A few weeks ago I shared an opinion (or hunch if you prefer) that I thought the US market was going to be in for a range busting rally that I think will then retrace. It is too early at this point to know whether this is yet correct or incorrect but I have made an observation that I hope is useful even if not original.
If you've been reading this site for a while you may be familiar with my preference for owning stocks with all different types of attributes, I think it makes for better diversification. The stocks at the riskier or more volatile end of the spectrum are up a lot of late. This is not a comment about what we own but about the recent performance of things like emerging markets, some tech, some financials (we do not own US banks but they are on a good run), some materials, some energy and some industrials.
Again, although not an original thought, when these types of areas outperform for a while like now it is often a sign of some sort of confidence being expressed and this can last for a while, like several months and many percentage points. As a bit of a contrarian nugget, it seems like many pundits were looking for a lift in the second half of the year and one outcome of that consensus being wrong is that the lift comes in the first half. Another contrarian outcome of course would be no lift, that the market in fact drops instead.
For all I know this run could of course end today but I think there is merit in assessing the current mentality of the market because occasionally you will make a change in the portfolio on this.
Short post, busy week.
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6 comments:
"riskier or more volatile end of the spectrum"
Does risk = volatility?
volatilty = opportunity
no opportunity without risk,
therefore by substitution,
risk = volatility
mathematical proof.
volatility = noise
Benjamin Graham, the father of modern day security analysis, took time out in his later years to say: “Beta is a more or less useful measure of past price fluctuations of common stocks. What bothers me is that authorities now equate the beta idea with the concepts of risk. Price variability, yes; risk, no. Real investment risk is measured not by the percent that a stock may decline in price in relation to the general market in a given period, but by the danger of a loss of quality and earnings power through economic changes or deterioration in management.”
Riskier asset classes like emerging markets (Brazil has popped) and western Europe (France, Germany) have grown by double digits in the last month. It's almost too much to take seriously after seeing so much red for so long. Will we see a bull to get all those disillusioned individuals back into stock-picking, just in time for the retrace?
Even if not original, still, pretty good call!
Jeff from Milan, Italy
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