Financial markets are always full of “headline” risks, and if you’re in the habit of getting your information from headline economic numbers or headlines, then you’re lost before you even begin, says Landon Whaley Tuesday. He's presenting at MoneyShow Toronto Sept. 15.
You knew that if everyone’s favorite U.S. equity benchmark was able to crack the code and bounce to brand new all-time highs, it was going to be “newsworthy,” right?
Frankly, I’m not sure how CNBC is still in business, and I completely understand why their viewership numbers have been in a perpetual bear market for the better part of the last decade and are currently sitting at 20-year lows.
What the CNBC “S&P 500 All-Time High” headline and the accompanying article leave out is a litany of risks that a description of price action alone can’t embody.
Concentration Risk
Eighty percent of the S&P 500 (SPX) returns this year have come from the technology and consumer discretionary sector exposures. One-fifth of its year-to-date return is thanks to Amazon (AMZN) busting a 71% year-to-date move to the upside.
While this concentration has been immensely profitable against the economic backdrop we saw during Q1 and Q2, we aren’t living in an H1 2018 world anymore.
It’s Q3, and the Fundamental Gravity shift we’ve been discussing for months is now upon us. This concentration will at best be a headwind to further upside for the S&P 500 and will at worst likely see it give back most of its gains as we traverse the final four months of the year.
Volume Risk
We’ve said it on many occasions, but it bears repeating here: there are five weeks a year when stock market volume is pitiably low and price action therefore unstable: July 4, the last two weeks of August and the final two weeks of December.
This latest push higher in the S&P 500, which has gained 3.6% since bottoming on August 15, is accompanied by daily volume that is 20% lower than July’s average and a full 70% lower than January’s average.
The volume risk is that these multi-week “no volume, no conviction” bounces tend to reverse themselves in a matter of hours or days once healthy levels of volume return.
Bonus Risk
August 31 is month-end for every asset manager on Earth, which means it’s time for the standard window dressing of portfolios.
In addition, August happens to be the fiscal year-end for a number of mutual fund companies. This creates something called the portfolio manager bonus risk. Guys and gals who are underperforming their respective benchmarks are forced to buy in to a volume-less rally simply to keep up and prime their books for that fiscal year-end snapshot. This portfolio snapshot and its accompanying performance metrics dictate whether they’re able to take their kids skiing in Switzerland over Christmas break or whether they’ll be spending the holidays crammed into a guest room at cousin Ned’s in Sioux Falls.
When these folks put money to work, they simply chase the best performance.
This is why the tech and consumer discretionary sectors are being pushed (or bounced) to brand new all-time highs, while the performance across the rest of the U.S. equity space is languishing in comparison.
The Bottom Line
The headline risk bottom line is this: don’t be drawn into making decisions based on a bounce to all-time highs, even though it causes the Fear of Missing Out gene to rage inside you. Let the Fast Money guys glob on to every bounce in price and all-time high.
Riddle me this: would you rather plow more money into markets (tech and consumer disc) that are already up 20% for the year as the fundamental backdrop becomes more bearish?
Or buy into markets that are down (consumer staples) or up less than 1.5% (utilities and REITs) as the fundamental backdrop becomes even more bullish?
Remain data dependent, process driven and risk conscious because that’s what allows you to see risks and opportunities most investors miss.
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