Is This Sector Offering Forward Guidance?

CAMS Weekly View from the Corner – Week ending 1/22/21

January 25, 2021

In the latter part of the fall season and on through the end of 2020 we consistently shared a view of the stock market via the S&P 500 Index.  On that Index we overlaid a blue horizontal line which identified previous highs that were acting as resistance to trending higher.
 
As we chronicled stock market behavior via what we called the “blue line chart” we noted it did break higher and then continued to observe the tepid behavior of the new upward trend.  It was anything but strong and filled with momentum.  Rather, it was and continues to be tepid. 
 
To be certain, the stock market landscape generally is constructive with pockets of strength exhibited but the overall landscape remains – here’s that word again – tepid.
 
While participating in the pockets of strength that have arisen we simultaneously remain vigilant on observing the overall landscape while searching for any signs that activity may want to heat up either to the upside or the downside.
 
We draw your attention to a sector of the stock market whose behavior offers potential of downside trend.  The sector is known as Consumer Staples.

Click For Larger View:  https://schrts.co/jnruJchR


Historically speaking, this sector is often viewed as a defensive sector whereby participants gravitate toward it if the economic backdrop or stock market itself is questionable.
 
Internally we turned that around a bit last year with the upside down nature of 2020. 
 
It became a sector that was a canary for continued reopening of society as many of its components were also crushed with a locked down societal backdrop.  With this, rather than a defensive sector it became an offensive sector in light of the larger societal storyline.
 
Current day, per the chart above, we are seeing it beginning to trend downward.  The red line identifies the sideways price action and now the black line identifies the downward price trend attempt.
 
Is this sector reflecting our economic backdrop?  For example, this past Thursday we continue to see Initial Weekly Unemployment Insurance Claims posting north of nine hundred thousand per week. 
 
Those levels of Initial Claims are solidly in the “weak economy” bracket.  For historical perspective, in healthy economic backdrops Initial Claims are customarily below four hundred thousand and under three hundred thousand in strong economic backdrops.
 
Is the economic backdrop continuing to weaken while consensus is convinced nothing but better days are ahead with all the stimulus, vaccines and expected reopening of society?
 
Furthermore, are Consumer Staples, as depicted above, offering forward guidance for the stock market as a whole relative to price performance?  Staples have been negative year-to-date thus far in 2020. 
 
Frankly, that is a bit strange when overlaying the consensus narrative of expectations of things to come economically speaking.
 
At this stage we share this not as a prediction of things to come but rather as an observation of an area within the stock market that doesn’t quite add up.  Are collective market participants offering important information here? 
 
At this stage, these are questions that need more data to help fill them in accurately.  Currently, as a whole, the stock market remains constructive but chinks in its armor are appearing.
 
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.