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Keep it Simple – Watch the Red Line

Week Ending February 5, 2017

Since the start of 2017 our focus here in the Weekly View in regards to the stock market has been a watch for onset volatility.  For several weeks we saw the Dow Jones Industrial Average (DJIA) trading sideways in a tight formation that left it moving around in a mere 200-plus point range.  As shared in a recent View, this was some of the lowest volatility for the Dow that we had seen in the last twenty years.  This calm trading behavior is not abnormal as we typically see markets quiet down after significant moves to the degree the Dow displayed post-election.

The central question after any market move of significance, which then calms considerably, is whether the calmness represents a pause that refreshes which in turn leads to a continued upward trend, or if said pause is exhaustion for a time whereby the market in question turns lower.  This turning lower can be a simple correction or something more severe.

At times when the general market landscape is loaded with profound positives, as well as profound negatives as we are now, it helps to reduce the question of the markets’ trend to simplicity as much as possible.  For either scenario to unfold what we do know is either a higher high needs to be put in place for an uptrend scenario or a lower low for the correction/downturn scenario.  Currently, we have no trend as identified by the Dow’s behavior over the previous two months.  In addition, this can also be said for many areas of the market that were leading the charge higher post-election.


For a larger view click here: http://schrts.co/D76EHv

The above chart is excerpted and updated from our previous Weekly View.  It depicts the DJIA for the last year.  The upper right portion reflects the tight trading range it has been in since mid-December while the red line emphasizes how Dow 20,000 has acted as a significant ceiling.  As offered in our previous View, we had finally pierced through the red line only to see it pull below it this past week and then by late week move up through it again.  With this, the previous two weeks have begun to reflect an increase in volatility, or choppiness if you will, as we see the Dow’s daily prices begin to swing around more.

Important to the central point here of identifying the near-term trend, the Dow needs to remain above the red line at a minimum to reflect it has inherent strength.  In addition, in the name of posting a higher high and in so doing leaving in its wake a sound up trend, the Dow needs to exceed the high point of several days ago and will do so by achieving a 20,175 level.  If it does this and holds, it would be giving an additional signal of wanting to continue its post-election up trend.  Otherwise, if it continues to waffle around the red line this will speak to uncertainty and lack of conviction by market participants.

Lastly, speaking to the potential of a near-term correction, if the red line were to continue to represent a ceiling of which the Dow cannot penetrate through and hold for more than a couple of days, then concerns for a near-term correction would increase considerably.  As offered above, keep the market predictions simple by focusing on the red line and seeing whether the Dow can make a higher high offering continuation of the post-election up trend or whether it will continue a struggle at the red line offering concerns for a near-term correction.

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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