We Have Arrived at a Crucial Area for The Stock Market

CAMS Weekly View from the Corner – Week ending 5/1/2020

May 4, 2020

In the past three-plus weeks of trading the stock market has basically remained in place.  To be clear, it has certainly moved up, down and all around but to current day it remains in the same general range it had begun nearly a month ago.

When analyzing charts of any market or investment vehicle the process is known as Technical Analysis.  Within Technical Analysis a consolidation period of a previous notable move is quite common and is constructive.

Bulls and Bears within the overall category of collective market participants battle it out for trend dominance and in the wake of this battle consolidation forms on charts as a dominant trend is unable to emerge.

This essentially offers the pause before the next move and the trend of said move offers which category became more dominant – the bulls or the bears.

SPY - 5.4.20
Click For Larger View:  http://schrts.co/pFqtkeuT

The above chart displays the S&P 500 Index on a daily basis for the previous year of trading.  The blue circle highlights the time of the aforementioned consolidation period.

The red line above the blue circle represents the 200 day moving average for the S&P 500.  This is simply a continual line that updates daily for the average prices of the previous 200 days of trading.  The significance of this line is in Technical Analysis it is often viewed as a demarcation line for an investment that is healthy or unhealthy.

When an investment has traded below the identified red line for some time and then reverses upward toward it again a resulting consolidation is normal.

If the bulls can gain dominance and push this consolidation to an uptrend and on through the red line then that behavior will be signaling a major statement of the stock markets’ general health.  This in-turn will be offering a probability that it wants to erase – near term – the tremendous down turn it experienced over the previous couple of months.

Conversely, if this red line area wants to act as a notable resistance whereby stock prices cannot emerge north of it then stock market behavior will be offering we may be fully in the grasp of a true bear market.

In our previous Weekly View we shared that Bear Markets come in both the amount of downturn a market has experienced and in the amount of time a market can remain in bear market status.  As offered in that Weekly View; if the bear market takes on notable time duration then the masses begin to rethink their investment views and approaches.

We have not had such an experience for over a decade and with this the masses have become accustomed that notable downturns are quickly erased and nothing changes.

It is when notable downturns are met with notable time duration where all investors begin to look around and question if what they are doing is wise.  With this, volatility can pick up again and more downside issues can arise.

So in total, the above chart is crucial at this juncture!

Can we get above the red line near-term and continue as the masses have become accustomed?  If not, then expect behaviors to change.  With this, at an individual level, think proactively now what you are comfortable with rather than reacting later to something you may not have expected and were not prepared for.

We are watching close and will share accordingly.  This is a very important consolidation area for the stock market and its emerging trend will offer a strong message of its structural health or lack thereof.

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.