farther than their larger peers despite the fact that they are insulated from headwinds like the trade war. So how to pick them? The answer is to stay away from indexes and actually choose individual shares whose fundamental outlooks appear brighter than benchmarks. For instance, one fund manager says that investors should choose “quality value stocks” with “with high free-cash-flow yield, low net debt to earnings before interest, taxes, depreciation, and amortization, or Ebitda, and below-market volatility”.
FINSUM: Small caps are a hugely diverse sector and some shares will inevitably have bright outlooks no matter what else may be going on in the market. The issue, of course, is the time and selection necessary to find such shares. Perhaps actively managed small cap value funds are a good bet?
One of the guiding mantras of the markets since at least 2015 has been to buy the dip. The generally idea was that the market was on an upward trend, so every little downturn presented a good buying opportunity. One of the big problems with the markets right now is that such dip-buying has all but evaporated. With a trade war raging and a recession on the horizon, investors have lost faith that the direction of the market is upward, which means each dip now represents additionally downside risk instead of a buying opportunity.
FINSUM: That core belief in the direction of stock prices has been badly shaken and it is hard to imagine it will return any time soon.
The market is in its toughest position in recent memory. Numerous headwinds, none of which are easy to resolve, are stacked against it. Wit that in mind, banks are starting to publish their doom and gloom outlooks for 2019. Nomura has identified a number of “grey swans” (not black) which could topple the market next year. Some of the most interesting risks they identified included a European debt crisis sparked by Italy, oil plunging to $20 per barrel, the end of populism, and an “inflation sonic boom”.
FINSUM: To be honest, we think these are all very unlikely. What is much more likely is a recession accompanied by a trade war.