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Holding The Line

CAMS Weekly View from the Corner – Week ending 10/21/2022

October 24, 2022

The bulls and bears within the market participant community have been displaying a notable pricing battle within the stock market the previous few weeks.  In our last edition for the month of September we noted that a significant price line had been broken in the well recognized S&P 500 stock index. Since then we have seen seemingly a new market environment every couple of days.  Up notably and then down notably while leaving no trend in its wake.  The no trend part, at this stage of pricing behavior for 2022, is very important.  We emphasize this fact when such behavior is at a distinct line in the sand price wise – known as “support” in price behavior analysis. The True Bear Strewn throughout editions over the previous year we have shared our in-house phrase of a “true bear market” which is meant to succinctly describe a down market that is not some mere hard blip down only to then turn right back.   Rather a true bear market is meant to describe a true bear – i.e. the “animal” that wreaks financial havoc on the vast majority of participants from the casual 401K investor up to the most advanced participant.  The bear leaves in its path serious financial damage that last for many months to years and then takes years to see the wreckage righted. There have been plenty of these types of landscapes throughout market history.  Understandably the masses have forgotten such an environment in light of the market’s behavior in recent years whereby any type of downturn was met with the aforementioned similar quick upturn often on the back of the Federal Reserve “riding to the rescue” with some form of easy money with you-name-it acronym type plan such as QE (Quantitative Easing) or ZIRP (Zero Interest Rate Policy) to name a couple. The Gorilla in the Room Unlike recent years our socioeconomic landscape has a gorilla running about known as price inflation.  This is not some casual type of short lived uptick in prices but rather is historic and dates back several decades to find comparative experiences.  Bringing the Federal Reserve into this we have chronicled ad nauseam over the previous year and a half or more how far behind the price inflation curve the FED has been and remains so to current day.  This fact has the FED playing catch-up relative to price inflation and yet there are ever building data pointing to economic deterioration occurring due in large part to the price inflation backdrop.  (On this note there are signposts suggesting, importantly not guaranteeing, this economic deterioration could turn hard south quickly.) Simply, households can’t keep up of which we have also chronicled over numerous editions in 2022.  (We’ll save additional looks into that backdrop for near-term editions.) Simultaneously, the ever increasing interest rates are only adding to the collective household challenge of trying to keep up with the entrenched price inflation while also incurring X increase in debt servicing via the rising interest rate storyline.  Do you see the conundrum here?  Specifically, the entrenched price inflation is seriously hurting households while the rising rates, meant to reduce price inflation, is hurting households further. Want to create a true socioeconomic nightmare?  Start lowering interest rates in the face of historic and entrenched price inflation!  That could unleash a beastly price inflation backdrop that makes our 2021/22 experience look like a picnic in the park with cookies and cream loaded in the lunch basket.  Market Participant Narratives – The Psychology of Markets At the outset we shared there has been a notable bull/bear pricing battle taking place by collective market participants.  With this, the price behavior has gone full-on volatile while also leaving no trend in its wake.  There has been a building sentiment over recent weeks in particular, within collective market participant psychology that has evolved into a narrative.  Said narrative stated succinctly is basically offering the FED is about done (looking out over near-term months) with their rate hikes which then will invite a “FED pivot” which offers the FED will then be ultimately lowering rates, hence pivot. With this bids are coming into the market against ever building bad news with a belief that this build-rate of bad news will surely push the FED to stop with their rising rate campaign and even invite a lowering of rates down the timeline.  There are other contingents within the participant community that thinks this is ludicrous – hence the bull/bear full-on volatility of recent weeks. Just More True Bear Market Behavior For our part, using history as a guide, the above storyline is typical true bear market collective behavior.  In such a bear market narratives ebb and flow.  There are periods when “it all looks good again” (you pick the narrative under that broad caption) and with this rallies ensue.  These are known as countertrend rallies.  Countertrend because the primary trend is down (as is the case in 2022) and yet a trend counter to this primary trend emerges for X days/weeks and even months.  Will the aforementioned building narrative that the FED will need to pivot in light of the increasing challenges households are experiencing and through them the broad economy is experiencing take hold to the point of a notable countertrend rally?  That is the market question and it is at the absolute front of our minds in the managing process of assets under our care. For our part, participating in countertrend rallies within true bear markets is an essential part of our playbook, hence our focus on the interesting behavior of recent weeks. We leave you with this link if you are so inclined to view in a chart the overall narrated storyline shared above.  If you are a consistent reader of these editions you will surely recognize the chart as we have used it numerous times in recent months with add-on placed on top of add-on along the way. The focus is how market participants, collectively, are holding the black line and the behavior in recent weeks around the black line speaks to the full-on volatility taking place.  Will the countertrend rally surface through this volatility?  Frankly it certainly should, and if it doesn’t – look out below – the downside will be notable. 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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