Realized Volatility is Picking Up, but Remains Far From Extremes

After an extended period of extremely muted volatility in virtually every major asset class, volatility is finally starting to pick up, as it was always likely to do. A number of our volatility measures such as our equity, FX, bond and commodity volatility have turned a corner recently and have moved up off of in some cases generational lows.

In this post, instead referring back to our asset class volatility indicators we'll touch on a few other measures of vol that have also picked up. The main theme is that volatility has picked up recently, but still remains fairly depressed by historical standards. Those measures are as follows:

The S&P 500 daily range (the high value minus the low value) as a percent of the index level has spiked from low never before seen outside of an end of year period to a more normal level.



The 65-day cumulative number of stocks that gap lower at the open of trading has moved from an all-time low of about 800 back to a still low level of about 1750.



The average realized standard deviation for developed markets stocks as moved from an all-time low back to levels that are usually at the low end of the typical range.



In the four tables below we can see that the average volatility by both country and sector is moving from yellow (low) to green (high). In the below tables we are looking at the progression of 20-day average volatility over the last 10 days.

Developed Markets Realized 20-day Volatility by Country


Emerging Markets Realized 20-day Volatility by Country


Developed Markets Realized 20-day Volatility by Sector


Emerging Markets Realized 20-day Volatility by Sector

“Dollar Dynamics” Quarterly Video with Steve Vannelli

Yesterday Chief Investment Officer Steve Vannelli hosted a quarterly conference call. This video recap includes his discussion points on the economy, global equities and the investment team’s strategy.

A Point-and-Figure Primer

GaveKal Capital’s Jennifer Thomson explains the effectiveness of using relative strength point-and-figure analysis in order to identify stocks moving into up- or downtrends, using company examples to illustrate the methodology.

Bounce In European Early Cyclicals

The last week has been quite a volatile period, with stocks dipping and then bouncing off the lows in a V-shaped type of bottom.  European consumer discretionary (early cyclical) stocks have been among the groups that have bounced the strongest off one week lows.  In the table below, we can see that among the sectors in the MSCI Europe Index, consumer discretionary has led the way.

Performance of MSCI Europe Sectors


While a net 87% of European companies have experienced positive performance over the last week, consumer discretionary stocks top the strength with 97% experiencing positive performance.

Percent of MSCI Europe With Positive Performance


At the same time, consumer discretionary stocks in Europe have experienced a good statistical run, with 74% of the last five trading days up.  Here we calculate the percent of up days for every company and then calculate the average.

Percent of Up Days For MSCI Europe


Listed below are the top performing European consumer discretionary stocks for anyone so inclined to continue to play the bounce.

Performance of Top 20 European Consumer Discretionary Companies

Negative Sales Growth Expected For 3 Out Of 10 Sectors

We have recently commented on how sales and earnings estimate revisions have been in a decline (here and here). Today, we wanted to look at just what kind of growth rates are imbedded in those falling estimates. Currently, three out of 10 sectors in the MSCI World Index are expected to have negative sales growth for the next fiscal year. Those sectors are telecommunication services, materials and utilities. Contrary to earlier in the year, zero sectors are expected to have double-digit sales growth in the next fiscal year. Overall, sales are only expected to grow by 3% for the MSCI World over the next fiscal year based on sales estimates. Sales growth expectations for FY2-FY4 are about twice as high as expectations are for the next fiscal year.

MSCI World 


Expectations are much higher, however, for earnings growth. Only one sector, telecommunication services, is expected to have negative earnings growth in the next fiscal year. And three sectors, industrials, information technology and energy are all expected to have at least 11% earnings growth over the next fiscal year. Earnings expectations are really ramped up for two years out. Overall, earnings are expected to grow by over 14% in FY2. Earnings growth expectations remain very high for FY3 and FY4 as well as earnings are expected to grow by over 12% in each of those years, respectively. It will be interesting to see if get a further decline in overall sales and EPS estimates if the step-down in estimates continues to be focused solely on FY1 or if the weakness will flow through to later year estimates.

MSCI World

Small Caps Look to Have Resumed Their Underperformance

The relative performance of small caps bounced sharply beginning on October 10th, but that streak looks to be ending. As we can see from the chart below, the performance of the Russell 2000 relative to the S&P 500 moved back up to its downward sloping trendline that began in March of this year and was then turned lower beginning last Thursday. Today alone the S&P 500 was down 73bps while the Russell 2000 lost 144bps.

We also remind readers that from a nominal price perspective the Russell 2000 completed a head & shoulders pattern (regarded by technicians as a bearish signal) at the beginning of October, which we highlighted here. The Russell has rallied right back into major resistance so the action over the next several days will be telling.

The US Mortgage Application Market Finally Wakes Up

All summer long we talked about how mortgage applications were down and couldn't get off the mat. That looks to finally be changing, at least from a refinancing point of view over the past couple of weeks. In the last two weeks the mortgage application index has increased from the 350 to 413 and has broke out of the range it has been in all year.



It looks as though lower mortgage rates over the past month has finally kickstarted refinancing activity in the housing market. 30-year mortgage rates have fallen by about 25 basis points over the past month.



