Day Hagan Tech Talk: The Price of Admission: Volatility
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Summary
Election uncertainty, elevated geopolitical tensions, and pockets of excess optimism could lead to a price pullback or time correction, setting the stage for a post-election rally.
Q4: Rotation and Risk Management
Mark Twain once said, “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” Twain’s statement holds weight both historically and in 2024.
While there hasn’t been too much price volatility associated with the S&P 500 (SPX) because its price trend has been mostly higher since the April, August, and September lows, there has been a lot of volatility (rotation) in other areas. This includes the 11 S&P macro sectors (cyclical versus defensive), U.S. versus Emerging/Emerging ex. China, SMID versus Large, Index Movers (Large Cap Growth—cap weight) versus Non-Index Movers (everything else—equal weight), High Beta versus Low Beta, Momentum versus Dividends, Base Metals versus Precious Metals, and Crude Oil/Gasoline, etc.
With election uncertainty, geopolitical tensions, areas of excessive optimism, interest rate moves, poor election year seasonals (a condition, not a signal), and potential economic/inflation disruption due to two major hurricanes, October 2024 hasn’t shied away from Twain’s idea of “dangerous.” Expect volatility/rotation, as it can be the lifeblood of a prevailing trend—barring wholesale selling, which leads to investment dollars leaving the market. Reach out for a chart of any of the relationships above.
As always with our Smart Sector strategies, we manage risk by responding to changes in our models:
Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. As has been the case for all of 2024, the Catastrophic Stop model is positive, and we are aligned with the message. If our models shift to bearish levels, we will raise cash.
Additional questions to consider, and why we should focus on managing risk into year-end:
What if the Presidential election is contested? It may be too soon to say whether uncertainty will disappear post-election day.
Are investors feeling higher interest rates despite the Fed’s recent action? The stronger U.S. Dollar? Are these issues causing “dollars” to flow back into the Index Movers?
Nonetheless, to paraphrase Ned Davis Research:
The S&P 500 Index rose five months in a row through September, which is rare but not unheard of. The strong momentum has tended to result in a continuation of the rally. One month later, SPX rose 77% of the time by an average of 1.4%. Six months later, SPX rose 85% of the time by an average of 7.1%. One year later, the stats are 84% of the time by an average of 11.7%. These statistics support the adage that momentum begets momentum.
Figure 1: S&P 500. | Areas of support highlighted by green lines.
Figure 2: S&P 400 Mid Cap Index – weekly data. | Very few are discussing this bullish complex.
A Whole Lotta Nothing—Not Anymore
Figure 3: Palladium Continuous Contract – monthly data. | Bullish with an intriguing risk to reward.
Note #1: We’ve discussed owning Gold several times over the past few years (and Silver in a standalone report). The reasoning was to use it not as a hedge against inflation but as a hedge against an “event.” This continues to be the case. Please reach out for an updated chart.
Please let me know if you would like to schedule a call to discuss the process and discipline underpinning our Smart Sector with Catastrophic Stop, Smart Sector International, and/or Smart Sector Fixed Income strategies. Disclosures and Fact Sheets can be found here: https://dhfunds.com/literature.
Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know how we can further support you.
Art Huprich, CMT®
Chief Market Technician
Day Hagan Asset Management
—Written 10.21-22.2024. Chart source: Stockcharts.com unless otherwise noted.
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