A Few Positive Equity Market Technicals

The equity markets have been anything but kind to investors long stocks. Nearly all the broad market equity indices are in negative territory for the year. The S&P 500 Index: -6.2%, Dow Jones Industrial Average: -8.5%, S&P MidCap Index: -4.4% and the S&P SmallCap Index: -4.6%. Simply reviewing social media comments from investors, one could be lead to believe the market has no where to go but down. Admittedly, the market trend and direction of least resistance does seem to favor the bears; however, some technical data is beginning to potentially signal a turn to a more bullish posture.

In August when the S&P 500 Index dropped to 1,867 the CBOE Equity Put/Call Ratio spiked to over 1.0 indicating a potentially oversold market. The market did recover from that August low, but recently has resumed its downtrend. Sometimes a better indicator is to look at the 21-day moving average of the put/call ratio. As can be seen in the below chart, the moving average of this ratio has begun to trend lower after reaching a high of .79 on 9/18/2015. Declines in this ratio are generally associated with a market that trends higher on a go forward basis.

From The Blog of HORAN Capital Advisors

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The Fed Is In A Pretty Tight Corner On Future Of Rates

So the Fed did not raise rates yesterday. To some this seemed to be a surprise; however, as we noted in our post a few days prior to the announcement we believed global economic factors could play a part in the Fed's rate decision. In fact, Janet Yellen cited issues in markets outside the U.S. as one reason for not moving on rates. Additionally, inflation in the U.S. remains well below the Fed's 2% target rate. Possibly the biggest surprise out of the meeting was the fact one Fed member believes the Fed needs to move to a negative interest rate position.

In our view the Fed has waited too long to move interest rates higher. The result is the Fed is now in a position where their next move, not necessarily in the next six months, would be lowering rates given where both the U.S. and global economies are in their respective business cycles. The comment on negative interest rates by one Fed member was likely not made without the blessing of Yellen in advance of the meeting. Because the Fed may believe they missed the opportunity to raise rates, the negative interest rate comment is a way to telegraph to the market they have a tool to stimulate if necessary in spite of the current zero interest rate level.

From The Blog of HORAN Capital Advisors

The other factor at play in the Fed's decision maybe the interplay of higher rates and currency exchange rates. It is clear that China and Russia have been selling Treasuries in an effort to weaken support their own currencies.  (updated: 8:30pm)

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Fed Rate Decision More About The Economy Than The Rate Itself

Probably the most discussed potential Fed decision on rates is the one forthcoming on Thursday. When it is all said and done, the rate increase in and of itself is really not the issue investors should factor into their investment decision. As we have pointed out in prior posts, higher rates have mostly been a positive for stock returns. A primary issue is the state of the economy, both in the U.S. and globally and the tightening impact of a rate increase. Compounding the confusion around the impending rate increase or no increase, is the uncharted territory created by all of the Fed's quantitative easing activities implemented since the end of the financial crisis.

In reality, a quarter percent (25 basis points) increase from a near zero rate is likely to have no material impact on many fronts. The pace at which the tightening is pursued though is an issue. The other is the fact the Fed states rate decisions will be data dependent going forward. Therein lies the market's confusion. The Fed has a 2% inflation target which has yet to be reached and it is debatable if the economy is near full employment given the sharp decline in the participation rate. A case can be made that the last QE program was not needed and a tightening cycle should have been started over a year ago. In reality, at the end of QE3 the Fed made clear it would retain bonds purchased under the QE programs, would also reinvest bond proceeds and rates would remain near zero for a "considerable time." All of these are easing activities. This brings us to the decision on Thursday and the data that outlines economic activity.

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A Potentially Weakening Consumer And The Fed's Predicament

One aspect of the market's recovery since the financial crisis has been the strength of the consumer discretionary sector. Within the sector itself the retail industry group has outperformed both the S&P 500 Index and the overall discretionary sector itself. This strength could not occur over this long of a period without an improving consumer. The second frame in the below chart, however, shows the retail ETF has begun to underperform the discretionary sector this year and is a potential sign of a weakening consumer.

