Andrea | Wellington Shields & Co. LLC

A Bad Market…Or Just Another Bad October

Posted on 11/03/202311/03/2023 by Andrea

DJIA: 33,839

A bad market … or just another bad October. Actually, it has been a bad consecutive three months. Despite that the S&P closed October sporting a gain near 10%. When this first 10 months are that strong odds are some 70% November will be higher. Then, too, “sell in May” should’ve been buy in May and sell in August. Probabilities are not certainties. However, clearly there is a change for the better, and it started with Monday’s rally. We never trust up openings in down markets, and every up opening last week saw the rally fade. Monday’s rally did not do so, a simple thing but change is important. The rally has its flaws like the weak Semis and mediocre A/Ds, but lacking a real washout that’s not a surprise. Then, too, the updraft during the Powell speech was impressive. The key now is follow through, so far so good.

What we have seen is by no means a washout low. What looked to be give-up sort of declines in many stocks, certainly was not evident in something like the VIX – at a peak of 23 well short of the 30-35 you might have expected in a washout. Stocks above their 200-day did fall to the mid-20s, a level that has been reached only 17% of the time since 1928. Certainly good enough for a low, but not the 17 of the low last October. What did get pretty washed out was Tech other than the so called Magnificent 7, the Semis especially. The Technology ETF (XLK-170) saw only 3% of its components above their 10-day average. To that you might say they pretty much got to everything, typical at a low. The Mag 7 came through this pretty well, particularly Microsoft (348) and in a bit of a surprise, Amazon (138).

When it comes to wars, defense stocks are tricky. Ukraine was a long time in the offing, and the stocks saw little reaction. The 9/11 attack was sudden, as was October 7, and therefore a big reaction. Stocks discount, but they’re not psychic. They didn’t see coming 9/11 or 10/7. After 9/11 defense stocks rallied, but then faded. Then, too, 9/11 was more an event than a war, the war came later. Here we have an event turned into war, but for stocks still more event than war. Defense stocks had their initial surge and so far are holding up and more. Technically speaking, most of these stocks gapped higher, which should hold if they are indeed going higher. These are good charts but we look at them not so much in terms of the current situation but what might be forthcoming.

What kind of war is it that can’t rally Oil? The US Oil Fund is some 5% below its 9/27 peak. While that’s the commodity, stocks have more or less followed, in some cases for their own reasons. Among those reasons were the mega deals announced by Exxon (109) and Chevron (149), weakening the stocks and the ETFs that hold them. We rarely buy weakness and don’t recommend it, and we don’t like to buy stocks under their 50-day average. All that aside, Chevron at its recent low was some 12% below its 50-day, which for Chevron is about a lifetime. Different stocks relate differently to moving averages like the 50-day, so 12% here is nothing relative to stocks more volatile. Keep in mind too, the 50-day often acts as support and resistance for stocks, some more than others.

The Fed meeting was the nothing burger everyone had expected, and Powell’s little diatribe the same. Typically, the market waits until the speech is done before doing whatever it is going to do. Wednesday saw the rally start before that, when it seemed satisfied he wasn’t going to get in the way. The backdrop here was more impressive than the rally itself, but Thursday’s better than 7-to-1 up day was impressive all around. Obviously just about everything lifted, rate sensitive shares on the hope bonds have peaked. The downtrodden, so to speak, were particularly big winners, hinting of short covering. Then, too, what good rally didn’t start with short covering? If you found last week’s mention of Verizon (36) a little too staid, kick it up a notch with IBM (147) – the patterns are the same.

