Structural Strength – Weekly View from the Corner
Week Ending December 11, 2016
Structural strength is the operative phrase describing the stock market via our SPX9 system. The 9 sectors of the S&P 500 and how they perform offer a treasure-trove of guidance and information as to how collective market participants view the general landscape. As a long time market observer it is nearly stunning to witness the dramatic sea change that has occurred in such a short time – post election.
The immediate question we asked here in the Weekly View, post election, was whether the immediate reaction from overall markets was a knee-jerk or a seismic shift. With a few weeks past and the power of the various reactions it appears there is a seismic shift in place relative to market participants expectations of the near future economic landscape.
This is underlined when we recall how trend-less and lethargic the stock market in particular had been through the bulk of 2016. After it began the year with a significant downtrend only to retrace with a snap-back rally which then led into months of directionless movement. This directionless movement then went into weakness in latter summer and into the fall season as small sized companies in particular (the most economically sensitive) seen nearly 70% of their 2016 gains erased within several weeks leading into the election. All told, pre-election, we had notable weakness in the stock market while nearly zero sector leadership within the S&P 500 itself.
Compare and contrast the general story of 2016 to post election and it appears we are discussing not only two different timeframes, but rather two different eras. The aforementioned economically sensitive small sized companies have significantly led the charge higher. The U.S. Dollar Index is now near 15 year highs while Industrial Metals generally have moved notably higher. In addition, via our SPX9 system, sector leadership structure within the S&P 500 is extremely healthy with risk/offensive oriented sectors broadly leading the way higher.
We now have five key offensively oriented sectors in confirmed leadership rankings. Consumer Discretionary, Industrials, and Basic Materials have all achieved all-time new high levels while Technology and Financials have achieved multi-year new highs. This list of sector leadership is impressive but even more so when looked at in terms of the strength of their new high breakouts against the backdrop of their own trading history.
The stand-out question currently in light of the overwhelming strength of the last few weeks is whether we will see some pausing in markets or even retracements lower. Obviously no market goes straight up without an eventual pause or pullback even against the most bullish (real or expected) economic and policy backdrops.
The above noted strength does not necessarily offer a straight easy ride endlessly higher. The powerful moves though do offer an intriguing view from the markets that collectively they are expecting profound changes in the economic landscape. If changes do not materialize as expected then mere pauses or pullbacks will become something much more significant. At this time we can only identify the collective expectations of markets and look for evidence to the contrary the inherent expectations are not being met.
That’s a process of which will be pieced together as data points come over the next several weeks to months. We will be sharing much here in the Weekly View as 2017 unfolds. As for now, market structural strength is strong and has broadened even more over the last week pointing to tremendous expectations of an economic backdrop that we have not seen in some time.
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.