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Is Market Caution Becoming More Notable?

CAMS Weekly View – Week Ending 3/24/17

March 27, 2017

“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. 

Trend change many times begins with subtle hints on the fringe and then begins 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.” – Is Caution Creeping Into The Market Landscape – The Weekly View February 26th, 2017

Via today’s header quote, excerpted from a Weekly View back in late February, we continue with addressing the cautionary tone that has been radiating from markets for just over a month now.  As offered above, the “quiet clues of change” the markets began to offer then, have slowly, but noticeably, evolved to being a bit more blatant.

Through the lens of our SPX9 system, the structural health of the S&P 500 has deteriorated.  (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.)  Back in February, caution was primarily centered on behaviors around various markets that were deemed questionable if the general market landscape was truly thriving.  At that time, SPX9 was offering only marginal signs of concern via the observation of some activity in the defensive/cautious sectors and sub-industries.

We have since seen SPX9 churn up a bit whereby leading – risk oriented sectors – have added to the list of questionable behaviors.  In keeping with the markets quiet clues, caution from SPX9 has most notably shown itself strewn down in the weeds of the 107 sub-industries.  The collective healthiness of these sub-industries has shown notable weakness whereby we are now at 54% H&UP (see footnote) down from a general range of high 70’s to low 80’s at the time our header quote was written.

In addition to the above, a continued subtle observation of the underperformance of small size companies compared to large size companies has become more blatant as well.  With the most recent week ending period, the S&P 500 Index is up approximately 4 ½% (down from a 7% high point) for 2017 while the S&P 600 Small Company Index is actually negative for 2017 with a minus 1.5% return thus far.  The previous high point for the Small Company Index was nearly 3% in 2017.

All told, small companies have struggled to perform at the rate of larger companies for the bulk of 2017.  In a vibrant market backdrop, small companies should be leading the charge or at least comparable in performance with their larger peers.

Revisiting our SPX9 system, the one stand-out concern on the sector front is the loss of leadership status from the Financials.  Adding to this concern, the Financials sub-industry health has turned quite weak.  This sub-industry weakness has been led by key areas such as Banks, Asset Managers, Consumer Finance, and Investment Services.  The Financial sector and stated sub-industries were key leaders in the initial post-election upward thrust.  Losing key leaders within the Financials sector while the Financials themselves are a key sector to the overall market offers increased concern.

Importantly, there is little to point to in terms of damage to headline type indices such as the S&P 500 as we currently stand.  The overriding purpose of our theme of quiet caution in recent Weekly Views is to get ahead of damage before it occurs so we are properly prepared for trend change rather than being surprised by it.  Our on-going focus on monitoring for any continued signs of trend change continues and will be shared accordingly.

I wish you well…

Sincerely,

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

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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