Summary

  • Major US indices are below important price levels, for now
  • August market gains have been erased in September
  • Large Cap and Tech stocks have lead the market lower during September
  • The Russell 2000 remains the biggest headwind
  • Precious Metals continue to consolidate along with the dollar

Detail

After a very smooth and successful month of August for stocks, we have seen some volatility recently. Even though the probability of a quick, hard correction grew as broad indices like the Nasdaq continued to climb with zero hesitation over the short-term, no one knew when it would finally end. But the month of September has seen selling return to the market. In fact, during September, all market gains (and then some) from August in the Nasdaq 100, Russell 2000, and the S&P 500, have been erased.

We have talked a lot about the 3400 level on the S&P 500 during our weekly podcast updates and it continues to be a major area for us to manage risk with. This level was the peak in February, before the large drawdown we saw in March. Does this mean we are for certain entering another period similar to March? No. Does this mean the chances are higher for entering another period similar to March? Yes.

Image for illustrative purposes only
After a very smooth and successful month of August for stocks, we have seen some volatility recently. Even though the probability of a quick, hard correction grew as broad indices like the Nasdaq continued to climb with zero hesitation over the short-term, no one knew when it would finally end. But the month of September has seen selling return to the market. In fact, during September, all market gains (and then some) from August in the Nasdaq 100, Russell 2000, and the S&P 500, have been erased.

We have talked a lot about the 3400 level on the S&P 500 during our weekly podcast updates and it continues to be a major area for us to manage risk with. This level was the peak in February, before the large drawdown we saw in March. Does this mean we are for certain entering another period similar to March? No. Does this mean the chances are higher for entering another period similar to March? Yes.

Image for illustrative purposes only
As we know, stocks cannot go higher without moving through previous highs. It’s just how trends (and math) work. Thus, taking a big picture view, we are not as willing to be aggressively invested in US equities until the S&P 500 can close back above 3400.

While we have mentioned weakness in Growth stocks (Technology and Discretionary) over the last few weeks, and strength in a few more inflationary areas (Materials, Industrials, and Commodities), we continue to believe that over the long term, this bull market is built on the backs of Growth stocks. Companies like Apple, Microsoft, Amazon, etc. remain the most important names. If they cannot move higher, it will be a major headwind for US equities as a whole.

The biggest spot of skepticism is still Small Caps, measured by the Russell 2000. As we have mentioned many times, we do not need Small Caps to outperform – and they most likely won’t – but we do need them to participate. As of right now, they are still below their highs from June 8th. That’s 2.5 months of sideways price action. On top of this, one of the biggest issues with this group of stocks remains in the Banking industry. To put it simply, they’re a huge chunk of the Russell 2000 index from a weighting perspective, and they just aren’t attractive stocks to investors right now. Market participants will most likely want to see interest rates begin to rise (and sustain said rise) before becoming interested in Banks again. And as the Fed has said repeatedly throughout 2020, they have no interest in using their own tools to boost rates until 2024 at the earliest. It is quite the conundrum.

Precious metals remain range bound, and should continue upwards, given the primary trend is still bullish. The key level for Gold remains $1900/oz. Above that level, we can remain positive on Precious metals. Below that level and things become a little more murky. A potential warning flag to precious metals overall, is Silver’s recent break below $26. When Silver is doing well, it typically means good things for precious metals overall. The fact that Silver failed to break higher after a month of consolidation is information to be noted.

Foreign stocks are still showing a few bright spots, especially with the recent weakness in the US Dollar. This has also been a boost for Materials, Precious Metals, and other Commodity-related areas. However, there are some signs that this could be coming to an end in the coming weeks. As always, supply and demand will dictate price discovery and any allocation towards these areas.

While intermarket relationships are a wonderful thing, 2020 has been full of curveballs. And this is why we must take each chart on it’s own merit. There is, after all, a chance the Nasdaq and S&P 500 do indeed continue higher without the Russell 2000 moving above its respective June highs. If that were to occur, it would lead to more breadth issues. But again, it’s possible.

In summary, the first obstacle of supply this market must overcome is demand pushing the S&P 500 above 3400. This would mark an important development, signaling the increasing likelihood of higher stock prices and resumption of the uptrend we’ve seen for the past 5 months. Below that level, however, and increased risk needs to be respected.

As always, we continue to monitor and adapt to the market environment. If further action needs to be taken to protect accounts, we will do so.

 Ian McMillan, CMT Market Technician

 David Zarling, CMT Partner, Head of Investment Strategy and Research

P.S. If you would like more insight as to our thoughts and viewpoints on the market, including specific insight into client portfolios, please remember to subscribe to our podcast “The Weekly Trend” on your favorite streaming platform!

Client First Investment Management LLC is a Registered Investment Advisor This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Client First Investment Management LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Client First Investment Management LLC​ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.