CAMS Weekly View from the Corner – Week ending 1/28/2022
January 31, 2022
Day-in-and-day-out as market participants buy and sell within various markets they collectively reach an equilibrium point by the close of a trading day. This is simply known as the closing price. As this unfolds with each passing day and as the days turn to weeks and then to months their trading leaves tracks in the snow if you will. Looking back on their “trading tracks” we can see previous areas whereby they collectively agreed – think equilibrium was attained – whereby they closed prices at a point and clearly did not or could not trend them any higher or lower. When we see a section of time whereby they could not trend prices higher or lower this becomes known as price resistance and price support. Our focus in this edition is on the price support part of the process. Support succinctly offers an area whereby participants would not trend prices below a particular price level. As time unfolds these various levels on a price chart are identified as being important because previous trading had concluded X price point was steadfast. Hence, when these levels are broken to the downside they are viewed as significant because market participants changed their forward socioeconomic assessment. In the breaking of previous price support they are telling us they are adjusting negatively with their new forward outlook. (Remember, market pricing is always a reflection of collective participants’ forward view.)
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Above is a picture of the Russell 2000 Small Company Index. In recent editions we have included this index in our discussions. A primary reason is this area of the stock market has been early and quick to pointing out potential price issues for itself as well as the broader market. The red circled area pointed out a concerning issue back in November after it was finally (after many months of going sideways) breaking higher to trend only to then fail and fall quickly. Failed trend attempts are often cause for concern. To the point of today’s edition the red line identifies the next area of support that needs to hold. The black circled area highlights the previous area whereby market participants, after nearly a month of back-and-forth trading, collectively reached equilibrium as reflected within the circle. Having attempted to go lower while always failing to do so carved out an area of support of which this index then launched higher from at that time. Now, current day, this becomes the next level of observable support for this index. If this line cannot hold, not just in coming days but also in coming weeks, it then implies more downside which could be significant in light of the next expected area of support.
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Above is the same index but here we are taking a longer view via a weekly chart dating back beginning 2017. The red line identifies previous high points in 2018 and again in early 2020. At last by late 2020 market participants sent this on an upward trend easily eclipsing the black circled high points. Current day, if the red line level in our first chart cannot hold, the above (second chart) is an area of support to watch for. Importantly, if we go to the above red line area from current levels this will be an additional double digit downside move. In addition, if this would occur, as we have seen in recent weeks, this will not happen in isolation to this index but rather will also suggest more notable downside for the overall stock market. Speaking to our first chart above we need to see these current areas of this index hold in coming days and weeks. If it cannot hold, prepare for additional rough sledding. 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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