Is Caution Creeping Into the Market Landscape?
CAMS Weekly View – Week Ending 2/24/17
February 26, 2017
Through the lens of our SPX9 system, the structural health of the S&P 500 remains solid and strong overall. SPX9 dissects the S&P 500 by breaking it down to 9 sectors and then further splitting it into 107 sub-industries which comprise the 9 sectors. Sector leadership, post-election, has been strong and vibrant with offensive/risk oriented sectors leading the way throughout the recent months.
Said sector leadership has been dominated by Financials, Industrials, Technology, and Consumer Discretionary. This type of lineup representing risk oriented leadership is excellent. Drilling down via the sub-industry work we have seen Semiconductors, Software, Banking (regional and large money center) Investment Service, Home Improvement Retailers, Restaurant & Bars, Consumer Finance and Trucking to mention a handful that are leading the way at the sub-industry level.
Simultaneously in recent months, we have seen a notable disinterest in the defensive areas such as Utilities and Consumer Staples on the sector front. Healthcare can also be offered here although it has become more of a hybrid in that parts of the sector are considered growth areas in our society. Interestingly, the market’s disinterest in these areas have turned into significant interest in the last few weeks with the last couple of weeks being quite notable. This by itself is not a red flag per se, but it is worth noting.
What does raise the eyebrow is the coinciding under-performance of late in the micro and small size companies. These were tremendous leaders, post-election, which gave significant credence to the strong stock market move. Importantly though, this recent under-performance may be on-going digestion of their previous outsized gains following the election. Nonetheless, we are taking note of this recent behavior.
In addition, combining recent defensive sector out-performance with small size company under-performance, the VIX Index’s (known as the “fear gauge”) inability to hold (admittedly historically low levels) below 11 in recent weeks and turning to a seeming stubbornness to be in the 12 area, as well as a bias to wanting to go higher, offers an additional caution.
Taken even more broadly on an inter-market basis, we have seen the quite knowledgeable bond market giving support to long-dated Treasury bonds in the form of putting a ceiling above their initial post-election upward interest rate trend. This has resulted in their yields actually putting in a series of lower highs since mid-December. Furthermore, we are on the cusp now of attempting to put in a lower low for recent trading which taken together equals lower highs and lower lows – the very definition of a downtrend attempt.
With the recent increased trends in inflation, the strong employment market reflected by the continued very low Weekly Unemployment Insurance Claims, strong housing results released recently, and continued expectations of the FED hiking rates, a strengthening bond market is not what general consensus would expect. This “against the tide” behavior from a market as smart as the bond market, when coupled with some defensiveness creeping into the stock market does get our attention.
Through various Weekly View’s we have offered that we are in a vigilant mode for any signs offering a signal of a trend change in light of the plethora of cross-arguments we can make for both a bull or bear run in markets generally. The above is offered through this lens. It does not suggest we feel we are changing trend imminently but rather is a reflection of our vigilant watch for any signs offering a potential for trend change.
Trend change many times begin with subtle hints on the fringe and then begin to show up more as the trend change takes hold. With this, we offer this View through the respect we have for markets initial quiet clues of change. Sometimes markets share their wisdom blatantly and at other times subtly. At this point we continue to watch these and other developments to see if they are leading to something larger or if they are a nonissue that will clear quickly. An operative phrase we like around here remains – stay nimble/be flexible.
I wish you well…
Director, Market Research & Portfolio Analysis
Portfolio Manager, CAMS Spectrum Portfolio
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.
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