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An historically volatile week will test the bull market in stocks


I noted last week that the week after Triple Witching is among the weakest weeks of the year, and Friday’s action, with the S & P down 1.3% and ending at the lows for the day, seemed to hint at that as well. This historic weakness is well-enshrined in stock market lore and encapsulated in the old chestnut, “Sell Rosh Hoshana and buy Yum Kippur.” Rosh Hoshana started September 15th and Yom Kippur ends September 25th. This backdrop also aligns well with the week we are now entering. According to Jonathan Krinsky, chief market technician at BTIG, the S & P 500 has been lower the week after Triple Witching in 26 of the past 33 years for an average return of down 0.7%. (Triple witching refers to each quarter’s simultaneous expiration of stock index futures and options and individual stock options.) Bulls like to point out that seasonal weakness should be later overcome by the soft landing scenario, which is still intact, and by the fact that soft Septembers and October are traditionally followed by stronger November and Decembers. In addition, the fourth quarter of a pre-election year is traditionally strong. You call this a bull market? It may be true we are in a bull market, but it is certainly not a typical one. Only 52% of the S & P 500 is above their 200-day moving average, Krinsky notes. Market stalwarts like semiconductors ( SMH ) and housing ( ITB ) have been looking toppy as well. And small caps look terrible: down nearly 3% for the month, up a measly 4% for the year. But no one seems to care, as technical analysis service Lowry noted over the weekend: “Small-cap weakness has reflected risk aversion and investors clear quality preference. While atypical of a bull trend and certainly not ideal, this market trait should keep investors focused on what continues to consistently work (large caps) and limit exposure to what has not (small caps).” If you can’t identify winners, avoid losers This gets down to the problem of the Magnificent Seven stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, Meta) that have outperformed everything else this year. Howard Marks of Oaktree, one of the most astute investors out there, wrote a piece recently noting that active investors are again underperforming the markets, but observed this is nothing new: “For as long as most of us can remember, active investors have had a tough time keeping up with the equity indices.” He cites the usual issues besetting active investors (market efficiency, management fees, and investor biases and errors) but blames a good part of the problem on the need for active investors to take profits: “By definition, if you reduce your holdings of the winners relative to their representation in the indices and these winners continue to outperform, you’ll have a tough time keeping up.” Marks seems to have little concern over concentration risk, or the fact that those Magnificent Seven are north of 35% of the S & P’s value. He noted that top-heavy markets were nothing new, citing the Nifty 50 in the 1960s, FAANGs (Facebook, Amazon, Apple, Netflix, and Google/Alphabet) in the 2010s, and a big tech push in 2017 with a small group of techs moving the market. The problem for active investors is that without an average representation of the winners (which you cannot pick in advance) you are doomed to underperformance: “The bottom line is that winners aren’t entirely dispensable. If you hope to at least keep up with the indices, you probably have to have an average representation in them.” Instead of trying to pick winners, Marks sensibly proposes the opposite: You might also achieve that goal (of producing alpha, or outperformance) by holding fewer of the losers. Ah, there is a piece of investment advice as old as Wall Street, and Marks knows it. He cites none other than investing legend Jesse Livermore : “Winners take care of themselves; losers never do.” That was written in 1940. It’s certainly true, but “avoid the losers” suffers from the same problem as “buy the winners”: no one is quite sure how to avoid them either. That is why the vast majority of active stock pickers continue to underperform the market, and why money continues to flow into passive index funds.

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