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The One Trick Pony Market
By Nicholas Colas of Convergex
The One Trick Pony Market
The S&P 500 is up 3.4% year to date, but over half that return comes from one sector: Health Care, which is up 13% YTD, and at a 15% weighting constitutes 57% of the S&P’s total gain on the year. In fact, half of the S&P 500’s industry groups are down on the year. Think Energy (-9.7%), Industrials (-2.9%) or Utilities (-8.6%). So where is the sector leadership coming from for the second half of 2015? Our monthly look at the “VIX of” different sectors and asset classes has an answer: Technology (+5.6% YTD) and Financials (+2.8% YTD). They both have solid weightings in the S&P 500, at 20% and 17%, respectively, and their individual “Fear Indices” (based on the same math as the CBOE VIX Index) are declining. And one bit of potentially bad news for gold (not that it hasn’t had enough lately): the VIX of the yellow metal has been rising as prices drop, but there is still a lot of relative complacency surrounding this price move. “Implied vol” in gold-based ETFs is still well below levels seen earlier this year and tells us the bottom isn’t in yet.
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The definition of a “One Trick Pony” is someone or something that only does one task especially well. The origins of the phrase go back to old-time carnivals with animal acts. A pony that could only do one impressive trick obviously wasn’t an especially useful addition to the troupe. The Oxford English Dictionary lists its first time in printed usage as dating to 1905: “The marvels that were seen at the first one-tent, one-clown, one-trick-pony, pioneer Oregon circus.” The phrase almost died in common parlance until 1980, when Paul Simon released an album and starred in a movie of the same name. Fun fact: Lou Reed, the demigod of NYC cool from 1970s (“Take a Walk on the Wild Side”) is in the movie, playing a mildly slimy record producer. His answer to any musical problem: “Add some really lush strings, and maybe a sax at the end”.
You don’t hear it much, but the S&P 500 has been a bit of a “One trick pony” in 2015. No, it isn’t the 4% weighting in Apple that makes it such; it is the combination of a 15% weighting in Health Care AND that sector’s 12.9% return year to date. When you compare the S&P 500’s price return year to date of 3.37%, you can see that the Health Care sector’s contribution is essentially just over half the market’s price return for 2015 (12.9 times 15% is 1.90 of that 3.37). Layer on the fact that 5 of the 10 industry sectors in the S&P 500 are still down on the year: Materials (-2.7%), Industrials (-2.9%), Telecomm (-0.7%), Utilities (-8.6%) and Energy (-9.7%).
So what happens when Health Care stops being such a strong performer or simply hits a valuation or fundamental pothole? The simple answer is that other sectors have to step in with better performance, or the U.S. equity market will stumble, well, like a pony after its one trick. Two sectors have the potential to be that support, both by dint of their weighting in the index and recent performance. Financials (17% weighing) may only be up 2.8% on the year, but over the last 3 months their performance is better – up 4.9%. Promises of a steeper yield curve and a better U.S. economy are the tailwinds there. The Technology (20% weighting) sector is doing a little better YTD, up 5.6%, but has really hit its stride in the last 5 days, up 3.8%, on the back of positive earnings from the likes of Netflix and Google.
When we ran our monthly “VIX of” analysis for the 10 sectors of the S&P 500 and other investment classes (see data immediately following this note), we also found that options traders/investors are less concerned about hedging these two groups as well. Some options nerd math required here: what most investors call the “VIX” – the fear gauge for stocks – options traders call “Implied volatility” (IV for short, in case you want to sound cool to an options guy/gal). The calculation is the same in both cases, but “Implied Volatility” is something that applies to any stock or exchange traded fund with listed options. And, just like the VIX, lower IVs mean less demand for hedging against sudden price drops. At extremes, low IVs/VIX can signal complacency, of course. But within a broad range lower IVs mean less worry, and generally rising asset prices.
That’s exactly what’s happening with the IVs for the large cap tech sector and the large cap financials. The IVs for both have dropped substantially in the last month. In the case of Technology, the IV/”VIX” is 17.8% lower than it was in June. As for Financials, their IV/”VIX” is 14.2% lower. Only one other S&P 500 sector – Consumer Staples – was down as much with an IV/VIX drop of 16.5%. All the other 7 sectors were either down less or outright higher than last month (including Materials, Energy and Telecomm, some of those troubled groups we mentioned as being down on the year).
The key takeaway from this price action is clear: options investors/traders believe the Technology and Financials sectors are going to move to the upside in the coming 3-6 months. In fact, even with Health Care’s excellent performance YTD, the IV/”VIX” of this group did not drop as much this month as those two other industries – just a 14.0% decline month over month. Yes, that is close to the drop in Financial sector IV/”VIX”, but remember just how much better the Health Care group has performed in 2015 than banks, brokers and insurance companies. In truth, the IV/”VIX” of the Health Care group should be down the most of any sector in the S&P 500. The fact that it isn’t shows some concern over a pullback in the weeks or months to come.
One other data point from the accompanying charts regarding the recent slide in gold prices. Yes, the IV/”VIX” for gold is up the most of any asset type or industry sector we track – some 23.2% higher over the last month. That makes sense given its move to new lows over the weekend. What is less clear is why the IV/”VIX” of gold isn’t trading at one year highs given the yellow metal’s move to 5 year lows. To see what we mean (and if you are an options nerd, as we are), look at the Implied Volatility for the two largest exchange traded funds that track gold and actually hold gold bars. What you’ll see is that the IV/”VIX” for each is 12.5-15.0%, at the low end of its one year range of 11-23%.
The fact that the options market didn’t factor the recent breakdown in gold into put/call prices is strange. Typically, assets trading at multiyear lows are at risk for further declines. So why didn’t traders bid up the price of protection by paying more for listed options?
We don’t have an answer, but we do have an observation. Assets tend to bottom when their options prices reflect very high IV/”VIX”. Think of US stocks in 2009, when the VIX was +60, or in 2011 when it was +40. Both good buying opportunities. Gold isn’t there yet in terms of an investable bottom. To get there, the IV/”VIX” of gold-linked ETFs would have to approach their one-year highs, at least. With volatility quickly picking up in the gold market, it should be there soon enough.
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"market"
OT.. but WTF
So you want to see who is going to run your Obama “health care”?
..good luck with that operation you need soon.. and so where will they send your tissue?
http://www.breitbart.com/big-government/2015/07/21/new-video-shows-another-planned-parenthood-doctor-haggling-price-of-baby-body-parts/
there is obviously a "market" there
http://i40.tinypic.com/351u7ly.jpg
For sale: One-trick-pony. Minature Shetland. Goes by the name of Yellen. Great for kids parties. Rolls over. $999, No time wasters.
Call Jamie on 212-270-6000
Noooo, not Yellen, thats obviously John Kerry
Check out LOCK lol
https://www.tradingview.com/x/h02CAlz6/
Heres why
https://www.ftc.gov/news-events/press-releases/2015/07/ftc-takes-action-...
Healthcare is going to crash so hard it isn't funny.
Notice that the market now relies on people's lives to keep the float.
Hence TPTB look at us like cattle...man are they in for a surprise.
Ok goodie, Barney Frank on CNBC later. Frank and Beans. Loose Stools. Hair lips.
"swap meet"