From The Blog of HORAN Capital Advisors

This weakness in the retail sector is further confirmed by the very poor University of Michigan Consumer Sentiment Index preliminary results reported on Friday. The sentiment reading of 85.7 was over six points lower than the August reading of  91.9 and below the low end estimate of 86.5. Econoday's summary of this report indicates this may put a potential Fed rate hike on hold later this month.

"Just when you think you've gotten through the week, consumer sentiment dives and, perhaps, tips the balance against a rate hike. The mid-month September flash for the consumer sentiment index is down more than 6 points to 85.7 which is below Econoday's low-end forecast. The index is now at its lowest point since September last year.

Weakness is centered in the expectations component which is down more than 7 points to 76.4, also the lowest reading since last September. Weakness in this component points to a downgrade for the outlook on jobs and income. The current conditions component also fell, down nearly 5 points to 100.3 for its weakest reading since October. Weakness here points to weakness for September consumer spending. Inflation readings are quiet but did tick 1 tenth higher for both the 1-year outlook, at 2.9 percent, and the 5-year, at 2.8 percent.

New York Fed President William Dudley himself has said he is focused on this report as an early indication of how U.S. consumers are responding to Chinese-based market turbulence. These results offer a rallying cry for the doves at next week's FOMC meeting."

From The Blog of HORAN Capital Advisors

The above chart also includes retail and business inventory to sales ratios. The business inventory to sales ratio (blue line) is far above the pre-2008 recession level and near the recession level prior to 2001. Also, the retail I/S ratio is near the levels reported in 2008. As noted above, the expectations and current conditions components of the sentiment report suggest weakness in the months ahead.

Consumer sentiment is not the only driving force of economic growth; however, the consumer does account for 70% of economic activity. The poor sentiment report does provide some Fed members with data that suggests a Fed hike should not occur this month. The Fed is in a corner for sure as we have noted in several recent blog posts. They seem to have missed an opportunity to raise rates a year or more ago. We will see if they raise them now in spite of the continued slow growth economy and a potentially weakening one.

Bullish Technicals Forming In The Midst Of The Correction

As is typically the case when the market is attempting to form a bottom, positive technical signs can be difficult to uncover in the midst of the bearish chatter. This time seems to be no different and the key is whether potentially positive technicals can win out in the face of some weakening fundamental factors.

The below chart shows the daily price action for the S&P 500 Index along with several technical indicators. Although the MACD  indicator line has not crossed the signal line, the MACD line (green) is nearing that cross. Additionally, the stochastic oscillator made new highs in August at a time the market was selling off. Shortly thereafter the stochastic oscillator fell below 20 on the gap lower low. Subsequent to this oversold indication, the market moved higher. Of interest in the below chart is the symmetrical pennant pattern that has formed with the market's higher lows and lower highs. A break above resistance will be important for further market upside.

From The Blog of HORAN Capital Advisors

Sometimes changing the exponential moving average settings for the stochastic oscillator can provide a clearer picture of the action in the market. The below chart uses a (5,21,5) setup. As can be seen below, this set up also shows strengthening upside momentum.

From The Blog of HORAN Capital Advisors

Investor sentiment measures are at extreme bearish levels as well. Yesterday, Pension Partners noted the Investors Intelligence Sentiment of the percentage of bulls was at its lowest level since the October 2008 reading of 22.2%.

From The Blog of HORAN Capital Advisors

Source: Pension Partners

Lastly, the 21-day moving average of the equity put/call ratio is at its highest level since late 2011. The equity put/call ratio is also indicating overly bearish sentiment and at this level the market has a history of moving higher.

