Our Caution Flag Continues

CAMS Weekly View from the Corner – Week ending 9/18/2020

September 21, 2020

Over the past few months we have intermittently shared the behavior of the S&P 500 index by looking at two versions of it – the weighted version and the equal weighted version.  In recent weeks we have focused on these exclusively.
 
The significance of our focus has been to succinctly display how the stock market had become what we have labeled as a “stock picker’s market” for a large part of 2020.  This type of label offers a market that is not operating on all cylinders but rather select companies were offering upside trends.  In some cases – outlandish upside spikes.
 
When these behaviors are displayed within the stock market it can create an illusionary healthy overall market when in fact it is struggling to find its footing.  The playbook in such an environment is to get more concentrated in portfolio allocation being the broad overall market is not operating well. 
 
Simultaneous to the more concentrated approach is to watch for any signs the market may want to broaden out and get healthier or conversely, to observe if the stock picker’s market is running out of momentum there-by suggesting caution.
 
In late August we offered a Weekly View that shared how it appeared the stock market was setting up to broaden out and get healthier.  This occurred – for a day – and then failed miserably the next day as well as follow-on days. 
 
That raised our caution flag immediately as the attempted broadening market landscape blatantly failed.  Blatant failures at an attempt to broaden, i.e. get healthier, are rarely a good sign.
 
Below we add to our recent focus of the weighted and equal weighted S&P 500 observations by adding the S&P 600 stock index.  The S&P 600 is comprised of 600 small size companies.
 
Stock market performance for small size companies has had a particularly challenging year in 2020 which adds to our on-going observations in recent weeks that the stock market as a whole has been unimpressive. 

Click For Larger View:  http://schrts.co/AKTEhpts

The above chart reflects the year-to-date performance of the weighted S&P 500 – top black line – and the smaller size company index – the S&P 600 – which is identified by the lower blue line. 
 
Looking at the behavior of the two indices above for 2020 speaks to a notably different stock market experience.  Hence, our stock picker’s market. 
 
Via the circle highlighting the two at the beginning of 2020 and near-term weeks following the highlighted area we can see how they were displaying the same type of behaviors performance-wise.  As the cliff-dive turned into rebound these performance behaviors began to diverge.
 
With the onset of the summer months – when the stock picker’s market really kicked into gear – we see two different stock markets displayed.  As the S&P 600 (lower blue line) struggled for trend the weighted S&P 500 trended nearly without pause. 
 
Through it all the S&P 600 index remained notably negative in its year-to-date performance while the S&P 500 index went solidly positive year-to-date.  The diverging behaviors offered poor overall market health.
 
In early September, with our aforementioned “blatant failure at broadening” attempt by the stock market as a whole – both became synchronized with downside trend.
 
All told, the above descriptions coupled with the highlighted indices within the chart offers a cautionary market backdrop.  These types of behaviors are not customary for a market that is healthy and vibrant.
 
With this, we continue to waive the caution flag until we see better evidence to the contrary.
 
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.