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If The Stock Market Was A Car, We Would Call A Mechanic

CAMS Weekly View from the Corner – Week ending 7/16/21

July 19, 2021

“Yes sir, it runs rough even when idling.  It seems to be challenged overall and then when we are seemingly gaining some speed it just bogs down, in particular when we press on the accelerator – it’s as though the 6 cylinder engine is running on 2 cylinders – is that possible?” The above is how we would describe the stock market behavior of the last couple of months to our trusted mechanic if it were a car.  But wait, you may think, the stock market has been up a few percent in the previous couple of months – what gives? In reply we agree and then immediately add the caveat of what stock market index are you referring too.  Realizing the often cited weighted (certain stocks are weighted heavy in the makeup and impact the results on a pronounced level) S&P 500 Index is up a few percent while other indices are flat-to-negative in the referenced time frame. Recent Editions In recent editions we have been sharing various views of strange inter-market behaviors that do not add up to the collective consensus outlook that inflation is running hot and will get hotter while simultaneously expecting the general economic storyline to also be running hotter as we move forward. Participants look forward and price assets today according to what they see or think they see out in the near-future.  Based on their behavior of late they are seeing lower inflation and a slower economy.  Those are very broad labels laid onto a complex story but we will stick with them for now in the name of brevity. As mentioned, to date the weighted S&P 500 has held up fine.  But how long can a proverbial 6 cylinder market run on 2 cylinders and continue to hold up let alone trend higher near-term?

Click For Larger View:

Click For Larger View:

To underline some internal behavior of the stock market via the S&P 500 landscape we share two charts above which encompass the previous year.  The top chart takes us under the hood if you will and reflects the percent of the 500 companies that comprise the S&P 500 Index that are above their 50 trading day price average.  If a company stock price is not above its average price of the previous 50 trading days then its uptrend is in question and often leads to further problems. The second chart is the weighted S&P 500 Index whereby higher weighted companies impact the performance of the Index on a more pronounced level.  The above are meant to be viewed together as we have annotated with thin black trend lines how, in the previous year, as the top chart trended downward and bounced back up the S&P 500 Index did the same. This relationship has changed as of mid-April and is highlighted with the thick red arrows.  The percent of these 500 companies that have been able to remain (think trend higher) above their average price of the previous 50 trading days have turned notably lower.  Unlike previous episodes depicted in the above charts whereby the two would recover together, in the previous month (red circle) they have disconnected. This means as the S&P 500 Index trended higher via the far right uptrend line (2nd chart) it was doing so with much less of its member companies participating in the move.  In market analytics this is known as a negative divergence.  Negative divergences underline issues in advance and often point to future problems.  In this case it is offering we truly are running on 2 cylinders inside the stock market.  This may be a market message of an impending correction.  If the percent of the S&P 500 companies turn lower from here, or worse, trend downward and cut through the lows within the red circle then even the weighted S&P 500 Index will feel that correction. Offered differently, the overall stock market already entered correction mode as of weeks ago the question is will the much heralded indices such as the weighted S&P 500 begin to feel it as well.  The above suggests it will.  To be otherwise, we need to see the percent highlighted in the red circle turn notably higher soon. 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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