From The Blog of HORAN Capital Advisors

In short, the market correction seems to be attempting to form a bottom. Of particular interest will be watching how the pennant pattern is resolved that is noted in the first chart above. A break above resistance would be an important market inflection point. With the increased influence of algorithmic trading, short term trading within the pennant is a high probability. And the market's uncertainty around whether the Fed raises rates or not this month has many investors on the sidelines until this event is resolved. In the end, some positive technical setups are forming in the face of this uncertainty that could enable the market to move higher into year end.

Market Timing Risk

Market timing, i. e., when attempting to trade into our out of the market, is a difficult strategy for nearly all investors. A Barron's article written in October of last year, The Timeless Allure of Stock-Market Timers, highlighted a few strategists' ill-timed calls and their confusion on why it did not work. The worst part of market timing is the fact the timing of getting out tends to occur near market bottoms and then getting back in the market near market tops.

Making ill-conceived market moves can reduce the growth of one's investments substantially. The below chart graphs the growth of the S&P 500 Index from 1990 through June 30, 2015. The blue line displays the growth of $10,000 that remains fully invested in the S&P 500 Index over the entire time period. The yellow line shows the same growth, but excludes the top 10 return days over the 25 year period (6,300 trading days.) By missing the top 10 return days over the 25 year period, the end period value grows to only half the value of the blue line that represents remaining fully invested.

From The Blog of HORAN Capital Advisors

Source: ICMA-RC

Given the market's recent pullback the calls for getting out of stocks has picked up momentum. Until this most recent pullback, the S&P 500 Index had gone over 1,300 trading days without a 10+% correction. This extended run without a 10+% correction can be seen in the below chart.

From The Blog of HORAN Capital Advisors

Source: Goldman Sachs

For an investor they should not get caught up in the market timing conundrum. These sell decisions often occur near equity market bottoms. Alternatively, an investor should stick with their asset allocation plan that incorporates their time horizon and risk tolerance. If the recent market pullback is jeopardizing one's retirement as a consequence of the recent downward move in equities, they should reevaluate what an appropriate asset allocation should be. The investor's asset allocation preferences should incorporate the time horizon for various buckets of assets. Shorter term investments should not be invested in equities if accessing these funds will occur over the next several years.

Timing the market may sound appealing, especially after a pullback like we are experiencing at the moment. Reducing equity exposure when the market has become increasingly volatile will certainly relieve some anxious feelings. If near term access to investments necessitates reducing equity at the moment, be sure that is the case and equity exposure is not being reduced in an effort to simply time the market. The increased market volatility experienced over the last few months is certainly more typical of equity movements and is likely to continue in the near term.

Rising Interest Rates Historically A Positive For Equity Returns

The upcoming two day Federal Reserve meeting that concludes September 17th seems to have investors on edge. The million dollar questions is whether the Fed will raise rates or not. If one is a stock investor, they should hope the Fed raises rates and puts this extended anticipation to rest. Another reason investors may want to see the Fed raise rates is due to the positive impact a rate increase has on equity prices.

As we noted in a post last month, Anticipating The Rate Hike, initial Fed rate increases tend to not have a negative impact on equity prices. Further evidence can be seen in the below chart. The red dots on the S&P 500 Index chart line denote the first rate hike in a Fed tightening cycle. The yellow line represents the yield curve (30 yr treasury minus 3 month treasury bill) and one can see why investors focus on equity performance when the yield curve inverts.

From The Blog of HORAN Capital Advisors

As the red dots clearly show, the onset of a tightening cycle isn't necessarily a precursor to poor equity market performance. In our earlier article link above, we provide a magnified look at equity market performance around this initial rate hike period. Equities do tend to exhibit weakness initially; however, the weakness tends to be short lived.

S&P Dow Jones Indices recently released a report, What Rising Rates Will Not Do, that also examined equity returns in rising interest rate environments. The below chart included in the report shows the S&P 500 Index return during rising rate periods. The shaded area represents rising 10 year yields and clearly a rising 10-year treasury yield has not been a negative for stock returns.