Frank D. Gretz

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US Strategy Weekly: Caution is Wise

Posted on 11/01/202311/07/2023 by Andrea

Federal Debt Distress

There are many things to worry about this week. At the top of the list are the wars in the Middle East and in Europe, which are proxy wars for any and all democratic societies, and which could have an impact on the price of crude oil. Earnings season has been a mixed bag and results have not been confidence-building. The Federal Reserve meets this week, but we doubt there will be any change in the fed funds rate given the uncertainty of the world’s geopolitical situation. However, one of our main concerns is the rising level of government debt, the lack of political will to change current trends, and what this will mean for the future of interest rates. Total outstanding US debt has grown from $31.5 trillion in June to $33.17 trillion recently. And this level is up from $23.2 trillion in pre-pandemic 2020, which equates to a shocking 43% increase in 3 ½ years. Meanwhile, Congress seems willing to put this issue on the back burner.

This year the Treasury sold roughly $1.56 trillion of new Treasury bills through the end of September and the bulk of this materialized after Congress suspended the debt ceiling in June. This week the Department of the Treasury announced its estimates of privately held net marketable borrowing for this year’s fourth quarter and next year’s first quarter. The Treasury indicated it expects to borrow $776 billion in privately held net marketable debt in the current quarter, down $76 billion from its July estimate, due in large part to projections of higher receipts. Since this new estimate is lower than what was previously announced, the bond market responded favorably to the news.

But borrowing will increase. The Treasury also indicated it plans to borrow $816 billion in privately held net marketable debt in the first quarter of 2023, assuming their projections of cash on hand are correct for December 2023. Treasury yields, especially on longer-dated securities, have risen in step with growing bond supply and supply is expected to continue to grow. By the end of fiscal 2028, White House forecasts show gross debt rising to $42 trillion, a 28% increase from current levels, and debt held by the public rising to $34.5 trillion, a 33% increase. See page 3.

There are many problems related to growing deficits. The first risk is that supply drives interest rates higher, but eventually, high levels of debt become a Catch-22. Interest payments on the debt increase deficits and raise interest rates which increase the interest payments on the debt, and so on. As we noted last week, while defense spending grew 7%, to $774 billion in FY 2023, interest payments on the debt increased 33%, to $711 billion. At this pace, interest on the debt will overtake defense spending in fiscal 2024.

Another warning sign is the high level of short-term government debt. The TBAC, or Treasury Borrowing Advisory Committee recommends keeping Treasury bills at 20% or less of total outstanding marketable US government debt. However, the current level of short-term debt already exceeds 20% which increases the rollover risk as interest rates rise. See page 4. In sum, the market may be too complacent about interest rates, particularly as the Fed leaves rates unchanged after two consecutive meetings, but we see the potential for the bond market to upset the stock market in the months ahead.

Economics: A Strong September

The advance estimate for GDP in the third quarter was a surprisingly strong 4.9% and this follows a 2.1% gain in the second quarter. Consumer spending was an important source of growth as well as inventories. Residential investment made its first positive contribution to growth since early 2021. See page 5. In line with this was good news about September’s personal income. It rose 4.7% YOY, disposable income rose 7.1% YOY, and real disposable income rose 3.5% YOY. Real personal disposable income has now been positive for nine consecutive months. However, personal consumption expenditures rose 5.9% YOY, which explains why the savings rate fell from 4.0% in August to 3.7% in September. See page 6.

It is worth noting that September’s 3.7% saving rate is well below the 2000-2023 average of 5.7% and this suggests that the current rate of consumption is unsustainable. In addition, rising interest rates continue to pressure consumption. Personal interest payments were up 48% YOY in September and currently represent 2.8% of personal consumption. See page 7.

Therefore, we were not surprised that consumer sentiment indices were uniformly weak in October. The Conference Board confidence index fell from 104.3 to 102.6, with present conditions weakening from 146.2 to 143.1. The expectations index fell from 76.4 to 75.6. The University of Michigan sentiment index declined from 67.9 to 63.8, while present conditions fell from 71.1 to 70.6. The expectations component was much weaker, falling from 65.8 to 59.3. All in all, October has not been a good month for many households. See page 8.

