<<there were only six other times in history when the volatility indicator breached 40, and those periods, which include 1974 and 1982, generally coincided with significant bottoms. Follow-up analysis showed that the S&P 500 performed very positively after the 40-day level was breached, rising an average of 19.9% over six months, and 27.1% over 12 months.>> Manley observation..
Did a jump in the S&P Financial Index during the last three days of October signal the return of the bull market?
John Manley, Salomon Smith Barney?s equity strategist, is certain the answer is a resounding ?Yes.?
In a strategy note dated November 1 and during an interview on CNBC that same day, Manley examined the volatility that plagued the markets from mid-summer through late last month. His conclusion is that the markets are indeed out of the woods and the time to buy is now.
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Judging from the surges in the major indexes to record or near-record levels through the past week, Manley may well be right.
But how did he arrive at this conclusion?
More important, should you believe him? And why?
Of course he?s a senior guy from one of the biggest brokers on the Street, but even the smartest investment bankers mis-read the market on occasion.
Manley relied upon technical analysis to quantitatively address the volatility that?s whipsawed share prices since June. Even though the overall change in the S&P 500 has been relatively modest ? the index is only up about 10% year-to-date ? daily moves of more than 1% have become increasingly common in the past few months.
Manley compared the recent pattern to other periods of extreme market volatility followed by bull markets. One of his calculations looked at the 100-day rolling sum of 1%-or-more price gains and losses. As of October 13, the rolling sum stood at 40 days, meaning that 1%-or-more moves took place on 40 out of the prior 100 trading days.
As Manley noted, there were only six other times in history when the volatility indicator breached 40, and those periods, which include 1974 and 1982, generally coincided with significant bottoms. Follow-up analysis showed that the S&P 500 performed very positively after the 40-day level was breached, rising an average of 19.9% over six months, and 27.1% over 12 months.
So does the market?s performance of the past week indicate that the S&P 500 is ready to post a comparable rate of return?
Well, let?s look at the second piece of Manley?s technical analysis.
Manley wrote that the surge in the S&P Financials (SPIF) during the last three days of October is a good indicator of a broad market rally. The sector index jumped more than 11% from Wednesday, October 27 through Friday, October 29. On Wednesday alone, the gain was 4.8%.
According to Manley, from 1976 to the present, single-day gains of 4% or more in the SPIF have occurred only 24 times. Such gains tend to signal the beginning of a sustained rally, both in the sector and the broader market, as measured by the S&P 500.
Given a 4% short-term gain in the SPIF, the average gain in the following three months for the SPIF is 12.7%, and for the S&P 500 is 10.8%. Over a six-month period, the results are even more dramatic, with increases of 23.4% in the Financials, and 18.2% in the S&P, respectively.
Finally, Manley wrote that the November through January quarter is generally the best time of year for equities. In analyzing the S&P performance over three-month periods, he found that October 31 to January 31 is by far the best period, with an average return of 5.8%, an amazing 240 basis points better than any other three-month period.
There are fundamental reasons for this discrepancy, as Manley notes, which very likely include seasonal tax-loss selling and positive fund flows. Still, an advantage is an advantage, and this one ?creates attractive buying opportunities for investors in the last two months of the year.?
Bottom line:
If you agree with Manley?s technical analysis, quit hoarding that cash under your mattress, and put in a buy order with your broker. Time?s a wastin?.
fwiw from individual investor .. |
