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Volatility Coming? – CAMS Weekly View from the Corner

Week Ending January 8, 2017

Through the lens of our SPX9 analytical system (dissection of S&P 500 through 9 sectors and 107 sub-industries)  we continue to see the constructive backdrop that developed post-election.  Of the nine sectors, we continue to have a full six of the offensive/risk oriented sectors in confirmed leadership status.  From a foundational strength perspective, through SPX9’s sector view, it would be hard to ask for much more.

In addition to the sound sector leadership, the overall H&UP results from the 107 sub-industries currently totals 75%.  This is a solid reading that simply states 75% of the 107 sub-industries are rated as being generally healthy to extremely strong.  Coupling the broad offensively oriented sector leadership with this strong 75% level speaks to the overall solid foundation of which the S&P 500 is currently reflecting.

Underlining this view through the perspective of recent history, we have not seen this type of broad leadership and solid inherent strength emanating from the S&P 500 since mid-2014.  More recently, post-election, we have seen the overall H&UP levels leap from the low 20% area up to the low 50% range, and from there (mid-November) increasing up to the current 75% reading.  Simply stated, the past 8 weeks have reflected a swift change in the structural health and vitality of the S&P 500.

Near-Term Thoughts           

We are seeing small rumblings within SPX9, as well as through various market interactions the emergence of some defensive characteristics developing within markets.  In conjunction with this, various leading sectors, sub-industries, and even individual stocks have been pausing in recent trading.  This in-and-of-itself is not a concern as much of this activity is normal behavior after significant moves have occurred over the course of weeks or even months.  What is catching our attention though is the minor, and yet noticeable improvement in defensive sectors and sub-industries while the recent pausing in leaders has occurred.  At this point this is worth noting but is not to a level of concern.

Adding to this, the behavior of an old friend here at the Weekly View, simply called the VIX and known in slang as the “fear gauge,” is also drawing our attention.  This is a volatility index which is confirming other observations of the low level of volatility that we have seen in the past couple of weeks.  Low levels of volatility often begets increased volatility and it seems the VIX is pointing to an expectation of this.  It now stands near the lowest levels we have seen in the last five and even ten years.  (A five year picture can be viewed with this link:

When the VIX is unwilling to move lower at historically low levels it often begins a move upward.  Simply stated, when the VIX trends upward volatility increases, and with this stocks generally tread water or go lower.  An increase in volatility along with an increase in defensiveness throughout markets (if continues further) would offer a near-term view of caution.  Here today we are only noting this and are paying close attention to these subtle developments.  If this develops further we will share accordingly.  For now, the stock market stands on solid foundational strength.

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.

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