Technical Breakdown

The deterioration in the technical charts of all the popular indices was obvious this week. However, the most significant development was the sell-off in the Russell 2000 index below the 1650 support level. This breakdown has not yet been confirmed since the index rebounded to 1662 on October 31, nonetheless, the pattern is worrisome. A confirmed breakdown will be a sign of lower prices for the overall market and the likelihood of another 5% to 10% downside risk. See page 10.

The 25-day up/down volume oscillator is at a negative 0.81 reading this week and neutral, after being in oversold territory for two consecutive trading days on October 20 and October 23 and for three out of four consecutive days on October 5 to October 9. It may surprise some readers that this oscillator did not reach an extreme oversold reading after last week’s decline; however, the lack of a consistent oversold reading continues to suggest that the equity market is in an extended trading range. Keep in mind that broad trading ranges are often substitutes for bear markets and are simply another way for prices to come in line with valuation. See page 11.

The 10-day average of daily new highs is currently 34 and the 10-day average of new lows is at 454. This combination is negative with new highs well below 100 and new lows well above 100 since we assume 100 is the benchmark for defining the market’s trend. The NYSE advance/decline line fell below the June low on September 22 and is now 40,491 net advancing issues from its 11/8/21 high. July was the first time in two years that the disparity between the AD line’s peak and current levels was consistently less than 30,000 net advancing issues. However, in recent weeks this disparity has increased well above 30,000 issues once again. See page 12.

Last week’s AAII readings showed a 4.8% decline in bullishness to 29.3%, and an 8.6% increase in bearishness to 43.2%. Bullish sentiment is below its historical average of 37.5% for the 9th time in 11 weeks. Pessimism is above its historical average of 31.0% for the 8th time in 10 weeks. After hitting a negative one-week reading the week of August 2, the 8-week bull/bear spread is now neutral and closing in on a positive reading. We remain near-term cautious but sense a good intermediate-term buying opportunity is approaching.

Gail Dudack

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THE COST OF MONEY

Posted on 10/27/202310/31/2023 by Andrea

The S&P 500 lost 3.3.% for the quarter ending September 30th, and while positive for the year, this is entirely due to a handful of large-capitalization companies. On an equally weighted basis, that index is now negative for the year.

In our July commentary, we emphasized the importance of interest rates, and rising rates are the major problem today. It would be easy to blame the Federal Reserve for the market’s weakness, but the Fed has been signaling “higher for longer” for many months. U.S. consumer confidence has weakened but retail sales continue to surprise on the upside as jobs and asset values are still supporting consumer spending. It would appear that interest rates haven’t been high enough for long enough to fulfill the Fed’s aim of bringing inflation back to 2%. We would expect, therefore, that a “data-dependent” Fed will continue their restrictive policy until there is clear evidence that its objective will be met. The downside of this approach is, of course, that the economy could suffer a sharp slowdown.

At least some explanation for the economy’s resilience lies with the wealth of American households, which are estimated to have increased by some $40+ trillion since the start of 2020. We can thank a good stock market and booming housing market for a substantial part of this increase. The downside is that this was all made possible by unrealistically low interest rates and massive government deficit spending.

While interest rates are beginning to normalize, government spending continues and deficits continue to rise. This latter factor is important for bond investors as they will demand a higher interest rate for holding a longer-duration instrument.

As we enter the fourth quarter, we are optimistic that we will see a year-end rally, and historically the third year of a presidential cycle is the strongest. There is increasing evidence, moreover, that the Federal Reserve may be done raising interest rates, at least for this year. For the market to move appreciatively higher, however, we must see increasing corporate profits and a decreasing cost of money.
October 2023

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War is Hell…The Bond Market Not Much Better

Posted on 10/27/202310/27/2023 by Andrea

DJIA: 32,784

War is Hell … the bond market not much better. It’s hard to talk about markets considering the suffering in the Middle East, but both have had their impact on stocks. We just don’t recall a time when for bonds it has been so much so. The week started with the 10-Year teetering around 5% for the first time since the summer of 2007. Just when all seemed lost, stepping up to save the day was not the Fed but Bill Ackman – well, covering a short position. Credit where credit is due, but this hardly seems the rationale. Consider Ackman’s Pershing Square has some $18 billion under management versus the $24 trillion value of the Treasury market. Such is the rate concern these days that the relief rally in bonds briefly lifted stocks. Of course, as Bloomberg’s John Authers points out, the risk is that rates will keep rising until they break something, which only then will cause them to fall.

