Is The Ole Cup N’ Handle Looking to Fulfill?

CAMS Weekly View from the Corner – Week ending 10/9/2020

October 12, 2020

Over the past several months we have had intermittent discussions internally on the topic of the 2020 election and what would surprise the most people in the meat of the fall season market-wise. 

Surprise the most people?

These types of discussions are more from a curiosity perspective rather than a steadfast market systems rule basis of guiding investments.  They are simply born from a long historical track record of markets having an uncanny ability at key and “obvious” market turning points to do the opposite of the expected behavior.  

In a larger sense markets have a way of seeing through the common wisdom of the day with the obsession of their forward thinking focus as that is the very essence of markets. 

It is not what is happening today that matters but rather what is coming down around the corner on the time line that is the focus.  That is the discounting aspect of markets – they bring forward to current day what they see out there in the near future and price assets accordingly in current time.

In the worst of times, if they see better times “out there” they will bid up stock prices for example.  Many times, in such an environment, the masses are baffled by this if not nearly angry at how they could do such a thing.  “Don’t they know we are in the middle of “x” crisis how dare they bid up stock prices in such a calamitous environment.”

Current Day

For the previous six weeks we have been sharing a caution flag within these Weekly Views.  The stock market had been on a run in the previous few months that we labeled a stock picker’s market because it wasn’t very structurally sound.  More simply, a small amount of stocks were carrying the torch and made the stock market appear stronger than it really was.

With this we had been focused on any signs for a broadening out of the stock market structure, i.e. a healthier market whereby more and more stocks would participate in actual up trends.  We seen this occur for a very short time late summer and then it failed immediately – hence our caution flag back then.

Since then – the beginning of September – the market has been unsure with attempts at notable weakness only to stem its fall and hold itself together. 

In our previous edition we shared a chart of the Dow Jones Industrial Average that had a cup with a handle chart pattern etched out.  The significance is such a pattern has forward positive implications.  A confirmation of this will occur with a break higher into new high prices.

This has not occurred yet but over the previous seven trading days or so the structure of the stock market has improved dramatically with each passing day.  This is not a stock picker’s market type of improvement but rather a near shocking structural improvement that is offering the best looking structure that we have seen in all of 2020 – what!?

Don’t they know there is a historic/contentious election right around the corner?

What is the market seeing “out there?”  Yet again, we ask with an insatiable curiosity.

We could hypothesize but that would take pages.  More importantly, what we know is what the stock market is telling us:  It is improving structurally at a rapid rate which often is a precursor to a notable breakout higher. 

Will the aforementioned Cup N’ Handle formation fulfill itself with an upside breakout? 

We offer zero guarantees but the structural message suggests it will.

Through the lens of market history wouldn’t that be about right in that it would certainly be surprising the most people relative to what most would expect while on the cusp of a historic election that offers a wealth of societal discontent seemingly no matter what the results end up being.

Or, will the societal discontent we are all seemingly fully expecting fail to materialize regardless of election outcomes? 

Is the market suggesting this? 

There are a lot of question marks with few direct answers. 

What we do know is the market is rapidly improving structurally at a time when the masses have been fully expecting the complete opposite.  That is notable dear investor and fellow citizen.

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.