Special Risk Capital Management LLC

Narrowing Market Leadership August 22, 2020

Aug. 21, 2020 – Last week my writing theme was what is fueling this market (especially in the U.S.). The bottom line was & is cheap and available money (especially for big banks) and optimism for a Corona virus vaccine (and soon).

The logic is that the world in general is either in recession or an economic depression. Valuations of common stocks are high (as measured by the price/earnings ratio) and the guidance going forward is mixed at best. Since the U.S. economy is roughly 70% based on consumer spending, what will stimulate corporate earnings in the immediate future? Back to the vaccine idea. So this market is overvalued but very hopeful. That sets the stage for disappointment IF things don’t work out. That could mean a slow rollout of a vaccine (distribution worldwide) and a slow economic recovery.

I note in the chart above that Sentiment has turned negative as well as Price Strength. Another observation is the very narrow bars over the past 7 days. This being an indication that buying and selling are about equal. Make no mistake, the big guys sell into a strong market when they have buyers. Is this the beginning of a correction? No one knows for sure but I did come up with a new way to look at market strength and overall breath.

The pie chart below shows the percent of stocks in the S&P 1500 Index that had a price movement in 3 categories over the past 5 days (the last week). As a reference I note that the index itself showed a increase of 0.5%.

Of interest is that over 76% of these stocks did not participate in the move and only 9% had a significant move. My conclusion is that this is (again) a time for caution. Let’s look at sector strength to see what ares are moving the market.

We see the Technology sectors well represented. Not surprising that they are typically the ones least affected by this virus economy. I am surprised about Consumer Goods & Services though. Keep a close eye on these sectors for weakness; the “canaries in the coal mine”.

That’s about it for now. I have throttled back just a little on Friday, but keeping an eye on the exit door. Have a good week. …. Tom ….

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.