CAMS Weekly View from the Corner – Week ending 3/25/2022
March 28, 2022
There is an old adage in markets that nothing goes up or down in a straight line – a personal favorite in light of its truism! It is the ebb and flow of price discovery that gives us this adage as collective participants bid and sell you-name-it market as they work out a trend, or lack of trend – in the case of a market that is trading sideways for a period of time. To be fair though, even a sideways market typically displays erratic behavior when viewing it in more detail. The Death Cross In our previous edition we dove into a technical topic that can sound complicated as well as ominous which is known as the death cross. This “cross” is not complicated in that it merely takes the average price of the previous 50 and 200 days and overlays them onto a price chart. With this, when the 50 day line crosses down through the 200 day line a death cross is signaled. As for it being ominous; some view it as such but we do not include ourselves in that camp. Simply, there have been a wealth of death crosses that did not materialize into significant trouble and yet, to be fair, there also have been plenty that have signaled notable issues to come. For our part the death cross offers an important information piece similar to a Yield sign on a roadway. It does not tell oncoming drivers to stop but rather offers to proceed with caution – eyes wide open if you will. This is how we look at this important signal. Be careful on this road there may be issues! A True Bear Market In our previous edition we also shared how a true bear market (down market) takes place not only in price but also in time. In the previous couple of decades we have experienced two such market environments. Our focus was on the longer 2000-2003 experience in light of not only its price damage but also its long duration in time. Taking the above topics together – death crosses and the 2000-2003 bear market (with an undertow that nothing goes up or down in a straight line) – we feel it may be instructive to place them all together via a historical examination. Importantly, we do not share this as a prediction of what we think is to come but rather as a view of what can happen when death crosses suggest larger issues are in front of us. Simply, keep eyes wide open i.e. the road sign offering to Yield.
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The above chart encompasses late 1999 on through to early 2003 for the NASDAQ 100 Index to represent the stock market. The solid black line emphasizes the long-term down trend the stock market was in during this timeframe. The aforementioned death cross is depicted with the blue and red lines noting the blue line (50) is below the red line (200) for the vast majority of this timeline. The overriding message is even within a long duration downturn we can fully expect to see ebbing and flowing of price behavior. Noting this, we have included numerous red up arrows highlighting times when it appeared all would be good again only to see yet another downturn. A true bear market indeed. In fact, one of the hallmarks of a bear market is “the bear market rally” which historically occurs very fast and violent to the upside. This typically is an out-of-nowhere tremendous upturn whereby participants can be easily duped into thinking the skies have cleared only to then find themselves in a “bear market trap” as it is known. Current Day We share all of the above through the lens of our current day. We are quite curious if we have begun a longer term bear market. Again, this is a curiosity not a prediction. The death cross and other trading behaviors have sparked this curiosity. When participating in markets it is important to have a sense of what type of market environment is unfolding. As depicted above, long-term bear markets can be brutal. These types of bear markets always find a way to go lower and worse, in light of their inherent fast upturns, dupe many into believing all is good again. This then sets them up for even more losses with more damage ensuing time and again as the bear timeline unfolds. The antidote to this type of a storyline is a new high in price. If we can see markets put in a new high, offering a new uptrend has begun, then this would negate the bear market question we are contemplating in light of the price damage the stock market has incurred here in 2022. At this stage, similar to the Yield sign, we have no concrete takeaways other than to keep eyes (and mind) wide open to the potential that we may have issues in front of us. Betting the farm in either direction may be dangerous at this stage. I wish you well…
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.