CAMS Weekly View from the Corner – Week ending 3/18/2022
March 21, 2022
For the bulk of this past week the stock market put in some much needed stabilizing trading behavior. A week ago, with our week-ending structural analysis of the stock market, we were seeing forward indicators blinking red suggesting a potential terrible market backdrop in the immediate future. Monday of last week continued with another very poor trading day which added to said red indicators. Then, Tuesday through Friday the skies lifted and all is good again. Or is it? With this, for this edition, our focus will be to briefly share a couple of trading characteristics as viewed through market behavior to determine, as best we can in the moment, whether we have and are experiencing a basic (albeit harsh) stock market correction which is attempting to end or if we have already begun and are currently experiencing a true bear market. “A true bear market” is an operative phrase in that it offers a market backdrop whereby it does not just go down in price by a lot (pick your negative percentage pain threshold) but also stays with us for a long period of time. This unfolds in time to the point where people get worn out with the false dawns coupled with the amount of calendar months (or years) it takes for the story to completely unfold. Hence, a true bear market not only in price but in time such as the 2000-2003 experience – a bear in price and time that comes to mind. With the above, coupled with the stabilization in the stock market for the bulk of this past week, we share below just a couple of views of trading behavior in recent months to help get a sense of where we stand.
Click For Larger View: https://schrts.co/JbdaDMKf
Above is a one year chart of the NASDAQ 100 Index (100 largest companies traded on NASDAQ) which is considered a growth index and through this is expected to perform if the economic/market landscape is favorable. To underline how unfavorable market participants have viewed the general landscape this index has been a notable leader to the downside in 2022. The red trend line depicted highlights the downtrend of this Index for 2022. Characteristically speaking, if a market is to heal it needs to break its established down trend line with an upside move of which this Index has done. This is a positive checkmark if you will. Next we need to see this hold above the red downtrend line in upcoming days and near-term weeks. If it cannot that will be a notable negative and would then be labeled a “false breakout” and with this a checkmark in the bear market behavior column. We need some time to observe this important characteristic.
Click For Larger View: https://schrts.co/WaYxZfix
Above is the same Index with what looks like to be complicated lines included. They are not complicated – keep it simple. 50 day and 200 day moving average lines are included and noted with arrows. Each day a market ends with a closing price. Add up the previous 50 or 200 days and average them out and with this you have a 50 day or 200 day price average. With each new close you drop off the oldest and include the current day close and continue to average these out. As you do this you get what is called a “moving average” which then can be included in a price chart of whatever market you are observing. Continuing with simplicity – it only makes sense that if you have a healthy market on your hands said market should be able to trade above its average price of the previous 50 days and certainly should be above its average price of the previous 200 days. If not, you most likely have an unhealthy market on your hands or certainly is trying to become unhealthy. What then adds to the unhealthy view of a market is when it has been trading poorly for a period of time and with this its 50 day price average is trending downward (along with the market itself) to the point where the 50 day cuts down through the 200 day average. This is known as a “death cross” in analytical circles. In the above chart the cross is noted with the black circle. The Death Cross Sounds Ominous For our part we do not subscribe to the thought that a death cross equals assured further pain and downside in a market. Rather, in our view it gives us additional information that our market is certainly not healthy on a price and time basis. (It takes time for a death cross to unfold – that is an important ingredient.) At the same time, every true bear market experiences a death cross which holds in place on a trend basis for an extended period of time. Hence, it is important to take note of such a development at an early stage in order to assess what type of market we may be operating within. With this, we share the above (2nd chart) as an information piece as we look at the trading characteristics of a primary growth Index for the broad stock market. In coming weeks-to-months the death cross needs to be exceeded to the upside with this NASDAQ 100 pricing trend. If it cannot, then we get further evidence that this bear is looking to be around for awhile. At this juncture, we need more trading evidence to answer our outset question above as to whether this is the beginning of a true bear market or if we are simply experiencing a normal but yet harsh correction. If you assume either outcome you may be disappointed and that usually equals further erosion of your capital. Caution continues to be warranted. 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.
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