More Bear Tracks in the Market Landscape

CAMS Weekly View from the Corner – Week ending 6/26/2020

June 29, 2020

For the bulk of 2020 we have shared our observations on market behaviors with each passing week.  Our focus is to observe and extract any pieces of wisdom and foresight collective market participants are leaving in the wake of their market executions.

In recent weeks there have been pieces of evidence suggesting the stock market is not that impressive overall and building to a point that it may be offering forward looking concerns.

With this, today we will focus only on a chart and that is of the Dow Jones Industrial Average Index.  We do this to point to some of the bear tracks in the market landscape that have developed.

$INDU - 6.29.20

Click Link For Larger View:   http://schrts.co/UDEFeUdE

The link directly under the chart will offer a larger view which may be helpful with the various pieces of information identified.  The above encompasses the previous twelve months of trading.

The black circle identifies four trading days whereby the Dow was unable to continue moving upward.  The significance of this is what took place before those four trading days and then after as well.

Prior to those four days the Dow was solidly under its average price line of the previous 200 days.  Historically, a 200 day price average is a line in the sand between a healthy market (north of the line) and an unhealthy market (south of the line).  Said price line is identified by the red horizontal line.

The price then opened up much higher than the previous day’s close which is known as a “gap up” day.  This suggests strength in the market.  Rather than continuing higher the Dow did nothing for the aforementioned four days of trading.

On day five the Dow then reversed itself and gapped down below the red 200 day average price line.  This is rare but in just a few days of trading collective market participants gave us two notable messages of caution.

The first and most obvious was the Dow’s head fake above its 200 day average price line.

At the same time when participants gapped the price up and then just days later gapped it down they left in their wake what is known as a “bearish island reversal” setup on the chart.  This is where the two gaps leave an island on the chart which is identified by the black circle with the text box sharing the significance.

The rarity in this is that the island reversal coincides with a significant average price line failure (200 day as described) which by themselves are significant but placed together emphasizes their individual market message – which is caution if not concern.

Lastly, the bottom of the chart identifies, on a daily basis, the number of shares traded.  When the bars are sizeable and red it offers a negative as well.  A red bar means the amount of shares traded occurred on a down day.

The significance of the large red bars identified with blue ovals is the tremendous size of the red bars.  This reflects tremendous selling pressure and has occurred four times within this month of June.  In addition, all of these have taken place while the Dow has remained below its 200 day price average.

We realize the above dives into a lot of technical jargon and information.  Reducing this to simplicity we circle back to the beginning in that there have been pieces of evidence suggesting the stock market is not that impressive.  Some of those pieces are displayed above and offer caution if not concern.  The price behavior of the Dow, for example, continues to build a negative backdrop.

Don’t forget, just because the stock market went much lower earlier this year does not mean it cannot go lower again.  The overall trend is in question.  Negative price behaviors are beginning to stack up.  By all means, remember to invest relative to your risk tolerance.

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.