The Ole Cup N’ Handle

CAMS Weekly View from the Corner – Week ending 10/2/2020

October 5, 2020

For the majority of 2020 our Weekly Views have been focused on various market dynamics, behaviors, trend attempts and inter-market relationships.
 
In a year where the economic storyline is chaotic at best we have tried to reduce a tremendous amount of inputs into something relatively succinct week after week that reduce the complexity down to something somewhat reasonable via various market based observations.
 
This week we continue this approach.
 
On September 3rd – a month ago – we raised our caution flag immediately.  For weeks – no make that months – we had been sharing how a “stock picker’s market” had developed which was a testament to the overall market’s lack of structural health.
 
With that backdrop our focus was watching for any indications that the stock market either wanted to fall over again or conversely, broaden out and get structurally healthy. 
 
Very late August and into very early September (yes a very short time frame) the stock market made an attempt at broadening out and then failed miserably, quite rapidly – not good – hence our immediate caution flag.
 
With this, over the past month now, the stock market has done nothing overall.  It went lower from our early September point but has been able to stem its attempt at a full-on down trend.
 
In narrative form we would describe stock market behavior for 2020 as a downturn followed by a chopping higher and then a questionable pullback/pause in the early fall season.
 
That narrative creates a well known chart pattern within the analytics community generally known as a cup with a handle.

Click for larger view:  http://schrts.co/qpAhjfSB

The historical significance of the depicted cup with a handle formation on the above Dow Jones Industrial Average chart is that is implies a positive forward view. 

The significance to our current day backdrop is with such a formation/narrative it does not come with a guarantee.  In fact, with such a general setup, if it does not fulfill to an upside trend (hence failing historical precedent) the downside failing aspect can become quite notable.

This takes us dead center to the heart of the matter stock marketwise current day: Something is coming and it may be a sizeable move that surprises many folks. 

A formation as depicted, especially when similar formations are being seen in many different areas of the stock market – from sectors to sub-industries down to individual stocks – offers an excellent setup for a notable move higher.  And as stated, if that move fails to materialize or attempts and then fails – a notable move lower should not surprise anyone.

To a casual observer this all may be stating the seemingly obvious right:  “so you are saying the stock market is either going to go up or down.”

As shared at the beginning of this edition, we attempt to succinctly share in each edition a summation of a tremendous amount of inputs.  For my part personally, in recent weeks in particular, I have sat shaking my head at the endless amount of negating data points deep inside the various markets. 

Seemingly every time a favorable indicator begins to develop there is a simultaneous negative indicator offsetting it.  Simply, the stock market and also various other markets together seemed to be very confused and yet they are holding up reasonably well.  Confusion and yet a simultaneous general constructiveness in the market landscape is very strange. 

Historically, markets and confusion equal downside not constructiveness.

That is the gist here – there is a tipping point coming and when she tips favorable enough to one side the move is on.  Our caution flag remains and simultaneously we are like a dog that is methodically searching about with a curiosity that something of interest is living in these woods.

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.