Where's the Volatility?

 | Jul 17, 2017 | 9:00 AM EDT
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We are more than halfway through 2017, in what I would have expected to be a volatile market environment -- but that volatility is nowhere to be found. For years, I've utilized a very simple method of measuring market volatility, that being the number of trading days that the S&P 500 closed up or down 1% or more. Perhaps that's a rather naïve method, but is beautifully simple to calculate and to understand.

In the 134 trading days so far in 2017, the S&P 500 has closed up or down at least 1% just four times: March 1, March 21, April 24, and May 17. By my count, during the same period last year, there were 39 "volatile" trading days. Once again, this is a great reminder that the market is full of surprises and has a mind of its own. Keep in mind that this is occurring in a rising interest rate environment (as orderly and telegraphed as it may be), and deeply divisive political environment, amid growing threats from North Korea. Yet the markets continue to shrug.

In my own small world of deep value, I've never seen fewer opportunities. Viable net/nets (companies trading below net current asset value) with market caps above $100 million are virtually non-existent. The population of "double-nets" has also been falling, through a combination of rising valuations and acquisitions. Originally self-developed as a minor-league of sorts for net/nets, double-nets became a fertile hunting ground. With their ranks now dwindling, I am even perusing the ranks of "triple-nets", or companies trading at between 2x and 3x net current asset value. Ben Graham would not be amused.

Furthermore, the results of re-running the screen featured in yesterday's column, Profitable Small-Caps with Cash, revealed just a handful of small energy companies; not sure it is even worth further review.

More than three years ago, a well-published and esteemed fellow value investor reached out to see what I thought about the markets in terms of valuations. He was concerned about the elevated level of the Shiller PE ratio at the time (which was around 25), and became agitated that I was not all that concerned. He stated that this will "end in tears." My response was the following : "It usually does end in tears. The question is when... and that's where we probably differ. The tech bubble should have ended two years before it actually did... It all made no sense, and continued much longer than it should have."

Three years later, there's no sign of the market letting up, valuations are even higher (Shiller PE is now 30), and volatility is nowhere to be found. Sounds like an environment to have some dry powder on hand. But then again, I am a value investor, a different breed.

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