A Tale of Two Markets

The month of December is now off and running. The end of the year is typically good for stocks. In fact, the S&P 500 ended up “up”, in the month of December, 75% of the time, since 1950, which is the most of any month. December, on average, is the third best performing month, with an average increase of 1.50%. Since 1950, the worst December for the S&P 500 was -9% in 2018. The second worst December was -6% in 2002, which was near the bottom of a bear market.

So, here’s the question: Will Santa bring optimism to the market, or will the Bear continue to pick up lumps of coal? Let’s briefly discuss the case for each.

The Bear Market

This is a bear market until proven otherwise. The following are some concerns:

  • Volatility remains high. High volatility is the number 1 characteristic of a bear market. Currently, the Canterbury Volatility Index, is at CVI 126. Volatility above CVI 75 is considered risky, and is therefore bearish.
  • We continue to see “foreign days.” An outlier day is defined as any trading day beyond +/-1.50%.* Last week, the S&P 500 had 2 outlier days. There were 74 total outlier days in 2022. In a normal bull market year, you would only expect to see 10-20 outliers.
  • The market leadership has shifted to the Dow Jones. A positive development for the markets would be for the Nasdaq index (oriented towards technology) to have a lead, as it indicates that investor sentiment favors taking more “risk”. Currently, the upper sectors are more “defensive.” According to Canterbury’s risk-adjusted grades, the top 3 US sectors are Industrials, Healthcare, Consumer Staples, and Financials.
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Markets have rallied from their October lows, but as we’ve seen time and time again this year, these bear market rallies have yet to be sustained. A sustainable rally will include reduced volatility, broad market participation, and an upward staircase pattern, as opposed to sharp declines and strong rallies.

Signs of Improvement

It is important to note that we are also seeing some positive developments in the behavior of the markets. Below are two characteristics of the strengthening market:

  • LS&P 500 contains 11 sectors. Of those sectors, five are now in bullish “Market States”. The five sectors are Industrials, Healthcare, Financials, Basic Materials, and Energy. These traditionally “defensive” sectors have seen substantial rallies in the last few months. They are also seeing a significant drop in volatility.
  • LS&P 500 is hovering around its 200-day moving average. The 200-day moving average is considered by many to be the dividing line between a bull and a bear market. The last time the S&P 500 was at its 200-day moving average, it went up again and failed to break above. The failure to break the average line was followed by a decline to new lows. Today, looking at the components of the index, 62% of S&P 500 stocks exceeded their 200-day moving average. The 62% “breakouts, is a much higher percentage than we saw at the top of the previous August market. This is a positive development.
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A Tale of Two Markets

Source: Canterbury Investment Management. Chart created using Optuma Technical Analysis Software

Bottom Line

The purpose of this update is to highlight two points:

  • We are still in a bear market. Volatility is still high, off days are occurring frequently, and market leadership favors traditionally defensive sectors.
  • There are some signs of improvement. We are seeing more sectors enter “bullish” Market States, and many individual stocks are crossing above their 200-day moving averages.
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Bear markets are full of strong rallies. The question remains whether, or not, this rally is different from the previous ones. December may be a “better” month historically, but volatility is bearish and you can ignore the record of many past Christmas events. At the time of this writing, the market is once again experiencing another day out, this time to the downside. It all comes to a crucial point as the S&P 500 hovers just below its 200-day moving average. Will he break this time, or will he go back and start a new leg down? Stay tuned.

Navigating a bear market requires a diligent process to adapt portfolio investments to changing market conditions. The rotation during bear markets can occur frequently and be unpredictable. Right now, it’s about weathering market movements, adjusting portfolio holdings, and continuing to monitor the characteristics of moves that will cause the market to go from bear volatile a lot for a low volatility bull. While some positive features are developing, there are still hurdles to overcome.

This video was submitted by Canterbury Investment Management, a participant in the ETF Strategist Channel.


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