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Another Out of Nowhere Dip?

CAMS Weekly Views from the Corner – Week Ending 6/9/17

June 12, 2017

In up trending markets there are usually periods where the trend dips and with this the question arises if said dip should be bought or sold.  Buying a market when it dips offers a belief the trend will continue while selling it suggests a view that it will fail and begin to trend lower.

Thus far in 2017 the clear leading index has been the NASDAQ 100.  This represents the 100 largest companies of the NASDAQ and is comprised of various areas of the economy from Tech stocks on through to Consumer, Healthcare and Industrial stocks.

Tech stocks dominate the makeup of this Index and only a handful of stocks represent approximately 40% of its weighting.  Very simply, this means only a handful of companies are responsible for a large portion of its price performance.  These names include well recognized companies such as Apple, Facebook, Google, and Microsoft.

It’s at this point we can broaden out away from the NASDAQ 100 index specifically and offer the above names, along with a handful of others, also have a tremendous influence on larger indices such as the Russell 1000 Index or even the S&P 500, albeit on a much reduced basis for the S&P 500.

The overriding point is the leading index in 2017 has been the heavily concentrated NASDAQ 100 while a couple of handfuls of companies that have been pushing this index higher have also had a tremendous influence on other recognizable indices.

This level of concentration being responsible for so much performance gets especially concerning when the poster-child of this concentrated performance (NASDAQ 100) begins to display some questionable characteristics.


Click for Larger View:  http://schrts.co/Py7gAc The chart above depicts the NASDAQ 100 Index for 2017.  What is beginning to get noticed in the last couple of months is the increase in notable one-day volatility bars that result in erasing 2-3 weeks of previous gains in a matter of hours.

This type of “out of nowhere” volatility is a characteristic that can act as a precursor to a change in trend at worst or the beginning of significantly reduced performance at best.  As stated previously, the larger concern (beyond this index only) is the companies that are driving this index have also been playing a larger role in overall stock market gains via more well recognized indices.

The question now is will we see this most recent dip be bought with the trend continuing as in the two previous occasions, or will this begin to lead to something more challenging?

This Index, for reasons offered above, has become an important overall market indicator.  If this cannot get back on trend it may be offering hints of weaker market performance in the near future than what the majority are expecting.

I wish you well…

Sincerely,

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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