Special Risk Capital Management LLC

At (or Near) The Point . . . September 26, 2020

Sept. 25, 2020 – Well my feeling is that we’re at or near an inflection point. On the chart below you can see that prices (near term) are bouncing up and down with no clear trend. Yes, Friday was a very positive day that closed above the downward sloping channel (purple lines) but we need far more confirmation. A positive break above the 11300 level would be bullish for going higher (green arrow) but also a break below 10412 would be bearish (red arrow). And of course, we could just continue to bounce back and forth between the two levels until after the election (in yellow). Is this a pause in a down trend or re-accumulation? Watch volume and a broadening leadership within the market.

The leadership lately has been “all Tech, all the time” and that’s not a recipe for a strong continuing market. Besides there are many economic headwinds to overcome and right now they are being ignored (IMHO). Here’s one thing that concerns me: in general, strength is being shown in only a few stocks, and these are large cap Tech stocks that have a major effect on the indexes.

The pie chart above shows the number of industry sectors (48 in total) and their 5 day % return on price. 44 of them had a negative week (shades of red). One week does not a trend make, but if this continues . . . . well, not good. Narrow leadership.

Last point is the valuation of this market. The chart below shows the P/E (price/earnings) ratio from a historic perspective. i.e. “Are stocks cheap or expensive?”

The yellow line is roughly where the classical point is between expensive and cheap (about a P/E ratio of 23). So looking at stocks in the S&P 500 index, the current evaluation is not “cheap”. Not to say that over valuation can’t continue, but we are in that “expensive” region.

My thinking is that we’ll hover around these levels until after the election . . and then we’ll see (or maybe after the first debate on Tuesday?). Until then I’m very cautious and only dipping my toes in certain areas and only in small amounts.

Sector Strength table –

I note a number of defensive sectors toward the top.

Have a good week. ……. Tom …….