Stock Market and Account Update

Jan 3, 2022

 

Major market indexes advanced strongly last year, but that does not tell the whole story. Not even close.

Historically, sustainable market advances characteristically exhibit strong market breadth (meaning there is participation from most stocks) and a risk-on environment.

That is the opposite of what we experienced last year and is a warning sign for 2022 unless conditions improve markedly.

Mid, Small, And Micro Cap Indexes

 

All Underperform

 

When the stock market and economic conditions are positive the majority of stocks perform well. As a result, to confirm that an advance in the stock market is sustainable you want to see all market capitalization indexes advancing.

Below is a chart of the S&P 500 Index, Mid-Cap Index, Small-Cap Index, and Micro-Cap Index. The red line in each chart is that indexes 200-day moving average.

While the S&P 500 has advanced strongly and is comfortably above its 200-day moving average, smaller market capitalization indexes have not done well.

The Mid Cap index has consolidated since May and is sitting slightly above its 200-day moving average. This index has gone virtually nowhere since April.

Small Caps look worse. This index has fallen below its 200-day moving average and now is at about the same level it hit back in February.

And worse yet is the Micro Cap index decisively breaking below its moving average and below the highs of February.

Keep in mind that the S&P 500 is capitalization-weighted. This means the stocks with a higher market cap will receive a higher weighting in the index and thus more heavily impact performance.

The S&P 500 has advanced on the backs of a small group of large-capitalization stocks. This is a warning sign that continues to plague this market.

 

 

Lagging Sectors and Industry Groups

 

Now, let’s look at some very important sectors and industry groups. It is hard to imagine a sustainable stock market advance without the participation of key groups such as the ones charted below.

In the top panel is the S&P 500 and in the panels underneath are sectors/industry groups that are dependent on a healthy economy and thus their lack of participation should be viewed as a warning sign that the market is not on firm footing.

They have all consolidated sideways since about April/May of last year. This is not indicative of a strong stock market.

 

 

Defensive Sectors Outperform

 

What has done well over the past year? Defensive (risk-off) sectors. Namely, consumer staples, utilities, REIT’s and healthcare. All of which are charted below.

Good performance in defensive sectors would not be a concern if it was accompanied by strong performance in both risk-on sectors and economically sensitive sectors, but that is not what is occurring.

The outperformance of defensive sectors over the aforementioned sectors and industry groups is indicative of investors’ lack of confidence in market and/or economic conditions.

 

The Bottom Line

 

Market breadth is poor, defensive sectors are outperforming and major sectors/industry groups that are dependent on a healthy economy are not confirming the market’s advance.

Additionally, stocks are severely overvalued and extended, the Fed is going to be removing liquidity this year and inflation is going to be a persistent problem.

Unless conditions change dramatically the stock market is at an increased risk of some type of correction.

 

Client Account Update

 

It is important to calibrate the risk you take in your investment accounts based on the underlying risk in the market. Currently, I view market conditions as being poor in the near term and even worse if we see any further market deterioration.

Because of elevated market risk, client accounts are allocated very conservatively. The bond portion of our portfolios are fully allocated and our equity exposure is light and hedged with index short positions.

As always, we monitor market conditions daily and look to protect our clients from losses during times of major stock and bond market stress.

 


If you have any questions, please feel free to send me an email.


Craig Thompson, ChFC

https://assetsolutions.info/

Email: [email protected]

Phone: 619-709-0066

Asset Solutions Advisory Services, Inc. is a Fee-Only Registered Investment Advisor specializing in helping the needs of retirees, those nearing retirement, and other investors with similar investment goals.

We are an “active” money manager that looks to generate steady long-term returns, while protecting clients from large losses during major market corrections.


Asset Solutions may discuss and display, charts, graphs, formulas which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions. Most data and charts are provided by www.stockcharts.com.

Asset Solutions is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

All charts provided by: StockCharts.com

Subscribe To Our Newsletter

Join our mailing list to receive the latest news and updates from our team.

You have Successfully Subscribed!

Subscribe To Our Cryptocurrency Newsletter

Join our Cryptocurrency mailing list to receive the latest news and updates from our team.

You have Successfully Subscribed!