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Weekly Views from The Corner – June 20,2016

Congratulations to the 2016 NBA Champions – Cleveland Cavaliers!  The first championship for the franchise and the first major sports championship for the City of Cleveland since 1964!

“The U.S. treasury bond market, coupled with other global government bond markets’ strength can be viewed as a flight to safety.  Flight to safety trades, especially on a global basis, can pick up in earnest leading to an array of inter-market actions.  Historically, if this unfolds further, stocks will be hard pressed to perform being they are considered risk assets in the capital structure.”

CAMS Weekly Views from The Corner – June 12, 2016

The header quote above, excerpted from the previous offering of the Weekly View, walks us right to the focal point of a significant developing theme within the market landscape.  That is the tremendous flight to safety via the incredible upward moves in government bonds globally.  The U.S. Treasury bonds, in particular, are viewed as a safe harbor.  As an aside, these safe harbor trades can become quite “unsafe” when they go upward too far too fast.  That topic will have to be for another time so we can stay on our central theme of monitoring this flight to safety and any downstream impacts it may be pointing to for markets generally and stocks specifically.

We’ve had a year’s worth of sales and profit declines for the collective S&P 500 companies.  This against a backdrop of uncertain economic data coming in over the same time-frame.  This has given bonds a strong bid – which is to say they’ve done well – bouts of volatility notwithstanding.  Their healthy performance have left interest rates lower which has been a testament to the questionable economic landscape globally, as well as domestically.

The much weaker than expected monthly employment report for May, which was released on Friday June 3rd, sent the safe haven trade of government bonds into overdrive.  Simultaneously, stocks have gone lower – albeit marginally so.  The weak employment report was seemingly a bell ringer for the safe haven trade in the sense of its strong performance nearly screaming overall economic concerns.  Relative to stocks, this increased economic concern via the bond market message points to a necessary vigilance on their near-future performance.

Inside the S&P 500, via the SPX9 system, stocks have been pointing to their own broader concerns via their “safe haven” flow toward traditionally defensive sectors of Consumer Staples and Utilities.  This past week we seen Utilities continued to perform while Staples pulled back.  This now points to the most safe haven oriented sector within the S&P 500 leading the way by itself.

Conversely, two risk oriented sectors – Consumer Discretionary & Technology – have pointed lower and more challenged.  In addition, the very important Financial sector has continued its poor performance since the release of the employment report and is now rated “NN” within the SPX9 rating system – the system’s lowest rating.  (For further details on SPX9 ratings see notation at the bottom of page.)

Adding to the internal strife within the S&P 500, we see numerous notable sub-industries, spread across several sectors, that are, or have been posting “N to NN” ratings.  Here is a short representative list:  Auto’s, Home Construction, Retailers,  Financials generally, in particular Banks, Investment Services, Asset Managers as well as Technology generally with long standing Internet leadership pulling lower now.  Home improvement Retailers, which have been a steadfast leading sub-industry for a long while has become challenged.  Biotech within the Healthcare sector have been quite challenged.  Placed as a group, we see significant portions of overall economic activity represented in this short list suggesting more concern for the economy as a whole going forward.

All told, from an overall SPX9 ranking, we are now at 50% H&UP which is down from 57% the previous period and 64% the period before that.  For a reference point, on April 22nd, the date SPX9 first reflected sector and sub-group rotation – which was shared here as a central theme – the overall H&UP ratings equaled 71% – the peak for 2016.

Whether we look at the bond market specifically or the stock market generally, via its components within SPX9, markets are pointing to safe havens as a reflection of overall concern.  The “fear index” (VIX) as shared last week has also moved up strongly in the past week.  It is now above its 200 day moving average (red line) and holding.  (updated chart:  If it holds that line and spikes upward from here we can certainly trust stocks will be challenged further as depicted in the general list of notable sub-industries that have been experiencing difficulties to different degrees.

Markets are continuing to point toward caution and concern.  This is not meant to be an alarm as much as it is to be a windsock.  With this, market’s continue to offer caution is warranted with investment positioning in light of the various messages the markets themselves are sending.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

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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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