Unfortunately lower mortgage rates haven't sparked new purchases. The purchase index is still near the lows for the year and actually declined last week.

Is Bond Market Volatility Signaling Equity Investors MOVE To the Sidelines?

Since 1998, the correlation between bonds and stocks has swung positive, so when interest rates move higher, stocks do well and when they move lower, stocks do poorly.  In a similar concept, we can relate movements in bond volatility to movements in the equity market.  The MOVE index is the implied volatility of bonds and is expressed in basis points, but we convert it into a percentage (similar to the VIX).  In the chart below, we compare the MOVE index percentage (left scale, inverted) to the S&P 500 (right scale). It is pretty clear that bond volatility is negatively correlated with stock prices.  So, when bond volatility is on the rise, stocks tend to struggle.

The most interesting asset price move last week was not in the equity market, rather it was the 10 year bond, plunging well under 2% temporarily.  Bond volatility has retreated some in the last week from 47% to 36%, but we wonder whether the fact that bond volatility is holding at higher levels is a signal the bond market is sending to equity investors to MOVE to the sidelines.

Washed Out Energy Sector Bounced Today

The energy sector has been the hardest hit sector over the past month as well as over the past year. On an equal-weighted basis, the energy sector is down 14.7% over the past month and down 9.7% over the past year. To put that in perspective the average stock in the MSCI World Index is down 7.7% over the past month and down only 0.8% over the past year. Note all statistics are as of the close yesterday unless otherwise stated.



Is it any surprise then that the energy sector is on top of the daily leaderboard today as the MSCI World is advancing nearly 1.5%? Not really, as we will show in the charts below, the energy sector has been much more oversold relative to the headline index, The energy sector was the best performing sector in the MSCI North America index as well as the MSCI Europe index today.

Performance on 10/21 (all prices in USD)
MSCI World


MSCI North America


MSCI Europe


Only 9% of of MSCI World energy stocks are trading above its 200-day moving average and only 39% of stocks have its 50-day moving average above its 200-day moving average. We have actually experienced an increase in the percent of energy stocks trading above its 200-day moving average. It hit a low of only 4% on 10/14. The lowest level since 2012.









The median energy stock is down 9% while the the median MSCI World stock is down only 1% over the last year.





Only 28% of energy stocks are outperforming the MSCI World Index over the past year. This compares to 44% of all stocks in the MSCI World Index that have outperformed over the past year.





29% of energy stocks have positive performance year-to-date. This compares to 38% for the MSCI World Index as a whole.





Finally, the average stock is 18% from its 1-year, nearing bear market territory. While the average stock in the energy sector is firmly in bear market territory as it is down 27% from its 1-year high.

Have Estimate Revisions Bottomed?

A few weeks ago we discussed how the USD was negatively impacting sales and EPS estimate revisions. The dollar's rise since then has stalled somewhat which has us wondering if we have seen a bottom in sales and EPS revisions? Current levels of the percent of stocks with positive sales and EPS estimates revisions for the MSCI World Index are at levels that have recently been the cyclical trough (red line in the next two charts).





However, it looks like the dollar just needed a breather after recently completing the largest 3-month annualized gain since December 2008. The dollar also has the benefit of a 10-year government debt market that is currently yielding between 89 bps and 171 bps more than other major bond markets in the world. Finally, on a CPI-differential purchasing power basis, the USD has moved to it's strongest (albeit still net-weak) position relatively to 18 other currencies since 2010. As the last chart shows, trends in PPP tend to play out over years so a reversal would be surprising but not completely unprecedented. If the dollar does continue to advance, we would most likely expect revisions to make another downleg as well.

October has Been a Tough Month for Stock Picking

The percent of stocks with positive performance for the month of October through last Friday stands at a paltry 15%. Granted, as of last Friday there were ten trading days left in the month, but 15% would the lowest reading since May of 2012 and September of 2011 before that. As chart two shows, only 38% of stocks are trading higher YTD, which is the lowest since 2011 and 2008 before that.

The Most Expensive Stocks Have Surprisingly Outperformed

One of the ways we like to dissect equity performance is by taking a valuation factor, such as the price-to-book ratio, and analyzing how the performance of the lowest (i.e. cheapest) price-to-book stocks have performed relative to the performance of the highest (i.e. most expensive) price-to-book stocks. In the table below, we place all 1600 MSCI World Index stocks into 10 different deciles based on its price-to-book value. The first decile is lowest 10% price-to-book stocks and the 10th decile is the highest 10% price-to-book stocks.

Judging by the R-squared value in the bottom row of the table, stock performance has been highly correlated to price-to-book ratio over all time frames over the past year. Over the past month, the cheapest stocks have fallen by 11% on average compared to the most expensive stocks which have only dropped by 5%. The returns over the last year are even wider. The cheapest stocks have dropped by over 14% while the most expensive stocks have increased by 10%.



We also see that stocks have performed inverse to its dividend yield level. The stocks with the highest dividend yield have fallen by nearly 9% over the past year. The stocks with the lowest dividend yield have increased by 3.7% over the past year. Looking ahead, it would be surprising if the most expensive and lowest yielding stocks continue to impressively outperform especially as valuation levels remain near record highs.