The low market volatility is making some investors a bit crazy.
In the past two weeks, the S&P 500 Index has moved in a four to five-point trading range on many days, just one-third of its typical range. Jefferies recently said its trading revenues were the worst in a year-and-a-half as investors have shown little interest in trading.
The S&P may be moving in a narrow range, but look beneath the hood and you will see a market that is showing healthy rotation and no signs of breaking down. Investors used to investing in nothing but index-backed ETFs need to get their eyes off the S&P 500, and focus a little more carefully on the market nuances.
I called my old friend Laszlo Biryinyi, who has been a market watcher for 43 years. Biryinyi raised eyebrows back in June when he said the S&P 500 would hit 2.500 by the end of September, but he was proved right.
He, too, has been inundated with calls from investors worried about the low volume and low volatility, and he has a simple message for them: “I tell them to stop whining. There is no law that says the markets need heavy volume or high volatility to advance. If all you are going to do is look at the S&P and volume, you’re not going to understand what’s going on in the market.”
He’s right. There is a real dynamism in the market just below the surface that isn’t captured by just watching the S&P 500.
In the past month there has been big rallies into energy and materials stocks, and biotech and semiconductors have again reasserted market leadership. Even banks — a huge underperformer all year — have begun outperforming:
Biotech: up 9.5 percent
Energy: up 8.3 percent
Semiconductors: up 7.0 percent
Retail: up 6.5 percent
Materials: up 6.1 percent
Banks: up 4.5 percent
S&P 500: up 3.2 percent
Birinyi’s solution to a low-volatility environment is simple: “Individual stocks are where the market action is. There’s plenty of volatility. The S&P may be up 1, but today Google is up 11, Apple is down 4. Look at Goldman,” he said, which is up 7 percent in the past two weeks.
The big issue, Birinyi said, it that today’s investors have had seven years of doing really well with indexes and ETFs. Meanwhile, so many are simply not very good at picking stocks.
I asked Birinyi if he had any advice for all those investors who want to invest in more than just ETFs, but are nervous about their ability to pick stocks. Birinyi’s surprising advice: “Try buying the stock with the largest market capitalization in all the S&P 500 sectors, except for Utilities and Telecom.”
That would be nine stocks, and he claims a basket of those stocks are up 25 percent this year as a group.
What about the fourth quarter? Right now, he’s still working on his target for December 31st, but he does say the market will be higher.
Finally, Birinyi laughed when I asked him about seasonal trading patterns, like sell in May and go away, or that August and September are historically poor months.
All of this has been wrong this year, but he ignores that kind of market trading routinely: “That doesn’t tell you anything about tomorrow,” he said. “People tell me all sorts of things that are just not actionable. They say September is a down month. This is just a lot of noise, and for me, the market is fine.”