U.S. Markets closed

As laggard stocks lead, investors wonder if storm has passed

Michael Santoli
Michael Santoli

Has the volatility storm tracked out to sea like Hurricane Joaquin - giving us a scare, prompting frantic precautionary actions and inflicting isolated damage, but ultimately sparing us real pain?

That’s what the typical Wall Street weather buff is asking today. After a five-day winning streak, stocks have put some distance between the S&P 500 and its August low, while finally lowering the pitch of investor fear, if not dispelling confusion.

A bit of noise is being made now about the fact that the CBOE S&P 500 Volatility Index (^VIX), which tracks demand for protective index options, has receded below the 20 mark for the first time in more than five weeks.

While no magic threshold, many traders use 20 as the frontier between a hazardous, agitated market and a more orderly one. Certainly, the VIX chart now shows a steep spike that certainly resembles many passing market storms of years past, though it’s always tricky to sound a confident “all clear.”

Looking back to when this rebound started, last Tuesday could indeed hold up as a sufficient “retest” of the August lows – a return to the depths that is less chaotic and intense and draws strong buying interest.

The makeup of Monday’s impressive rally, building on Friday’s big recovery, is worth inspecting, though. The gains were led by the most bedraggled laggards - those stocks and sectors that had been punished for months before the broad market downturn hit.

Get the Latest Market Data and News with the Yahoo Finance App

The leaderboard from yesterday was dominated by heavy and dirty cyclical sectors such as coal, steel, mining, oil drillers and globally exposed industrials. Lagging were the clean-and-steady stalwarts such as healthcare and consumer discretionary stocks.

This stands as a snub to the standard thinking right now among Wall Street advice-givers, who have responded to the setback in stocks with chastened lowering of index targets and recommendations to emphasize “quality” stocks. These would be the stable companies with strong balance sheets and high returns on capital that tend to boom and bust less than the market as a whole.

Yet this rally has not been about patiently acquiring the durable equities built for the long term. Rallies from a dramatic low almost never are. This ramp has been about macro pressure easing off emerging-market currencies and stocks with expectations of a Fed rate hike being pushed out. Junk bonds caught a bid, the most obliterated markets such as Brazil have surged from desperate depths and short sellers covered some bets.

This makes sense. When the feared hurricane fails to make landfall, the most vulnerable coastal areas in greatest peril experience the most profound relief.

So now we watch to see whether the market can hang near the upper end of the jumpy new range it’s entered, or if this was a fleeting reprieve. We have skirted the line between bull market and bear for a couple of months now. The weight of the evidence has slightly favored the continuation of a bull market of some description, but it’s far from an easy call still.

The S&P 500 has regained a bit less than half the 12-plus percent it lost in the correction. The index is now down less than 7% from its all-time high, yet 68% of S&P 500 stocks remain down more than 10% and more than a third of them are sitting with losses of 20% or more from their highs.

So if the salvage instinct persists, there is plenty of wreckage still left to survey.