Volatility Tests Bull Market as Historic Weakness Looms
Last week, I highlighted the post-Triple Witching period as historically weak, and Friday's market performance seemed to confirm this trend with the S&P down 1.3% and closing at its daily lows. This weakness aligns with the well-known saying, "Sell Rosh Hashanah and buy Yom Kippur," as Rosh Hashanah began on September 15th and Yom Kippur ends on September 25th. According to Jonathan Krinsky, Chief Market Technician at BTIG, the S&P 500 has been lower the week after Triple Witching in 26 out of the past 33 years, with an average return of -0.7%.
Challenges in the Bull Market
While some argue that seasonal weakness can be overcome by a soft landing scenario and the historically strong fourth quarter of a pre-election year, the current bull market is far from typical. Only 52% of the S&P 500 is above their 200-day moving average, and market stalwarts like semiconductors (SMH) and housing (ITB) have shown signs of vulnerability. Additionally, small caps have performed poorly, with a nearly 3% decline for the month and a meager 4% gain for the year.
Focusing on Winners and Avoiding Losers
The issue of concentration risk arises with the dominance of the "Magnificent Seven" stocks, including Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta, which have outperformed the market this year. Howard Marks of Oaktree highlights the struggle of active investors to keep up with market indices, attributing part of the problem to the need to take profits from winners. Marks suggests that instead of trying to pick winners, investors may achieve outperformance by holding fewer losers.
The Challenge of Avoiding Losers
While the advice to avoid losers is sound, it faces the same challenge as picking winners: the uncertainty of how to identify them. This dilemma contributes to the underperformance of active stock pickers and the continued flow of money into passive index funds.
In conclusion, the volatility in the market poses a test for the bull market, particularly during historically weak periods. The concentration of certain stocks and the challenge of identifying winners and losers present additional hurdles for investors. As the market landscape evolves, it is crucial for investors to stay informed, adapt their strategies, and consider a balanced approach to navigate these challenging times.
Conclusion
The current volatility in the bull market presents a unique challenge for new businesses, particularly those with investments tied to the stock market. The historical weakness following the Triple Witching period, coupled with the dominance of a select group of stocks, creates an environment of uncertainty.
Impact on New Businesses
For new businesses, this could mean a need for increased financial vigilance and a reassessment of investment strategies. The focus on avoiding losers, as suggested by Howard Marks, could be a viable strategy for these businesses to mitigate potential losses.
Adapting to Market Changes
The ever-evolving market landscape requires businesses to stay informed and adapt their strategies accordingly. Despite the challenges, the current market conditions could also present opportunities for savvy businesses to capitalize on market trends and potentially achieve outperformance.
In essence, the current market volatility is a test for the resilience and adaptability of new businesses. By staying informed, focusing on avoiding losers, and adapting investment strategies, new businesses can navigate these challenging times and position themselves for future success.
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