From The Blog of HORAN Capital Advisors

Source: S&P Dow Jones Indices

Breaking down returns by month, S&P notes,

"Furthermore, between January 1991 and June 2015, the average monthly return for the S&P 500 was 0.88%. Paradoxically, in the four periods of rising rates, the average monthly return was 1.26%, compared with an average monthly return of 0.73% for the periods of declining rates. Rising rates have clearly not been bad for stocks over the past two decades (emphasis added.)"

For more insight into equity returns during these tightening cycles, our article a few years back, Rising Interest Rates Can Be Good For Stocks, provides a table outlining equity returns over various cycles going back to 1973. It seems the Fed has missed an opportunity to increase rates as far back as a year ago; however, a lift off in September doesn't mean stocks are a poor investment over a complete tightening rate cycle. Certainly, stocks are likely to experience more volatility around this initial lift off period, but can move higher after the beginning of the rate increase cycle.

Death Cross More Of A Buy Signal?

With the recent weakness in the equity markets, many stocks' and stock indices' chart patterns have traced out a death cross pattern in their moving averages. The Death Cross is a technical indication when the 50 day moving average crosses the 200 day moving average from above. As Michael Batnick of The Irrelevant Investor blog noted a few days ago, very few technical analyst use the death cross pattern in their chart analysis. However, much has been written about the death cross recently and a closer look at the pattern reveals stocks/indexes tend to be closer to rebounding subsequent to the death cross trigger than experience further weakness.

The chart below highlights the most recent occurrence of the death cross for the S&P 500 Index other than the one just occurring late last month.The below chart covers the calendar years 2010 and 2011. The orange line on the chart is the rolling three month return for the S&P 500 Index. This line has been shifted to the left by three months and shows the forward three month return from near the date the index average triggered the death cross pattern. For example, in August 2011 when the index triggered the death cross, the subsequent three month return for the S&P 500 Index was about 13.97%. Importantly, the worst of a market's decline tended to occur and end near the point the moving averages triggered the death cross.

From The Blog of HORAN Capital Advisors

The following four charts show death cross triggers back to 1999. The times in which the market continued to weaken once the death cross pattern was triggered was closer to or during recessionary economic periods.

From The Blog of HORAN Capital Advisors

Finally, below is the chart for the late August death cross for the S&P 500 Index. Is a subsequent rebound in the index more likely?

From The Blog of HORAN Capital Advisors

Moving averages are lagging indicators by the nature of their construction. In other words, the patterns traced out in the moving averages follow the price of an index or stock. When the death cross is triggered then, it is likely most of the price decline in the index or stock has already occurred. Again, the exception is around recessionary economic periods and our current view at HORAN Capital Advisors is the U.S. economy continues its slow growth pace and does not tip into recession.

Stocks Higher 10-Years From Now

Before the onset of the market weakness in the early part of last week and the end of the prior week, S&P Dow Jones Indices released a report highlighting rolling 10-year annualized returns for the S&P 500 Index. The report seems prompted by a response Warren Buffett made to a question on timing the market. Buffett noted he was not a market timer and simply responded, "Stocks are going to be higher, and perhaps a lot higher, 10 years from now. I am not smart enough to pick times to get in and get out."

In the report, S&P notes,

• "Since 1947, the S&P 500’s price return was up in 72% of calendar years. Add in dividends reinvested and that batting average jumped to 80%."

• "And if one is worried that the S&P 500 has gone too far since the conclusion of the 2007-09 mega-meltdown bear market, consider that the rolling 10-year CAGR through Q2 2015 was +7.9%, nearly 400 basis points below the long-term average."

• "...there have been times when things didn’t work out too well for investors, but these times were few and isolated. Of the 278 quarters of rolling 10-year CAGRs from Q1 1946 through Q2 2015, only eight were negative, and they all occurred between Q4 2008 and Q3 2010."

