The markets experienced a lot of volatility in August. That being said, the S&P 500 finished the month off within range of where it began. In the first three days of last month, the S&P 500 declined by -6%. The Nasdaq 100 technology-based index declined by nearly -8%. Markets then rallied to close the month. Volatility went in both directions.
August was a month filled with “outlier days,” which are defined trading days beyond +/-1.50%. Outlier days are a sign of high emotion and an inefficient day of trading. So far in 2024, the S&P 500 has only seen 10 trading days that went beyond +/-1.50%. Five of those days came last month. Outlier days are a sign of heightened volatility and erratic trading. Looking at the “V” shaped trading pattern that has occurred since the S&P 500’s July 15th peak, the market does not know where it wants to be right now.
We are entering into one of the “shakier” periods of the year. While market seasonality is somewhat coincidental, history says that September is one of the more volatile months. Looking at daily data of the S&P 500 since 1950, September has historically had the lowest average monthly return and 3rd highest daily standard deviation. The months of October and November also have high volatility. As noted in some charts shared by the Carson Investment Research team, early September tends to be okay for markets, but the second half of the month typically sees the stock market decline. Take that with a grain of salt, because as every investment disclosure reads, past performance is not an indication of future results.
Market Leadership
Not much has changed in terms of market leadership over the last 2 months. While technology-related stocks and sectors led on a risk-adjusted basis at the beginning of the year, sector leadership shifted in July. Now, the leading sectors, adjusted for their levels of volatility, are Utilities, Consumer Staples, Financials, and Health Care.
Conventional wisdom would say that those sectors are traditionally more conservative sectors. With technology-related sectors now lagging, perhaps investors are feeling more “risk off.”
The table below shows the current sector leadership, ranked by Canterbury’s risk-adjusted relative strength (Volatility-Weighted-Relative-Strength).
Sector | Risk-Adjusted Ranking |
Utilities | 1 |
Consumer Staples | 2 |
Financials | 3 |
Health Care | 4 |
Real Estate | 5 |
Industrials | 6 |
Communications | 7 |
Basic Materials | 8 |
Information Technology | 9 |
Consumer Discretionary | 10 |
Energy | 11 |
Source: Canterbury Investment Management. Sectors are ranked by Volatility-Weighted-Relative-Strength. Sector data is from State Street’s SPDR sector ETFs.
Chart of the Week: Investor Sentiment
We noted earlier that markets have become more volatile. Markets that trade irrationally, or markets that have erratic swings, will cause investor emotions to float between extreme levels of optimism and pessimism rather quickly. To be clear, this is not a volatile market just yet, but it certainly is one that is showing signs of increasing volatility. If market volatility continues to climb, investor sentiment will rotate rapidly.
One method we can use to visualize investor sentiment is by looking at weekly data from the American Association of Individual Investors’ sentiment survey. The sentiment survey is published weekly and according to the AAII’s website, asks investors if they “feel the direction of the stock market over the next six months will be up (bullish), no change (neutral) or down (bearish)?”
Investor sentiment is contrarian in that investors feel most optimistic at peaks most pessimistic near troughs. Positive and negative emotions tend to move in the same direction as the market. Those emotions will alternate between extremes when markets become increasingly volatile.
Our team at Canterbury compiled S&P 500 data from 2022 to present, as well as the results of the weekly investor sentiment survey. The chart below shows the S&P 500 price action from 2022 to present, overlaid on the percentage difference between bullish investors and bearish investors. A positive (green) bar indicates a higher number of investors with bullish outlooks, while a negative (red) means that there is more bearish sentiment.
Source: Chart created by Canterbury Investment Management using S&P 500 data from Optuma and Investor Sentiment data from the AAII sentiment survey.
Here are some observations:
1. While investor sentiment was mostly bearish in 2022, you can see that sentiment was most bearish near market troughs and became significantly less bearish near market peaks.
2. Coming out of the bear market in 2023, the gap between bullish sentiment and bearish reached an extreme level optimism. This occurred prior to the market’s sharp decline in the fall of 2023, when bearish sentiment took over near the bottom of the market.
3. In 2024, sentiment has been largely optimistic. Keep in mind that volatility has also been much lower this year than it was in 2022 and 2023. Now, markets are beginning to become a bit more emotional. During the recent S&P 500 decline, investor sentiment shifted from having an extreme level of bullish investors to having almost an even number of bullish and bearish investors. Now, since the market has rallied, investors are more optimistic. As the markets become more volatile, sentiment can change quickly.
Bottom Line
The markets could be due to experience some choppiness this month. Here are a few reasons, which were mentioned in this commentary:
1. We have seen an increased number of “outlier days” (trading days beyond +/-1.50%). Our studies show that outliers are a sign of rising volatility, will occur in both directions, and typically come in clusters.
2. September is historically a shaky month for the markets. September has the lowest average return since 1950, and autumn tends to have the highest standard deviation of daily returns.
3. Market leadership is favoring “risk off” sectors such as Utilities, Staples, and Health Care. “Risk on” sectors like Information Technology and Discretionary are lagging.
4. The last month has seen an extreme shift in investor sentiment. For most of 2024, investors have been extremely optimistic, as shown by the results of the AAII sentiment survey. After a sharp decline over a three-day period, bearish sentiment sharply rose, then cooled off two weeks later as markets went back up. Whipsaws in sentiment show heightened emotion and volatility.
While the markets could be choppy, many sectors outside of large technology stocks are showing positive characteristics. The equal weighted S&P 500 set a new high last week, and eight of the eleven S&P 500 sectors are right around their 52-week high.
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