October 29, 2016
From a structural perspective, the stock market via our 9 sector and 107 sub-industry analytics continue to get more concerning. From a sector perspective within our SPX9 system, we now have 8 of the 9 sectors rating as unhealthy. Equally concerning, most are far from registering leadership characteristics, let alone actual leadership rankings. This leaves the one sector – Technology – as the on-going stand-alone leader from a sector perspective. Within this leading sector, its own structural health has deteriorated to the point of being notable. At this stage Technology is constructive but is beginning to look vulnerable to a near-term pullback.
SPX9’s overall H&UP ratings have dropped right back down to the concerning level of two weeks ago which is 23%. In a recent Weekly View it was shared that this low 20% reading, and the propensity of the S&P 500 to return to these levels offers significant concern. This most recent week-ending period only adds to said concerns. As we currently stand it is highly improbable that we will see new highs that can actually trend higher near-term. For the S&P 500 to do so while 8 of the 9 sectors struggle in various forms is a tall order. Currently, the primary concern is near-term weakness per this on-going structural struggle.
Adding to the above is an old friend that has not been shared in the Weekly View for some time now. The Volatility Index, simply called “The VIX” which is more popularly known as a fear gauge for the stock market. It can be viewed with this link: http://schrts.co/fV642u
Similar to the propensity of the S&P 500 to continue returning to the low 20% H&UP levels within SPX9, the VIX has had its own propensity to rise back to its 200 day average (red line) since the end of the summer. While the VIX chart itself has been quite unstable, importantly, it has continued to put in a series of higher lows since early August. Higher lows coupled with a continued magnetism toward its 200 day average offers building fear within the stock market. If the VIX holds this 200 day line for more than a couple of days, unlike prior instances since early September, near-term concerns offered through the lens of our SPX9 system will be added to significantly.
To underline the importance of the above concerns, I will push back until next week’s View some updated economic data that we have intermittently followed here in 2016. At this time, in light of said concerns I believe our focus as market participants and/or strategists should be locked on the deterioration within the stock market and near-term implications. We are teetering closer to a pullback that the stock market has been flirting with since mid-summer. This is not to suggest an epic drawdown is in front of us but rather focused attention to a possible notable pullback is in order. To stave off this teetering yet again, as the market has done on recent occasions, we need to see significant structural improvement very soon. Stay nimble – be flexible!
I wish you well…….
Ken Reinhart
Director, Market Research & Portfolio Analysis
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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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