From The Blog of HORAN Capital Advisors

Source: S&P Dow Jones Indices

The S&P report contains additional detail on sector returns going back to 1990 and investors should find the entire report a worthwhile read. One sector highlight noted in the report is the fact, "...each sector recorded very high monthly 10-year CAGR batting averages, or frequencies of positive observations, from 100% for consumer staples, energy, materials and utilities, to 79% for telecom services and 67% for financials. The S&P 500’s average was 87%."

In short, timing the market can be a difficult endeavor for many investors, Last week's heightened market volatility is an example of this, especially for those who sold out of stocks on Tuesday.

Source:

The Wisdom of Warren
S&P Dow Jones Indices
By: Sam Stovall, U.S. Equity Strategist
August 17, 2015

Equity Market Recovering Like October 2014

On Tuesday I wrote about the bulls waiting for that elusive equity market bounce. The wait was short as the market snap back over the last two days qualifies for that bounce. Investors are likely contemplating the market's direction from here.

A "V-type" pattern seems to be forming just as the market traced out late last year. As the below chart shows, the contraction from July to October of 2014 was not as severe as the one being experienced at the moment and took longer to develop. What is interesting is the pace of this bounce back seems to be occurring just as quickly as the one last year.

From The Blog of HORAN Capital Advisors

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Awaiting The Elusive Equity Market Bounce That Holds

The stock market bears have been calling for this current pullback for what seems like years. Now the bulls are looking for the elusive bounce that "holds" and signals another move higher in the market. After the close on Friday, I noted the oversold market conditions and a potential bounce that may follow. Three days into this potential "bounce" scenario, the market has failed to cooperate. This shows how difficult it is to time the market and find market bottoms. Nonetheless, the bears have had years predicting a correction, so for one calling a bounce for a few days (and being wrong) should be given a little leeway.

After today's trading action, with the waterfall decline near the close, much technical damage was done to the market. On the positive side, market conditions are at extreme oversold levels. As the below chart shows, the relative strength index (RSI) reached an oversold level of 16.77. The only lower level for the RSI over the past five years occurred in August 2011 when the RSI reached 16.46 and was followed by a sustained bull market run.

From The Blog of HORAN Capital Advisors

The percentage of S&P 500 stocks trading above their 50 day and 200 day moving averages continue to indicate oversold market levels as noted in the two charts below.

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Bears Awaken From Worst Nightmare

With today's market close the S&P 500 Index and the Dow Jones Industrial Average both are in correction territory, down 10+%. The S&P 500 Index is down 11.15% from its closing high on 5/21/2015 and the Dow Jones Industrial Average is down 13.33% from its closing high on 5/19/2015. It is safe to say the bears have awakened from their worst nightmare as the markets moved higher, nearly unabated, for four consecutive years until this past week. It is safe to say the market is in an extreme oversold position after today's trading activity. Nearly 90% of the stocks (444 issues) that comprise the S&P 500 Index are in correction territory, i.e., down 10+% from their 52-week highs. As we noted in a post this weekend, this figure stood at 70% after Friday's close, so more technical damage was done today.

With today's close, only 8% of S&P 500 stocks are trading above their 50 day moving average as noted in the first chart below. This low percentage was last reached in August 2011 at a time the government's credit rating was lowered to AA+ from AAA by Standard & Poor's. The second chart shows the percentage of S&P 500 issues trading above their 200 day moving average and this stands at 20.8%, again near a level last reach in August 2011.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

Another indication of potential excess fear in the markets is the level of the VIX Index. Today, the VIX spiked higher to 40.74. More insight into the VIX can be found in our article post from late 2011 titled, Fearful Investors.

