Pockets Of Volatility Keep Popping Up; Is There A Liquidity Vacuum?

Pockets Of Volatility Keep Popping Up; Is There A Liquidity Vacuum?

mastaka/iStock via Getty Images Brian Dress – CFA, Director of Research, Investment Advisor

Another trading week in the books, but in many ways, market events are beginning to blur together from one week to the next. The only constant appears to be choppy market action (volatility) and the sense that not much seems to be working. We see weakness not only in stocks, but also treasury bonds; stocks in growth sectors like technology and consumer are still struggling, while investors are scarcely finding solace in traditionally defensive sectors like consumer staples and health care.

Our CEO, Noland Langford, termed this phenomenon the “whack-a-mole” market a few weeks back. Investors appear to be searching for a place to hide and these efforts continue to go wrong. This feeling that most investors are experiencing is largely why we have been saying for months now that we are in the midst of a bear market.

Making money in the current market environment is, of course, extremely difficult. We see two sectors (energy and materials) benefitting directly from the inflation so clearly in evidence worldwide, only accelerated by the brutal and disruptive war continuing to unfold in Ukraine. Apart from the humanitarian tragedy, the war has made the job of policy makers in the world’s Central Banks even more difficult than what it was previously, as the world strives to recover from the Covid pandemic. With all the strife, political, economic, and humanitarian, it feels like we have been beset by the ancient curse “May you live in interesting times.”

Volatility remains elevated in the context of all these current events, with the VIX index still holding above an elevated level of 30. This indicates a level of fear among market participants that seems not to have faded, clearly logical given all the uncertainties the world faces. Market structure seems unsuited to processing everything and markets are becoming increasingly disorderly, a topic we will cover in greater depth later in this week’s letter.

We are fully aware that our tone has been broadly negative over the past weeks and we are uncomfortable with that posture. We remain optimistic that the dynamism of the US economy can shake off the bad news and move forward in the long run, but are steeling ourselves to expect near-term choppiness. We urge caution for investors, while also mindful of the fact that there is profound risk in holding cash in such an inflationary environment.

With that in mind, we remain constructive on energy and materials. At the same time, we keep looking for other areas where falling prices are creating opportunities, namely retail, health care, financials, and some selected technology stocks. One subsector of tech looks interesting to us, which we will cover that in “What’s Working?”

At times like these, investors need to get creative to find ways to preserve and grow capital. We have alluded to this in 2022, but one asset class we like as a place to park assets is short-dated high yield bonds. Many of these bonds offer annual yields of 4-6% and mature in 2-3 years. Investors can lock in a decent yield in some companies with strong balance sheets and have capital to redeploy at maturity, when conditions may be more favorable. With that all being said, let’s get into it!

Below is the performance data of key indices, ETFs for the five trading days between 3/4/22 and 3/10/22: Left Brain, Yahoo Finance What’s Working?

The basis of our “What’s Working?” and the “What’s Not Working?” segments in our newsletter is our Jarvis securities evaluation system . We use the patterns we see in that data to determine where we see pockets of strength and weakness.

Things are getting repetitive in terms of this section of the letter, with energy and materials still leading our list of top performing ETFs. A few new ETFs in energy are taking the lead this week, including SPDR S&P Oil & Gas Equipment & Services ETF ( XES ), SPDR S&P Oil & Gas Exploration & Production ETF ( XOP ), and Invesco S&P SmallCap Energy ETF ( PSCE ). Strength in PSCE has a lot to do with the fact that the small-cap Russell 2000 is outperforming the broader market S&P 500 in recent weeks. Of our top 25 performing stocks, 8 were in the energy sector. This is still quite significant, but a lower number than what we have seen in recent weeks.

Metals continue to stand out, with many of them supply constrained due to the growing sanctions […]

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