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The Ten Year Spills Over to Stock Market Volatility

CAMS Weekly View from the Corner – Week ending 10/12/2018

October 15, 2018

“Rising interest rates in the bond market are inviting increased scrutiny to markets overall and with this, volatility is on the rise.” – Weekly View 10/8/2018 Our header excerpt starts right where we left off in our previous Weekly View.  In the case of said View our focus was on the 10 Year Treasury bond and how market participants were beginning to sell that instrument.  The natural follow-on in such a scenario is for the interest rate on that instrument to rise higher.

Following the tributaries of such a market scenario we also delved into a few underlying causes (think solid economic growth and building wage growth rates) and how this could impact everyday lives depending on how an individual runs their household and/or business finances.

Within the above excerpt the “increased scrutiny” is the focal point when it comes to markets generally and the stock market specifically.  When the 10 Year Treasury rises to notable levels it is as though collective market participants have a wake up moment and start to look around the landscape more thoroughly.

With the more thorough investigation versus a relative auto-pilot approach (hey stocks are trending higher nothing to see or think about here) brings with it seeing things real and imagined.

The imagined part is what kicks the collective fear into gear (think taking a current rising 10 Year Interest Rate and “seeing” that going up so relentlessly for weeks/months that it will not stop until it crashes the economy).

This forward process of pushing the unthinkable to the “certainty” level begins to increase fear levels.  Increasing fear and uncertainty work together like hand-in-glove.  Uncertainty in markets brings volatility, which is to say, an up-down-all-around type of trading experience when looking at price action.


VIX - 10.15.18

Click for Larger View:  http://schrts.co/5zRhSp

As soon as we start talking fear we immediately walk to the S&P Volatility Index.  Within the analytical community said index is often referred to as the “Fear Gauge”.

Above is a 1 year chart for the Volatility Index.  The red arrows highlight the fear episodes we have experienced here in 2018.  The first one in late January was the largest to date which left a lot of market damage in its wake.  In fact, said damage was not “fixed” until late August when the S&P 500 had fought its way back to its January price level.

As an aside, the 10 Year Treasury was also the focal point back in the January experience when, at that time, collective participants then too “imagined” this Treasury bond would not stop going higher until it crashed the economy.   (It stopped and essentially went sideways until a couple of weeks ago when it began moving higher again.)

The other notable episode this year is our current volatility experience brought on by the increase in the 10 Year Treasury.  We are in the midst of this experience and more volatility can be expected in the near-term.

At this stage the focal point is whether the stock market can hold recent lows and build off them similar to what happened in previous volatility episodes.

If it cannot and lower lows are put in then we may have something developing in the stock market that speaks to a down trending market potential.  If that develops then we will have entered new market waters so-to-speak.  To be clear, we are not there yet but caution is warranted.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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