From The Blog of HORAN Capital Advisors

As I write this post the Shanghai Index is down over 6%, while the S&P 500 Index Futures Index is up almost 2%. Yes, there are challenges in the emerging markets, but we continue to believe developed Europe and the U.S. economies can withstand the impact of weaker emerging economies. Truth be know, China's historical growth has probably been much overstated for the past year and a half and developed economies have continued to experience economic growth, albeit slow growth. Now is likely a good time to follow Warren Buffett's often repeated quote, "Be Fearful When Others Are Greedy and Greedy When Others Are Fearful." The market action over the course of the last few days may not have shaken out all the weak hands; however, some markets and stocks are now trading at fairly attractive prices and valuations. No one can predict exact market bottoms, but the markets may be near a level where the bear trap shuts.

Nearly 70% Of S&P 500 Stocks In Correction Or Bear Market Territory

Last week's market pullback did not spare too many equities from the draw down. As of the close on Friday, 30.3% (152 issues) of S&P 500 stocks are now down greater than 20% from their 52-week highs and another 39.0% (196 issues) are down between 10% and 20% from their 52-week highs. In total nearly 70% of stocks are in correction or bear market territory. Below is a table noting this breakdown.

From The Blog of HORAN Capital Advisors

For those investors seeking to deploy cash, below is a table and link to those stocks mentioned above. Some of these stocks are rightfully down due to fundamental business issues. However, with in depth research, some of the equities may offer investors attractive entry points to begin building long equity positions.

From The Blog of HORAN Capital Advisors

Full View Link

VIX Futures Curve In Backwardation, Indicative Of A Near Term Market Bounce?

With Friday's market sell off, the VIX curve went into steep backwardation at 4.56. VIX backwardation refers to the situation when the near-term VIX futures are more expensive than longer-term 3-month VIX futures (VXV). This is an indication traders expect volatility in the future to be lower than it is now. Historically, when this occurs, short term market rallies tend to result from this technical event. In addition to the VIX backwardation, I noted other overly bearish technical indicators in our post yesterday, Oversold Technical Indications, Market May Be Due For A Bounce. In total, these bearish sentiment levels are viewed as contrarian signals.

From The Blog of HORAN Capital Advisors

Oversold Technical Indications, Market May Be Due For A Bounce

The market action on the last two days of this week was not kind to equity investors. The Dow Jones Industrial Average closed down 530 points today and closed the week in correction territory, i.e., down 10% from its May high. The S&P 500 Index has not reached correction territory though, down 7.5% from its closing high on May 21st.

From The Blog of HORAN Capital Advisors

The pullback this week in the S&P 500 Index and the Dow has resulted in oversold market conditions that historically have resulted in a subsequent market bounce. The equity put/call ratio closed today at 1.04 and levels above one are indicative of overly bearish market sentiment.

The equity P/C ratio tends to measure the sentiment of the individual investor by dividing put volume by call volume. At the extremes, this particular measure is a contrarian one; hence, P/C ratios above 1.0 signal overly bearish sentiment from the individual investor. This indicator's average over the last 5-years is approximately .635 indicating the individual investor has been generally mostly bullish and more active on the call volume side.

From The Blog of HORAN Capital Advisors

Another indication the market is oversold is the percentage of stocks trading above their 50 and 200 day moving averages. Both of these measures show the extent of the weakness in the market. The 200 day moving average is approaching levels last reached during the fiscal cliff period/sell off in the later half of 2012.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

We noted in articles in April and May of this year that those smaller pullbacks at that time were not likely the beginning of a correction. Activity this week certainly qualifies for that correction.

The dog days of summer are now showing their colors. The question for investors is whether this pullback is one that will extend into a bear market, i.e., down 20%. This is difficult to predict; however, we do believe economic activity in the U.S. and in developed markets outside the U.S. continue to show growth, albeit slow.

• The weakness seen in emerging markets along with their currency depreciation policies, certainly are of concern. We do not believe a full blown currency war occurs as this will benefit no country.

• Japan's growth has fallen below expectations and this is in spite of a massive QE program being pursued by the Bank of Japan.

