CAMS Weekly View from the Corner – Week ending 8/27/21
August 30, 2021
With Labor Day being the unofficial end of summer we offer our last edition of the summer season. Being we do not publish on holiday weekends next Monday will be ushering in the fall season – unofficially at least. For the bulk of the summer, broadly speaking, we have been sharing how markets have been trendless. The central theme that developed from the beginning of May was general dormancy with seemingly lots of price action. When the price action was upward it would find a way to stop at a previous high point while conversely when price action was lower it would find a way to stop at a previous low point. Through it all trading ranges developed all around markets. Through this we seen well recognized indices such as the Dow Jones Industrial Average post just over a 1% gain in the previous few months while the equal weighted S&P 500 also posted just over a 1% gain. A literal handful of very large well recognized technology stocks did put some trend on in the season and to the degree they were included in an index it performed better than the referenced indices above. With this, the weighted S&P 500 (whereby these large technology companies play a significant role in the direction of this index in light of their heavy representation within it) was able to increase just over 6%. When a handful of large technology stocks are the primary driver for returns in a mainstream index while other mainstream indices barely perform it does not speak to a broadly trending stock market structure. At the same time, this does not necessarily speak to a negative stock market backdrop. It simply speaks to the aforementioned trading ranges that have developed for the market as a whole. The general bond market did put on a consistent trend starting in early spring through most of the summer. In recent weeks though this market has become trendless and with this displaying uncertainty in its next direction. Dare we offer – trading range?
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Above is a one year chart of 30 year Treasury bonds on a yield basis. In light of their length to maturity they are quite sensitive to inflation concerns and the general economic backdrop. As the above yields (think interest rate) were trending down for the bulk of the spring and summer their prices were trending up. Bonds move inversely – yields down means prices up. With the above downtrend in yields this equates to market participants enthusiastically purchasing Treasury bonds at a time when inflation has been hitting multi-decade highs in some cases. This calls into question the prospect for on-going inflation to continue at high levels in light of long maturity Treasury bonds performing as they have. With this, to this point in time, they have been offering that price inflation as well as general economic strength will mellow out. Market participants are not infallible so the question remains if this will occur and with this will bond market participants change course and start pushing these yields higher realizing they have become too optimistic on their forward view of price inflation reducing to more acceptable levels. The verdict is still out on this. In the above chart we can see how current yield levels remains notably below the average of the previous 200 days (the solid red sloping line) which denotes a notable down trend. Through this we can read thus far bond participants remain serious about their forward inflation expectations and general taming of economic strength and yet the sideways action of late offers a question of whether they are reassessing this view. The bottom line of this is, yet again, which way will this trend from here? Per the chart above, clearly the solid downtrend has stopped for now with no clear uptrend in sight at this point. The fall season offers plenty of potential for market fireworks as these trading ranges will surely break at some point. No range last forever in any market. To the degree you are a market participant prepare for what has the makings of a very interesting fall season. Trends are begging to appear out of the numerous ranges that have developed throughout markets. The direction is the question as is always the case when ranges have solidly formed. 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.
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