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Watching Leadership Like a Perched Hawk

CAMS Weekly Views from the Corner – Week Ending 7/28/2017

Prior to June 9th the clear leadership space had been Technology and then on that date a notable drawdown suddenly cast doubt on its ability to continue to lead markets higher.  Underneath the Technology leadership, at that time, was a concern of the outsized performance by a small number of companies that was providing the bulk of the results for said leadership.

The concern was historically when we see such narrow outsized leadership it invites sudden and unexpected setbacks which is what we experienced on June 9th.

Importantly, since that date Technology has dusted itself off and quickly moved back to the previous high area offering an intriguing observation if this space is ready to continue with its leadership run.  As we stand here today it is too early to tell in light of another notable setback for this space this past Thursday, July 27th.

To be clear, there has not been any significant damage at this stage for Technology.  With this though, Thursday’s drawdown does place a cloud over the space until and/or if it can move to higher highs whereby it would solidly be continuing to lead the way.

Broadening out our leadership watch we have witnessed a near immediate hand-off attempt on the aforementioned June 9th date from Technology to the Dow Industrials, Transports, and small sized companies generally.

The concern has been the inability of these leadership attempts to really get moving, in particular, the Transports (which have turned notably south) and the small size companies.  The Dow Industrials have continued higher but out of the 30 Dow components only 9 (paltry 30%) grade out with leadership traits.

Leadership Obsession?

Full disclosure, since June 9th we have gone full on obsessed with observing leadership and whether there would be a baton hand-off to other areas or if Technology would continue its way and perhaps be joined by other areas which would be the most constructive scenario.  Our obsession is born from history in that if the market finds itself in a leaderless structure we know overall stock market setbacks can occur quicker than most expect.

For my part I continue to ponder the question of the next five percent.  Will the next five percent move be up or down thereby giving full year gains in the 15% range or in the 5% range?  When viewed through this lens the next five percent direction paints a significant difference in returns for the year.  Being ahead of this is our objective and we know leadership, or the lack thereof, will offer significant help in determining this near future direction.  We will continue to share as we observe. I wish you well…

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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