If not breaking, Financials certainly are bending. And not just the Regional Banks, which look more broken than bended. Weak too have been the credit card guys like Capital One (90) and Discover (81), and the same day lenders – what could go wrong there? Or look at Blackstone (92), not exactly in the above category, but with its own recent downside gap. In this market there’s pretty much no place to hide, for Financials it seems particularly so. In terms of making a low this isn’t such a bad thing. If you’re reading this, you have been through this kind of market before and know the feeling – pretty much one of the nausea. This sort of feeling probably tells you as much as the VIX which so far is only around 20, while a number closer to 30 seems more likely for a low.

Price gaps as you know are one of our favorite chart patterns. The textbook says these come in different varieties with somewhat different implications. For now suffice it to say stocks tend to follow through in the direction of a gap be it up or down. There have been several gaps recently, perhaps none more noteworthy than last week’s gap in Netflix (404), one which historically at least makes our point. A gap occurs when the low in a stock is some two or more percent above the previous day’s high. Last Thursday NFLX opened 17% higher, the 15th time it had done so by 15% or more. After a few days of consolidation, the stock moved higher over the next 15 sessions, at a win rate of some 80% or more, according to SentimenTrader.com. Of course, Russian roulette has the same win rate, but with considerably more risk.

Investor psychology is tricky, and sometimes almost amusing. Take Nvidia (403). Back at the end of August it was a must own, have to have it stock, with everyone just hoping for the elusive pullback. Now that the pullback looks more like a bottomless decline, it’s hard to buy. Granted it’s a different market than back then, the war, rates, and so on, but still. Meanwhile, Verizon (34) is a hard stock to buy mainly because it’s Verizon. It’s one thing to lose money in a cool stock like NVDA but sort of embarrassing to lose money in a stock like Verizon. And even if you make money, are you going to belly-up to the bar and brag about it? What’s cool is making money however you do it. Verizon has been kicked around long enough you might think whoever wanted to sell it has done so. The stock has a turn, including a gap higher the other day.

There are lows of the garden variety, and there are lows of the washout variety. Stocks above their 200-day average already are around the mid-20s, close to the garden variety low of March. Washout variety lows like last October saw a number around 17%. And even March saw a VIX around 30, October around 35. Financials as you know are many, and therefore impact the A/D Index. Long ago we were told that’s why the A/D Index works – Financials are important. The A/D Index has significantly underperformed relative to the Averages themselves, opposite of a bull market. Against this pattern It seems increasingly likely the market will see a washout sort of low. Plenty of things could provoke that, the unknowns associated with the war, another spike in rates, it’s hard to say. Then, too, it could be the Magnificent Seven themselves that do it.

Frank D. Gretz

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US Strategy Weekly: Spooked

Posted on 10/25/202310/31/2023 by Andrea

Halloween is quickly approaching, but the financial markets are spooked for other reasons. It is already an unsettling time with Iran and Russia sparking wars in Israel and Ukraine and many of the world’s major cities experiencing disturbingly large demonstrations in support of the Hamas terrorist group. The breadth of antisemitism seen both domestically and abroad has been a frightening revelation for many. A small consolation is found in the growing number of industry leaders stating they want the names of pro-terrorist demonstrators seen on Ivy League campuses because they will not hire them. University donors are also pulling money from universities that are supporting Hamas, or do not differentiate between Hamas or other terrorist organizations and Palestine. These are small steps in the right direction in very troubling times.

