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Leaderless Market Structure Concerns Us


November 5, 2016

From a structural perspective the stock market has been and continues to be a mess.  Here in the Weekly View we have offered for months now how the SPX9 system has struggled to produce any sound and consistent leadership across the 9 sectors and 107 sub-industries.  Since the front part of summer this theme has been a constant.  There was an attempt at sector rotation whereby the long-standing defensive oriented sectors went by the wayside while offensively oriented sectors took the leadership baton.  We had shared that process as it was unfolding and also as it began to wane nearly as fast as it started.  That attempt at rotation has failed.  The significance is with that rotation it offered a peek at a structurally strong stock market that would have had the sector leadership characteristics to propel it on an upward trending trajectory.

In recent weeks we have been offering that sector leadership was down to one sector – Technology – and with this the market was dangerously close to going into the worst structural scenario – a leaderless market.  In our most recent View we offered that Technology itself was now a concern in light of its own structural breakdown.  This past trading week only added to those concerns as Technology was the poorest performing sector in SPX9.  We now stand with zero sectors in SPX9 that can be considered leaders – hence a leaderless structure.

In our previous View we also offered a significant concern for the stock market in light of the relentlessness of the overall H&UP levels within SPX9 magnetizing to the low 20% levels.  The concern was with this propensity we would go below 20% which would trigger a historical setup of a leaderless market that ultimately goes lower before any significant new trend attempt can begin.  With this past week of trading we now see the overall H&UP levels of SPX9 at 17%.  Unless we see some notable improvement quickly in this structural setup it offers a backdrop for the stock market to continue with its recent struggles.

For perspective on the S&P 500, in mid-summer the S&P was up nearly 7% for 2016 while currently it is up around 2%.  This is a 5% drawdown as the above rotation theme came and went.  If you would have invested in the S&P in mid-summer that investment would currently be negative by 5% – a notable drawdown.  At this point with a leaderless structure from a sector perspective the focal point is to watch closely whether the stock market can hold its slim gains into year-end.

A Personal View

For my part I have been quite interested in the general lethargy of investors at large over the last few months while the above challenges have unfolded.  I have heard a range of feelings about the stock market from it is doing well and fully invested is the appropriate posture, to it is up and holding its own.

This general perception relative to the reality of continued deterioration and a 5% drawdown from mid-summer doesn’t square.  This elicits the timeless human story of perceptions in general versus underlying true realities.  I cannot remember the number of times I’ve heard, “where else are you going to put your money?”  My typical reply has been the long-standing big picture story of investing which is there are times where your focus should be the return ON your capital and there are times your focus should be the return OF your capital.

With the above in mind we have been cautious throughout and we continue to employ caution.  Leaderless market structures can get unruly in a hurry.  This is not a prediction of near-term market reactions as much as it is an explicit respect of the danger leaderless market structures present.  With this, hyper-vigilance is our current mantra as we round out this year of 2016.  It should be quite an interesting year-end run.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

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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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