A Breakout or a Drift?

CAMS Weekly View from the Corner – Week ending 12/4/2020

December 7, 2020

In recent editions we have intermittently shared the view of the S&P 500 Stock Index.  The central observation point was simply can this Index breakout to a true trend rather than meandering about at previous high levels.
 
We had shared multiple times in the fall season, which holds true to current day, the internal structure of the stock market has been very solid.  The importance of this is history offers such internal strength typically leads to new high trends.
 
This past week collective stock market participants have indeed pushed the S&P 500 to new highs in what can be called a new uptrend.  The question is, yet again, can it hold.  We have seen a previous attempt or two at breaking higher only to see those attempts quickly fail.
 
This time though the move upward is far more consistent and solid.  Previous attempts lasted for a day whereas we are now multiple days into this new uptrend.

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We continue to use the same “blue line” chart of the S&P 500 that we initially offered upon opening this topic a few weeks ago.  With this, we can see the developing story as price continued to work into the blue line (previous high levels where price could not penetrate and trend upward) only to fail.

In recent weeks though price behavior reflected far more determination to stand right up in the high area and resisted falling notably lower as had occurred in previous attempts.

While we now see a clear change in behavior with the uptrend in place we have to question the strength of this breakout.  We are not sure this is a breakout as much as it is a drifting higher process.

The significance is the forward view through the lens of history. 

That is, drifts higher in price do reflect an uptrend but the lack of notable strength in the trend, i.e. drifting higher, offers a degree of hesitancy in the advance.  More simply, it is as though market participants are saying, “yes we are trending this market upward but we are not real sure we want to be doing this.”

We offer this not as a prediction that this trend will end quickly but rather as a reflection of our hyper-vigilance in trend watch, especially at this time with endless questionable societal and economic backdrops.

What we do have currently is an undeniably strong internal market structure which is always the preferred scenario when the market overall begins a new uptrend.  This type of structure lends staying power to the move.

Looking forward, if this initial trend phase fails and ends up pulling back beneath the blue line it will be offering notable concerns that a correction lower rather than a trend higher is in the offing.  At this stage though, we watch with vigilance that a new uptrend has shown up and yet again, internal market strength had pointed the way for that to come to fruition.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

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.