Mild-mannered and humdrum on the surface but a superhero underneath—that’s Clark Kent and, in recent months, the Low Volatility factor. Low Vol stocks are unexciting by definition, and the factor’s current holdings focus on utilities, REITs, and insurance companies.
In mid-summer we suggested that attaining new market highs would probably require a rotation away from the long-time Low Volatility market leaders and into High Beta areas like Technology and industrial cyclicals.
For months we’ve speculated that any major extension of the bull market would require a rotation into High Beta groups from the Low Volatility and economically-defensive themes that were the market’s big winners from mid-2015 to mid-2016.
The divergence between S&P 500 Low Volatility and High Beta Indexes has emerged for the 3rd time in a year. The 3-month performance spread is even more extreme than it had been on the eve of either the August or December stock market air pockets.
The stock market rally off the February 11th lows has been powerful enough to lift the Major Trend Index into its Neutral zone (in fact, a high-neutral ratio of 1.04), and therefore certainly deserves some level of respect.
Among the dozens of indexes we monitor, the year’s final all-time highs (S&P 500 Consumer Staples and S&P 500 Low Volatility Index on December 29th) can’t possibly provide any comfort to stock market bulls.