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Can This Economically Sensitive Sector Kick Into Gear?

CAMS Weekly View from the Corner – Week ending 7/9/21

July 12, 2021

Since mid-May activity in the bond market has garnered our attention. Our developing attention had reached a level whereby in our previous edition we focused on the action inside the Treasury bond market – a very important market and a very smart market. Against a general economic backdrop of rapidly rising price inflation the Treasury bond market began to act out of character relative to what we would expect when price inflation is flourishing. Specifically, Treasury market participants were bidding up Treasuries. When this occurs Treasury interest rates move lower. As offered this had been a developing market observation since mid-May. This past week it became crystal clear Treasury market participants are adamant in bidding for Treasuries as their prices moved aggressively higher which also means their interest rates (known as yields) went notably lower. Simultaneous to this Treasury market storyline, also as shared in our previous edition, stock market volatility measures have offered occasional out-of-nowhere tremors and Consumer Discretionary stocks have remained dormant at best. Consumer Discretionary Stocks Similar to the Treasury market catching bids against a backdrop of notably rising price inflation Consumer Discretionary stocks stuck in a going nowhere trend against a societal backdrop of pent up desires with pent up cash to get back to living makes us take note. Why are these economically sensitive stocks chiming in with the Treasury market relative to their curious behavior in light of the seemingly obvious economic and societal backdrop? Market participants obsess about the forward view always. Do these two markets see something down the timeline that is counter to consensus expectation relative to price inflation and general societal economic behavior?

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The above is a one year chart of the Consumer Discretionary sector.  Per our red horizontal line this space has been dormant since early April – just as society was expected to launch into a massive spending and travel craze with States across the U.S. opening more and more. Market participants have not been particularly excited per the price action of this economically sensitive area.  In addition, we can see a couple of timeframes within the red line experience where these stocks attempted to fall into a downtrend only to quickly pull back up and into their sideways price action.  Additionally, we can see one period whereby these stocks attempted to break out higher for a trend attempt and quickly failed.  Interestingly, this was in early May just as the Treasury market began to act out of character. Similar to the aforementioned stock market volatility measures we’ll call the Consumer Discretionary attempts at downtrends tremors at this stage. These market tremors are adding up with each passing week as we view multiple markets together – known as inter-market analysis. The smartest market of the three mentioned is the Treasury market and it has moved past tremors with its clear downtrend in yields.  We ask with insatiable curiosity – what is going on here? Going forward if Consumer Discretionary stocks cannot hold themselves together on a price basis while Treasuries continue to become more attractive to bond market participants then we can expect increased stock market volatility.  Right now we continue to watch these Discretionary stocks in combination with the Treasury market closely.  I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


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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