• From an economic cycle perspective it has been some time that the U.S. economic cycle has been out of sync with foreign economies. The Fed wants to increase rates if for no other reason than to have fire power available if needed down the road. Many developed overseas markets, especially the euro zone, have just recently embarked on a QE strategy in an effort to stimulate growth. This will keep euro zone interest rates down at a time the Fed is trying to move our rates higher. This would result in a further strengthening of the US Dollar versus the Euro. A strengthening Dollar will continue to pressure multinational company earnings/sales.

• The laser focus on the Fed's rate policy is also creating market uncertainty. We do not see specific economic data points that suggest the Fed should increase rates. The corner the Fed is in at the moment is the fact rates should have never been left this low for this long. The sooner the rate increase occurs, probably the better for the market looking 12-months out.

The sideways action for the markets for the better part of this year has culminated in quite a bit of technical damage to a broad basket of stocks and the indices themselves. Repairing this technical damage does not occur overnight. On the other hand, many individual stocks are in bear market territory and maybe this week's market action provides an opportunity to begin deploying excess cash. It is difficult to predict market bottoms though.

High Beta Underperforming Low Volatility

As the market continues to trade sideways in its, seemingly, directionless trade, it is helpful to observe various intermarket relationships and technical indicators to see what exactly is driving returns and to check-up on the overall health of the market.  One interesting dynamic of the market this year is the underperformance of high beta stocks in relation to low volatility stocks.  In a typical bull market, high beta stocks outperform as market psychology shifts to a “risk on” mindset where cyclical companies (such as high beta and high growth stocks) are favored over non-cyclical companies that provide lower, more protected exposure.  This has not been the case this year.  High beta stocks have underperformed low volatility stocks measured by the ratio of the performance of the S&P 500 High Beta ETF (SPHB) over the S&P 500 Low Volatility ETF (SPLV).   As the ratio moves higher, high beta is outperforming low volatility and as the ratio moves lower, low volatility is outperforming high beta.

From The Blog of HORAN Capital Advisors

The performance dispersion can partially be explained by the difference in sector weighting of these two ETFs.  Given SPHB's high beta, cyclical tilt, overweights in Energy and Industrials have been a big drag on performance.  Conversely, SPLV has no Energy exposure and higher weightings to Consumer Staples and Health Care, two sectors that traditionally carry lower volatility and have outperformed the broader market this year. These are a few examples of why the low volatility strategy is outperforming not only high beta names this year, but has also caught up to the S&P 500.

From The Blog of HORAN Capital Advisors

This being said, it is interesting to note that growth stocks are still outperforming value stocks in the same time period, shown by the relationship between the S&P 500 Growth ETF (IVW) and the S&P 500 Value ETF (IVE).

From The Blog of HORAN Capital Advisors

While this is not a new dynamic to this bull market,  the amplified disparity in performance since the end of June is noteworthy as investors continue to favor companies with higher growth rates in this slow, bump along environment. High beta stocks may reverse trend and outperform the low volatility strategy should the market resume a trend to new highs, but until then, low volatility is in play.

Some Market Technicals Looking More Bullish

When looking back to mid-October of last year, the S&P 500 Index has enjoyed a nice move higher from the mid October 2014 pullback: up 12.9%. However, since the beginning of March the S&P 500 Index has traded sideways within a range from around 2,044 to 2,130 and is down fractionally since March 2nd.

Since the October pullback, the Accumulation Distribution Line has manged to trend higher yet moving sideways since March. Since July though, the ADL is moving higher again. The full definition of the ADL can be found here, but contains a Money Flow Multiplier. Briefly, the StockCharts.com website contains the following summary,

"The Money Flow Multiplier fluctuates between +1 and -1. As such, it holds the key to the Money Flow Volume and the Accumulation Distribution Line. The multiplier is positive when the close is in the upper half of the high-low range and negative when in the lower half. This makes perfect sense. Buying pressure is stronger than selling pressure when prices close in the upper half of the period's range (and vice versa). The Accumulation Distribution Line rises when the multiplier is positive and falls when the multiplier is negative."

