Stock Market and Account Update

Nov 1, 2021

In last month’s update, I wrote about how the S&P 500 broke decisively below its 50-day moving average after months of that average acting as support. This breakdown, in combination with poor market breadth that has plagued the market for months, had potential bearish implications.

However, over the past month, the index bounced at support and advanced above its 50-day moving average to new highs. This bullish market action and a slight improvement in market breadth has the stock market on more solid footing heading into what is historically a seasonally bullish period for stocks.

 

Market Breadth Improves But Still Not Great

 

The weakness in market breadth that we have seen over the past handful of months can be seen in a number of different charts. One that I highlighted last month is the Summation Index which has been falling as the stock market has advanced (negative divergence).

The decline in the Summation Index over the past 6 months is the result of breadth deterioration. A drop below zero is commonly looked at as a signal that market conditions have turned decidedly bearish.

The Summation Index also experienced a bounce last month that coincided with the advance in the stock market. That bounce pulled the summation index back above zero erasing the negative implications of the index residing in negative territory. However, there is still a negative divergence that continues to suggest that underneath the surface the market is grinding higher on the backs of fewer and fewer stocks.

The index is sitting right at the downtrend line. A strong move above that line would suggest a material improvement in market breadth especially if it is in combination with improvement in some of the other lagging sectors, industry groups, and asset classes. Some of which I will highlight below.

 

Another way to view market breadth is by looking at price charts of different asset classes, sectors, and industry groups. So, let’s do that.

Small Capitalization stocks continue to consolidate; however, they are at the top end of their consolidating range. A strong break above this area would be bullish for the broader stock market.

 

Copper and Transportation stocks are economically sensitive and thus viewed as an indicator of economic conditions.

Both of these indexes have broken above their respective downtrend lines; however, Copper has retraced most of that advance and is slightly above its 200-day moving average. A move below this average would hold bearish implications for economic conditions.

With Transportation stocks advancing and Copper potentially breaking down, I view this as a wash. But something to monitor.

 

The Bottom Line

 

The market seems to have clawed it’s way back from what looked like the initial phase of what could have been a more drawn-out period of weakness. That improvement places the market back to where it was prior, which is grinding higher in an environment of sluggish market participation.

One major bright spot is that many of the charts that I monitor are near areas of major resistance and a decisive move higher, by at least some of them, would be bullish for the broader stock market. Given that most of them are so close to the top end of their respective areas of consolidation (resistance), we may not have to wait long for a signal.

 

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 good, not great.

Client accounts are over-allocated in bond funds and under-allocated in equities. If market internals improve, I will look to increase equity exposure.

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

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