Conflicted Markets and High Volatility, Bring the Few True Buy and Mold Opportunities for Equities

Russia’s invasion of Ukraine last week has pushed the S&P500 beyond the correction line of -10% and into the -12% range from its November levels of 4700.  Early last November, was when we first discussed much higher volatility for the first half of 2022 and the likelihood of first correction in the markets since March of 2022 in Mid-4th quarter of last year.  If you were perfect selling the early January top in the SP500, you avoided – 13.5%.  If you did so and have a documented history of repeating this market timing feat consistently, give us a call, the investment group at Oak Harvest is looking to hire!

I am Chris Perras, Chief Investment Officer at Oak Harvest Financial Group, and we are in the midst of the sloppy, choppy, messy, time period our team has been foreshadowing for months, however! I want to bring a little optimism to what might be many investors, otherwise gloomy outlook.  Let’s call this episode “conflicted markets” and high volatility, bring the few true buy and mold opportunities for equities. Why? Because as a retail investor. Time is on your side.

First, off, viewers, let me be clear, I am not one bit dismissive of the horrible events transpiring in Eastern Europe, Ukraine, and Russia. My prayers go out to families on both sides of the border who have been brought into this event by the powers to be beyond their control.  Viewers, this discussion will be focused on what it might mean for your money and the markets. 

So, here’s some data on military conflicts and their outcomes on the overall stock markets.  The first set of data and charts were published by Tom Lee’s group at FundStrat. Historically, the last 5 “invasion” conflicts from the Vietnam War through the Crimean Crisis, on all 5 occasions, the overall stock markets rallied on the invasion.  Viewers, please recall your history books. World War 2 was the beginning not ending of a multidecade bull market.  I’m not saying this is World War 3, however I am saying there is a good chance we are marking the lower region for the SP500 for the year.  Just as we did the prior conflict periods. Why could this happen a 6th time? 

 First off, few American companies have significant exposure to Russia and thus, sanctions should have less impact here in general than in Europe.  Historically, invasions mainly cause heightened uncertainty and short-term volatility in the near term, which we know was already high with Federal Reserve concerns.  This higher volatility causes short term P/E contraction however, this entire event is also likely to cause a reversal of some of the negative institutional positioning that was in the market coming into the end of February.  

What do I mean?  The data shows that large investors ramped up their hedging and shorting in January on the way down anticipating more volatility due to our Federal Reserve acting earlier than they had expected.  So, these big players bought insurance as those prices were increasing.  

I have a chart here that Larry Williams has presented only a few times in the last 5 years.  It’s a proprietary signal he uses that uses data about professional hedgers.  It’s a great contrary indicator, much the same way the AAII retail investor sentiment data we’ve discussed in the past is.  What is it saying now?  It’s saying for the first time in 2 years.  The overall market is a buy and mold. It’s a close your eyes.  Try to disregard your churning stomach and buy some of your favorite names with good growth prospects, and better valuations now that they are down 15-30%. 

The last time this signal went off was? March 2020 when Mr. Williams came out publicly, in the depths of the Covid selloff, saying now is the time to buy.  Our team was quoting him back then and following his work, because his signals have proven very effective over time.  However, remember viewers, no one’s signal, proprietary or not, is perfect. 

This event, Russia invading Ukraine at the end of February, gave these hedging investors a bit of “cherry on top of a Sunday” kicker for those short positions. What do I mean?  The Russian invasion gave their short positions a little extra boost right into month end. 

However, the event of Russia invading Ukraine, is likely quite negative over the next few months for many of those short positions.  How?  while this event shouldn’t dramatically change the Federal Reserve’s interest rate path this year, they do still need to raise short-term interest rates, it is very likely that it will cause them to change their tone of messaging.  It is likely that their messaging will become softer and make them clearer, earlier in their path higher.  Viewers, the markets can adjust to higher interest rates.  They just want a clearer view of the path that the Fed is taking for 2022.


A second interesting Chart and data series Mr. Williams presents, is one that compared the value of the stock market to bonds. As one can see, this one moves a little faster than Williams other indicators, but it has been 5 for 5 the last 4 years finding buying opportunities near, not necessarily at, market lows.  That indicator is flashing its 6th buy in 4 years. 


One final chart of Mr. Williams is what his 2022 forecast for the path of the market might be for the year.  He first started publishing these signals years ago, and sure enough, year to date? His path forecast, not necessarily levels, has been damn good.  Here it is.  A steep drop in January, followed by another one into the end of Feb to make a low, and then a multi-month rally starting in March.  Will Mr. Williams once again be proven prescience?  I don’t know, but his path work has been fantastic for the last 3 years. If you subscribe to his cycle work, which we do, we are nearing the end of the correction.


Finally, on the topic of volatility. As we discussed back in November, two indicators we like to look at are the MOVE index which tracks bond volatility, and secondly, VIX futures relative to where the spot vix index is, which is the number often discussed on TV. 

First the MOVE index is now close to 100.  This is extremely high, and Ex-the covid collapse, has only been higher for a total of 4 weeks the last 10 years.  Think of that. Over the past 500+ weeks, ex-covid, Treasury bond volatility and therefore the “collateral damage” it creates has been higher for only 4 weeks.  

As the Fed path becomes clearer, one should expect this number to decline.  A calmer Treasury bond market, even at higher overall interest rates, would likely flow through to all other risk orient asset classes as leveraged players would be more comfortable with their strategies.

As for stock volatility, at its peak on Thursday Feb 24th, the cost of insuring your portfolio for the next 30 days, cost almost 20% more than it did to insure your portfolio for 90 days.  That makes no economic sense and smells of forced selling and panic.  Yes, it can get more backward, and readings have been as high as 30,35% for short periods of time, however they historically haven’t lasted long. This fear is finally getting to the levels of being bullish.

Viewers, even should we begin, the normal seasonal rally in March, as forecast by Larry Williams, we would expect volatility to remain elevated for the first half of the year.  As we’ve said for a while, this would not be a fun first half of 2022.  However, with the markets now reaching into the correction zone, opportunities are presenting themselves for long term investors.

With the continued volatility that we expect, our investment team recommends that you get on the phone and give our Oak Harvest team a call and ask to speak to one of our financial advisors and planners.  Set up a meeting and sit down with our team and let us walk you through how sequence of returns can affect your retirement plan every bit or more than the average investment return your current advisor is generating you.

Give us a call at (877) 896-0040 and give our team a chance to help you into and through your retirement years.

I’m Chris Perras and Have a great Weekend!