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Falling Off Ledges

CAMS Weekly View from the Corner – Week ending 1/22/2022

January 24, 2022

In our previous two editions, among other items, we noted the significant deterioration within the stock market landscape. Our reason for concern at the time, i.e. focus on the topic is with such difficulty within the general market landscape it rarely leads to anything good near-term. A notable contributor behind this has been the established price inflation issue and with this the fact that the Federal Reserve is far behind the inflation curve. We have to remember, even with price inflation being a center of concern for the citizenry, to this day, the FED continues to print money – astounding! According to their most recent guidance said printing will conclude come March of this year. Following the end of their money printing policy (QE) it is then expected they will begin to raise interest rates – again per they guidance. We have summed up the expected ending of QE and the beginning of interest rate increases as coming tighter financial conditions. We have offered numerous times within various editions that the genesis of incoming tighter financial conditions dated back to early November 2021 when the FED and various regional FED Presidents began to essentially offer “Houston, we have a problem.” Prior to that, “transitory” was the drumbeat reply to any price inflation concerns. Stock Market Behavior – Is It a Precursor of Coming Issues? The above header is excerpted from our last edition for 2021 and can be read again here if interested: Outside of the specific green energy example the larger topics and views shared are as applicable now as they were then. Simultaneously, the above header is as applicable now as it was then even with the stock market incurring a notably rough ride here in early 2022. This rough ride now has numerous indexes falling off established ledges which now invoke a larger conversation: Are market participants offering a quite sober outlook for coming months if not the year?

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Above is the Russell 2000 weighted index which represents 2000 small companies within the broader stock market.  We have drawn attention to this index in a few editions in latter 2021 because of its concerning behavior.  Said behavior turned out to be foretelling for itself and the broader stock market as this index is down nearly 12% in 2022. The horizontal black line depicts a “ledge” if you will whereby numerous previous attempts to penetrate it took place throughout 2021.  Here in 2022 price action has easily fallen off this ledge and now is at price levels seen a year ago.  This tremendous drop, with ease we may add, from a notable level of price support for the bulk of the previous year portends additional concerning behavior for the stock market. In addition, the red circled price behavior offered an alarm.  When a major index breaks higher to finally continue its uptrend only to then turn tail quickly and head south relentlessly suggested all was not good, behavior wise, within the stock market. Importantly, and offering additional concerns, the above index is not alone in falling off its price ledge.

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The above is the NASDAQ Composite weighted index which represents more than 3000 companies within the market landscape.  The black line depicts a similar price ledge of which this index has swiftly and easily penetrated with downside action.  This index is now at price levels dating back to the late spring season of 2021. Speaking to the above charts we actually had a list of which to select from for this edition with our “falling off ledges” theme.  The point to this is these price ledges have been formed over time throughout the stock market and are being penetrated, mostly with ease, here in early 2022.  Not good. Are Market Participants Offering a Larger Message? When adding up the wide swath of indexes that have fallen through the above type of ledges and the ease to which they have moved through said ledges offers an additional concern as to the longer forward outlook for stock market price action.  More technically speaking, when notable areas of price support are taken out this quickly it begins to offer structural damage that is not easily repaired.  With this rapid and broad drop across many indexes and sub-industries it suggests this is not a run-of-the-mill type of correction. To underline this we have had fourteen trading days thus far in 2022 and the above two notable indexes are down 12% – that in no way offers a run-of-the-mill correction.  With this, we cannot help but suspect market participants are offering a much larger concern beyond coming tightening financial conditions that has them looking out deeper into the entirety of 2022.  For our part we are not inclined to tie ourselves to a particular view but rather prefer to operate in the market(s) with a near-term outlook as participants show their hand, via trading behavior, as well as using forward looking economic inputs.       We are confident in this –  behaviorally speaking:  key areas of the stock market being down double digits in a mere fourteen trading days is highly abnormal and in markets highly abnormal behavior often offers substance with its forward looking messaging.  That current messaging is concerning. 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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