“Whiplash!”
That’s what the market has done to us all year.
Every time the market pulls back this year, it rebounds just as quickly. You’ve seen that on several 3% declines. The S&P 500 has even come roaring back after the 5% swoon that started in September.
One day growth stocks rule. The next value stocks take the throne… This back and forth has been playing out across market capitalization, sectors and themes.
Just check out this chart of the daily performance difference between the S&P 500 Pure Growth and Pure Value Indexes:
(Click here to view larger image.)
The dashed line marks the start of the pandemic. After that, it looks like the seismogram of an 8.0 earthquake.
You can see that the volatility has not let up this year.
In fact, it could get much worse. Here’s why.
Tectonic Forces in Motion
Something extraordinary happened this year with stock correlations. That term describes how stocks tend to rise and fall together. A correlation of 100% means they move in lockstep.
Most of the time, stocks move together in the same direction.
But this year, correlations have plunged, as you can see below:
(Click here to view larger image.)
That means individual stock price movements are coming unhinged from each other. That’s not normal, as you can tell from the chart. And the tectonic forces behind the swings are only going to get worse.
For example:
- Federal Reserve. For the better part of the past decade, financial assets have been the beneficiary of the Fed’s $8.5 trillion in money-printing. That program will see the beginning of the end as soon as next month, which will pump more volatility into the stock market.
- Interest Rates. The yield on the 10-year Treasury has been trending down for 40 years. That’s been a huge boost for stock market valuations, especially in growth segments. But that trend could be in the early stages of reversing, and we’re already seeing the chaos in stocks from the rising rates this year.
- Reopening. Sector rotation this year is following the outlook for the reopening trade. Whether it’s the rise and fall of COVID-19 cases, labor shortages or consumer spending figures, this has a major impact on how investors position themselves. And those factors impacting the reopening outlook aren’t going away anytime soon.
The unprecedented combination of all three factors is setting us up for more volatility.
So how do you profit from the new normal?
Don’t Chase Market Returns!
With the pendulum constantly in motion between stocks, the worst thing you can do is chase returns.
The key is recognizing early when trends will emerge and when they’ll fade. That will be the path to success in this market.
That’s why I’ve spent the better part of a decade hunting for the keys to identifying and pinpointing when price trends will pivot.
And I found them! With them in hand, I can see a countdown — 3, 2, 1 … to price movements in any direction.
It’s the perfect strategy to trade this new normal stock market, and why I’m launching a new trading service so you can take advantage. Just click here to reserve your spot at my webinar, where I’ll unveil my new system!
Best regards,
Clint Lee
Research Analyst, The Bauman Letter
