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The Last Several Days I Have Commented About the Lack of Market Breadth.

The last several days I have commented about the lack of market breadth.  Yesterday Bloomberg reported the last time so few companies in the Russell 3000 pushed this gauge to an intraday high was March 24, 2000, two weeks after an all-time high was reached.

In fact today fewer than 55% of its components are trading above their 200 day average with the “typical stock” down over 20%.  Most of the carnage has occurred since June 30.

I think the reasons for the bifurcation are simple.  Historically the averages decline 5% to 20% before a midterm election.  This cycle is really no different except for the massive liquidity provided by the Federal Reserve.

Gargantuan levels of funds are gravitating from one ultra-liquid sector to another, bidding the sector higher like hording locusts.  Once the shares are bid higher, this large pool of money aggressively abandons this sector for yet another. The smaller capitalized shares are all but abandoned.

The large cap indices are around annual highs, highs led by massive sector rotation with most money managers attempting to chase returns and performance by following these funds desperately trying to avoid today’s stealth bear market.

If the markets follow the 2000 pattern, the next several months can be ugly for ultra-high capitalized equities that comprise the majority of the indices value.

However there are some significant differences between today and 2000.

Most obviously are valuations, earning momentum, overall lack of leverage, no confidence and gargantuan levels of cash.

And then there is the election.  It is now widely accepted Washington leadership is absent; divisional politics at its worst.

What happens if there is the proverbial November surprise where unifying leadership unfolds?

I can argue today’s stealth bear market will be viewed only as noise.

However in the meantime, many are starting to become concerned about the absence of performance, a concern amplified by the lack of a meaningful correction defined as a drop of 10% has not occurred in three years.

What will happen today?

Last night the foreign markets were down.  London was down 1.45%, Paris down 1.95% and Frankfurt down 1.45%.  Japan was down 0.71% and Hang Seng down 0.49%

The Dow should open moderately lower as the Administration is cracking down on tax inversions, a crackdown that in my view will lower the competiveness of the US.  I have a novel solution.  Instead of passing regulations via demagogy and divisional sound bite politics why not have bona fide tax reform?   The 10-year is up 3/32 to yield 2.54%.


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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.