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Stock Market Digestion

CAMS Weekly View from the Corner – Week ending 4/27/2018

April 30, 2018

In recent months we have sporadically peered into what we think of as a near-perfect volatility recipe for markets generally and the stock market specifically.

The brief of said volatility recipe is simply that the economy remains solid while profits are growing nicely.  The offset of this is that the stock market is valued at or near historic highs (depending on the value measure used) while inflation continues to chirp and interest rates trend upward.

Add to this intermittent geo-political question marks and it all equates to a general backdrop of uncertainty.  Historically, markets do not like uncertainty, especially highly valued markets.  This all lends itself to a resulting volatility experience for the stock market in particular.

Click for larger view:

Over the previous year-plus the stock market, as reflected by the S&P 500 above, has been on a solid uptrend.  The uptrend was halted in late January and since then we have seen a sideways period unfold, albeit a volatile one.

In chart analysis this is known as a trading range which is not uncommon of any market that has experienced a previous strong trend.  “Digestion” is a phrase that is often used in chart analysis whereby it is said the market is “digesting it previous strong trend” and with this potentially building a base for a continued trend.

The operative word is “potentially” and this is where vigilance is needed to see just what direction it is that the stock market wants to take.  That is, re-establish its prior uptrend or actually begin a new trend downward.

There is a wealth of analytical tools to help in getting a sense of the unknown direction.  Under the banner of keeping it simple for this View, the S&P 500 needs to hold above the solid red line.

This line represents the 200 day moving average of the S&P 500 which is simply the average of the previous 200 days of prices on a rolling basis.  In chart analysis, remaining north of this line is a well recognized measure as to whether a stock or market is performing well.

In the picture depicted above, the S&P 500’s 200 day moving average is also acting as a notable uptrend line.  If broken, this would suggest said uptrend is in real jeopardy.

While our volatility recipe offers no certain direction of trend it does help us understand what can be unnerving trading in the stock market on a weekly if not daily basis.

Volatility in-and-of-itself does not bring trends to an end; it certainly offers a stormy digestion period at a minimum.  This has been the case as shown above in recent months.  Now we dig in to truly see where this trend wants to go as neither direction is assured.  Keeping an open mind to both potential directions is essential at this juncture.

I wish you well…

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio


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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