From The Blog of HORAN Capital Advisors

The On Balance Volume (OBV) indicator continues to trend lower and OBV adds a period's total volume when the close is up and subtracts it when the close is down. A cumulative total of this positive and negative volume flow forms the OBV line. The trend is important in this line as well and maybe the OBV is beginning to turn higher as well.

In summary, the rising ADL is an early indicator that the market may be nearing a bullish reversal. As the above shows, market volume on down days has been trending lower while volume on up days has been trending higher. There remains technical resistance to the upside; however, if the market can manage to continue making higher highs and higher lows, the S&P 500 Index may break to the upside and out of this protracted sideways trading range.

Market Volatility In Perspective

It seems easy to forget what equity returns were like following the financial crisis in 2009. The significance of the contraction has certainly remained forefront in investors' minds. Just looking at the below chart reminds one of the damage done to portfolio values through this time period. At its worse, the 1-year return for the S&P 500 Index was negative 48.8% looking back from March 5, 2009. Almost exactly one year later, the 1-year return for the S&P 500 was 68.6% as of March 9, 2010. This type of volatility is not what investors like to experience or expect.

From The Blog of HORAN Capital Advisors

Notable in the above chart is the fact the returns for the 1-year rolling periods is trending lower as can be seen on the chart between the red and green resistance and support lines above. We do believe there is a high probability that equity returns, over the next three or so years, will be more muted in the mid to high single digit range.  With this potentially lower return environment, all else being equal, lower market volatility could persist as has been the case for the past few years and noted below.

From The Blog of HORAN Capital Advisors

A part of this lower return expectation is the fact we do believe a more neutral Fed Funds rate might be lower than the neutral level historically. If a neutral Fed Funds Rate is in the 2 - 3% range, it is not a stretch to expect equity returns to be in the high single digits from an equity risk premium perspective.

Anticipating The Rate Hike

For historically good reasons investors get fixated around Federal Reserve policy changes that lead to changes in the direction of interest rates. These interest movements provide investors with insight into the Fed's perspective on the economy. In short, in an overheating economy, the Fed will push rates higher in an effort to contain potential inflationary pressures. In an economy that is weakening, the Fed lowers rates in order to establish an environment that will stimulate economic growth.

In the past we have written that an increase in interest rates is not necessarily a negative for stock returns. This has especially been the case when rates are increased at levels below 4%. The thinking is a rate increase at this time is the Fed's desire to get rates back to a more normal level to have a tool at their disposal in the event there is some type of economic shock to the system. When rates are increased beyond 4%, this generally is a signal by the Fed it desires to slow economic growth to contain inflationary pressures and this is the point in time that rate increases can be a negative for stock price returns.

So we sit here today and investors/strategists seem to have heartburn around an impending rate increase. However, as the two charts below show, stocks actually move higher in tandem with a rising Fed Funds Rate (yellow line).

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

Source: Andrew Todd

As the above chart does show, at the initial onset of a rate hike, the market does tend to be more volatile and trend lower for a brief period of time. Over the course of the cycle, however, the equity market is positively correlated to the higher rate moves.

I do understand the concern about a rate hike at this point in time: emerging market slowdown, stronger dollar and its short term negative impact on exports, but, a rate hike of 25 basis points from this starting point should not have a huge negative impact to the market and the economy. The Fed should probably initiate the initial increase to remove investor fixation on this issue.

Better Investing Members' Most Active Stocks As Of August 13, 2015

It has been several months since I last provided readers with an update on the most active stocks from Better Investing members. At the top of the list is Apple (AAPL) which has been a favorite of Better Investing members for a number of months running. New to the list since I list provided an update is Ambarella Inc. (AMBA), Southwest Airlines (LUV) and Starbucks (SBUX).

From The Blog of HORAN Capital Advisors

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Disclosure: Firm long QCOM, AAPL