January 4, 2019

Breadth of Volatility

This may sound odd, but a very reliable technical observation that has presented itself to me over the many years I’ve been watching numbers flashing on a screen concerns what I refer to as the breadth of volatility. This refers to the space that occurs when markets spike up and spike down. And because as the measure of that breadth increasingly widens, so too do the investment opportunities. This is as opposed to the speculative opportunities that have been major players in the downtrend for the last few months. The nice thing about interest in the markets after a large fall is that the more stock that’s bought the wider the breadth, until either the bulls or the bears give up. Right now the bears are still in charge, and as usual bears always get better media coverage since portending the end of the world is good for the click business. But we’ll see how long that lasts.

The Market
The New Year has continued the trend of market unruliness (volatility) with more to substantiate it than previously observed. For example, this week Apple (AAPL) provided early guidance of their current state of revenue growth, which as everyone knows now was less than publically assumed. I have to uncharacteristically agree with a very well know pundit that I would like all companies to do what AAPL did for the simple reason that the company provided  analysts with the choice to use content over conjecture in estimating future earnings results. Other events also included the purchase of Celgene (CELG) by pharmaceutical giant Bristol Meyers (BMY). While I see this as an uneventful merger between a company with disappearing patents and a thin pipeline of replacements and a company with money to burn, that did just that, only time will tell if it works. There is the potential for a lot of talk in DC regarding healthcare, and while I favor the sector as a good defensive space, pharmaceuticals are too easy to fall prey to political attacks.

The Economy
Elsewhere in the domestic markets the defensive sectors such as Consumer Staples and Healthcare have been performing relatively well compared to the broad market. But so too have the Consumer related sectors that are a direct result of what has been a moderation in the manufacturing industries (trade) and housing industries (interest rates) while at the same time, as released today, a strong increase in job growth and increase in the unemployment rate mostly due to the increase in the overall participation rate, generally itself a good indication of rising income levels. Rising income means rising consumer activity, a big portion of GDP. On the corporate level AAPL isn’t alone as a recent decline in CEO confidence* has continued into the New Year. This is an interesting dilemma for the Fed since they are prepared to remain on watch before announcing further rate hikes. It is a further indication, in my opinion, why the markets will eventually find a place to resume its historically positive growth pattern.

The Future
It’s hard to ignore the pattern of pessimism that seems to be a popular source of entertainment. Understandably so perhaps, but the markets are rarely respondent to pessimism when real economic results present themselves. For now signs of strength in the US are still widely offset by moderation, similar to that taking place in Europe and the uncertainty of what the economy holds in terms of economic viability in China. For now my strongest indicator is the wide swings in the indexes and the goal is to complete any new buys, with equal sales and maintain a defensive posture that will increasingly rely on keeping cash at comfortable levels ready for investments that reflect a growing economy. It’s just a matter of time.