Volatility Precedes a Change in Trend

CAMS Weekly View from the Corner – Week ending 12/11/2020

December 14, 2020

In recent weeks we have been squarely focused on sharing the behavior of the stock market via an S&P 500 Blue Line chart that we created to clarify if it is trending.  In addition to this, we have also offered a peek into a tip of the sword type of employment indicator known as Initial Weekly Unemployment Insurance Claims.
 
The general gist, employment wise, was to use this indicator in terms of its own trend being it had become trendless of late. 
 
More specifically, at the time of our sharing this indicator a couple of editions ago, the Initial Claims were in the upper seven hundred thousand levels.  They then dropped in follow-on releases to the low seven-hundred thousand levels.  This past Thursday they jettisoned up to the middle eight hundred thousand level.
 
The point of our initial sharing of this employment indicator was that a new uptrend, if occurs, will be a notable negative relative to the economic backdrop and will most likely be reflected in market trading to the downside.
 
We have gyrations in recent weeks but no trend development yet.  The uptick noted above from this past week is not the direction we want to see though.
 
Stock Market
 
There is an old adage in markets that volatility often precedes a change in trend. 
 
Being we are hyper-vigilant on the behavior of this market trend we are taking note of everything relevant.
 
As shared in our previous edition, our S&P 500 Blue Line chart did show a break higher suggesting a new upward trend had begun.  Simultaneously, we shared caution in terms of the lack of real strength in its break upward.
 
Since then we have seen this trend attempt wilt on the vine a bit which raises our eyebrows.  This has occurred with a simultaneous minor rumbling from some volatility measures.
 
Placing all of the above into the proverbial mixing bowl; are we seeing some disintegration in the employment landscape that market participants were not counting on and with this, some limping in trend attempt out of concern that the economic backdrop is not trending upward.
 
Adding to the bowl if you will is perhaps a realization from collective market participants that yet another round of printed money may not be injected into the economic landscape soon. 
 
Absent self-sustaining economic trend coupled with no new onslaught of printed money soon may be offering some caution from participants which is showing up a bit in volatility measures.  If volatility picks up notably then the trusted old adage may be in play with downside price action from the stock market.
 
This is an early observation with a forward looking thought process. 
 
As we stand currently, the stock market is holding its break out level (north of our “blue line”) but is limping in trend.  This can change in a hurry hence our vigilance on watching anything that may offer insight to where collective participants will want to take this price action.
 
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.

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