The Weekly View: A Letter to Investors, Volatility Versus Value
Comment of the Day

March 22 2016

Commentary by David Fuller

The Weekly View: A Letter to Investors, Volatility Versus Value

My thanks to Rod Smyth for his ever-interesting letter, published by RiverFront.  Here is a brief sample:

Volatility has picked up in the last nine months.  In our Weekly Chart below, the history of the daily range of the S&P 500 is shown in the bottom panel.  Since 1982, when markets have been calm, the range between the low and the high on a given day is around 1%.  During bear markets, bubbles, and crashes, the daily range spikes to around 3.5%, especially towards the latter stages.  In the Weekly Chart

Below, the blue lines denote the low and high daily ranges outside the spikes.  This data supports our view that investors are most fearful near the bottom and complacent during steady gains.  In 1987 and 2008, the daily range was very briefly above 5%.  We would describe the current level of just under 2% as the higher end of normal (denoted by the red line in the Weekly Chart below), and yet the feedback we get from our boomer and retiree clients is that it feels abnormally high.

David Fuller's view

Here is The Weekly View

In the Volatility Versus Value assessment, it may take a wise and experienced forensic accountant to confirm value or more importantly, the lack of it – consider the Valeant Pharmaceuticals International, Inc. fiasco.  Also, the fundamental analytical process is inefficient in terms of time.  For this reason, I am surprised that many analysts spend more effort number crunching than focussing on the relative quality of the products or services provided, not to mention the calibre of management.  Genius and obsessional effort may be rare but it provides the clearest evidence of value – consider Jeff Bezos of Amazon or Steve Jobs of Apple, and his successor Tim Cook is no slouch either.     

Moreover, even when genuine value is determined, a share can continue to underperform for lengthy periods before the crowd of investors takes notice – consider Cisco and Microsoft over the last decade. 

Lastly, fashion is hugely important in terms of market performance and that is the province of common sense technical analysis.  Monitor momentum and be careful when a share or index loses trend consistency, let alone becomes very overextended relative to the 200-day (40-week) moving average – consider the Nasdaq Biotechnology Index.   

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