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Seismic Shift or Knee-Jerk Reaction?

Weekly Views from the Corner – Week Ending November 13, 2016

If you have read these View’s for any amount of time you may appreciate our focus on sector leadership within the S&P 500 via our SPX9 system.  First, to identify if there is any leadership at all and second, the “quality” of said leadership if it is found.  Quality from the perspective if it is offensive/risk oriented sector leadership, defensive/cautious sector leadership – or a mix of the two.  Offensive leadership is market-speak pointing to a collective view that the economy is humming along or is projected to do so with the market’s forward looking focus.

For the bulk of 2016 sector leadership had been absent of any real offensive/risk oriented sectors while defensive/cautious sectors dominated the ranks.  Mid-summer this changed and sector rotation – whereby offensive leadership rose while defensive areas faded – came to fruition but this ended as quick as it began.  This left the stock market wilting gradually lower as we headed toward a leaderless structure.  That’s where we left off last week coupled with our SPX9 system’s overall H&UP ratings tallying in the dangerous sub-20% range offering a hyper-vigilant concern for the market.

Fast forward a week later and add a post-election view to this structure and we see something dramatically different.  Forget about headlines that the stock market went higher as this rarely offers insight into the health and vitality of the market rise.  Structure does.  The structural sector shift within the S&P 500, along with the inter-market changes of various investment categories have been eye-catching.

On an inter-market basis yields have risen tremendously across the interest rate spectrum via the markets re-pricing of you-name-it bond market vehicles.  This speaks to a sudden expectation that faster growth and higher inflation may be on the horizon.  The U.S. dollar has risen noticeably as well in the currency markets.  With this the gold space has taken a downturn with the gold mining companies (sensitive to the expected forward price of gold) having put in negative returns as well.

In the broad stock market landscape Micro and Small sized company indices have exploded higher to the tune of 12% and 10% respectively, post-election.  These led the charge as broad categories for the stock market’s advance.  The significance is with their smaller company size they have far more sensitivity to the domestic economic landscape.  Within the S&P 500, sector leadership came full bore with the offensive sectors of the Industrials and Financials as dominate performers.  The Industrial sector rocketed to a new all-time high while 7 of its 16 sub-industries jumped to either near or above their own all-time highs.

With SPX9 showing such sector strength we now have a vibrant sector leadership backdrop with Industrials, Financials, and to a lesser extent Technology as confirmed leaders.  The defensive/cautious sectors have weakened further post-election.  In addition, SPX9’s overall H&UP tally went from a very concerning 17% level to respectable 52%.  While the 52% in-and-of-itself is not gangbuster vibrancy, the 3 day jump to that level from 17% certainly is.

Invitation To A Psychological Stance

I ended our previous View with the opinion that we should see quite an interesting year-end run.  We can now double underline that view.  As a market participant myself, as well as an investment strategist, I invite you to drop any and all biases based upon certain belief systems you may hold relative to political structures and general emotions experienced as a result (in any direction) as it pertains to investment posturing.  If there was ever a time to be nimble and stay flexible that time is now.

What you believe should happen based on election results or maybe even want to happen (in any direction) in a hardened psychological view can very well lead you down some difficult roads with your investment results.  Via the market’s initial response, from a structural view as shared above, there is a significant shift that has taken place in three short days.  Certainly three days does not make a trend (so don’t get carried away with this) but the magnitude of the structural shift is so notable that it begs the question if we may be embarking on an economic backdrop that we haven’t seen in a long while.

Through the lens of market-speak if you will, via the initial results above, it seems the markets in general believe that to be the case.  The question is, with so few trading days post-election, is this a knee-jerk reaction or a seismic shift in overall market postures that foretell a stronger economic landscape.  More time will certainly help in answering that question.

As always, be nimble – stay flexible.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

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.

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