Structurally Speaking the Stock Market is Building Strength

CAMS Weekly View from the Corner – Week ending 10/16/2020

October 19, 2020

Imagine you are observing the construction of a building all-the-while being a novice relative to the actual intricate details of constructing a well built structure.
 
The casual observer in you, upon seeing day after day that little is changing may conclude that the project, for some reason, is at a standstill.  This while the experienced engineer is sharing with coworkers how pleased he/she is with the excellent progress they are making and are ahead of schedule.
 
This basic analogy comes to mind when viewing the stock market of late.  While seemingly nothing is going on, with a deeper look there continues to be structural improvement that offers (does not guarantee) a healthy upturn is in waiting.  An improving structural market backdrop is often a precursor to an uptrend.
 
We emphasize a “healthy” upturn.  This in comparison to the stock picker’s market that we experienced in the spring and summer months whereby a relatively small number of stocks went on good runs and through their impact on marquee indices made the stock market appear stronger than it really was.
 
That was then and this is now and the two time-frames – structurally speaking – are quite different.
 
Below are two different charts that are speaking a similar language. 
 
Both participated if not led the way in the spring cliff-dive and both have struggled to put on notable strength for the bulk of the rebound until quite recently.
 
In addition, both are broad based with the first being the S&P 500 Weighted Index whereby all the companies have the same impact on the index performance.  The second is the S&P 600 Index which represents small size companies. 
 
The small guys have been particularly challenged as they cliff-dived and then have continued to remain in negative territory for 2020 as a whole.  Again, until recently as they have actually begun to show some leadership days and a resiliency to trend that has been out-of-character relative to their 2020 story-line.
 
All told, the two together represent large swaths of the market structure and both are offering solid trading characteristics.

Click for larger view: http://schrts.co/WGkxrUDp
Click for larger view:  http://schrts.co/EzzhBvez

In both charts the red horizontal line represents significant price areas where the indices were unable to attain and move through since late winter of 2020.  Both have put on some market leading strength in recent weeks which speaks to the stock market’s structural health and improvement of late.
 
Simply stated:  Something is going on here. 
 
Market participants seem to be persistent in their message of a much improving stock market deep inside it.  We have shared this in recent editions and the message continues to be enhanced rather than falling by the wayside.
 
Yes there is a historic election upon us and yes market participants are fully aware of this.  Through their collective pricing of assets it seems they are building the stock market structure to a launch point.  Strange – when viewed through collective expectations – but certainly true.
 
As we have chronicled over time, lady market has a long history of doing the opposite of what the collective view comes to believe as a certainty and it appears she is setting up for yet another surprise to an established collective view.
 
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.