MorningWord 5/13/15: Stick With What’s Working, Until It’s Not

by Dan May 13, 2015 9:33 am • Commentary

I am probably a lot like you when it comes to the financial markets, I find single stock stories more interesting than the rest of the stuff. Often, I gravitate towards companies whose products or services I have come in contact with as a sort of initial input of a trade/investment idea.  When it comes to consumer discretionary companies, the bubble that I live in is dominated by AAPL, AMZN, T, TWX, TWTR, NFLX, NKE, SBUX, BUD oh and Diageo, DEO, I loves me a little Johnnie Walker.  That basket of stocks has had a pretty good 12 months. I probably could have told you that from anecdotal experience. Obviously investing is more complicated than just buying brands you yourself like, but sometimes it can help if you invest in what you know, and have a real sense for the story and its impact on the investment prospects for the stock.

But that brings me to the current investment environment where it seems the macro, is trumping the micro. Often, I find myself as confused as the next as to what will be the driver for US equities on any given day.  Of late you could take your pick, USD / Euro cross, UST yields, German Bund yields, China monetary policy, crude oil crash/stabilization/rebound.

You know too well what I am talking about. There are strong correlations to all of the above, but on any given day the combinations of different moves from the different relationships can be confounding. Despite dramatic volatility in currencies, commodities and bonds, US stocks have continued to display unusually low volatility. And that’s alongside uncertainty over the end of the U.S. Fed’s ZIRP policy.

And despite the recent rise in rates from about 1.65% in the 10 year in January to 2.28% earlier this week, the S&P 500 (SPX) does not not seemed too bothered, actually rallying close to 4% in that time period, and just 1% from new all time highs.   The lack of fear priced into equity volatility suggests that the “big money” doesn’t seem to be worried about the effect of modestly higher rates on corporate earnings, as Bloomberg points out:

volatility as measured by the VIX’s 200-day moving average is in its longest dip below 16 since before the financial crisis, and almost three-quarters of the S&P 500’s members are now less turbulent than their three-year averages.

In an effort to use as many market axioms as possible in this post, I would add “stick with what is working.” But be mindful (as I pointed out on Friday – Checking in on U.S. Consumer Teflong™ Portfolio), that despite the complacency in the options market, momentum appears to be waning a bit in some of the biggest leaders. And we’re already in the third longest bull market in history.