However, here at home, there is another potential crisis. It began with the historic ousting of House Speaker Kevin McCarthy on October 3 which exposed the large schisms in the Republican party and how a small number of Republicans could wield control over the election of the Speaker of the House. Without a speaker, the House is unable to conduct government business, to continue its subcommittee investigations, or to push through bills, including vital spending bills that would prevent a government shutdown on November 18. As we go to print, a third candidate, Tom Emmer, Minnesota Congressman, who was nominated by fellow Republicans as Speaker candidate earlier this week, abandoned his bid due to party infighting. The House has now gone 22 days without a leader and a US government shutdown looms on the horizon. Government paralysis in the face of massive global disruptions and significant fiscal hurdles will not be good for the securities markets.

Crosscurrents

It is not surprising to us that the 10-year Treasury yield broke above the 5% resistance level in recent sessions. Treasury bonds are facing two strong and opposing crosscurrents. On the one hand, deficit spending has continued to increase. Year-end data from the September 2023 Monthly Treasury Statement of Receipts and Outlays of the United States Government show that the deficit for FY 2023 was $1.7 trillion, $320 billion higher than the prior year’s deficit. As a percentage of GDP, this was 6.3%, an increase from 5.4% in FY 2022. The Office of Management and Budget estimates that the FY 2024 deficit will be 6.9% of GDP. See page 3.

With both deficits and interest rates rising, interest payments on the debt have increased 33% from $534 billion in FY 2022 to $711 billion in FY 2023. In comparison, defense spending grew 7% from $727 billion to $774 billion in the same period. If this pace continues, interest on the debt will overtake defense spending next year. See page 4. In the near term, the anticipated record issuance of debt in the next few quarters has worried bond investors. But in the longer term, interest payments on this debt and its impact on deficits will soon become a Catch-22 problem for debt markets.

The other crosscurrent that is now helping the bond market is the war in the Middle East. Not only is the US bond market seen as a safe haven in a time of war, but this flight to safety is also having a positive impact on the price of gold and bitcoin. In sum, the cross currents in the bond market are as powerful as we have seen in a long time.

Higher interest rates seem likely over the intermediate term, although we doubt the Federal Reserve will raise rates in November, ahead of a possible escalation of the Israel-Gaza conflict. It will only raise rates once it has prepared the market for higher rates. Yet, the impact of rising interest rates is being felt throughout the economy. Mortgage rates have increased 425 basis points in the 24 months ended August 2023, and this is impacting the residential housing market. The August NAR housing affordability index dropped to its lowest level since June 1985, and mortgage rates have increased in the interim. The September report will be released November 9. The October NAHB confidence survey fell to 40, dropping 16 points since July and is now at its lowest level since January. See page 5. In short, the housing market is slowing, and we expect higher rates will impact auto affordability as well in the coming months.

Earnings

This is one of the busiest weeks in terms of third quarter earnings releases and as we noted last week, it includes a number of the large cap technology darlings. To date, the results are mixed. Microsoft Corp. (MSFT – $330.53) beat estimates for fiscal first quarter results in all segments, but Google-parent Alphabet Inc. (GOOG – $140.12) missed its cloud business revenue estimates and the stock was pummeled. The S&P Dow Jones consensus estimates for 2023 and 2024 are $218.71 and $244.97, respectively, down $0.84, and up $0.18, respectively as of October 20. LSEG IBES estimates for 2023 and 2024 are $219.74 and $246.91, down $0.72, and $0.05, respectively. This is the first time that the IBES estimate has dropped below $220. And based upon the IBES EPS estimate of $219.74 for this year, we believe equities remain overvalued. A PE multiple of 19.3 times is high given that inflation remains above average at 3.7%. The sum of inflation (3.7) and the market’s PE (19.3) equals 23.3 and this is barely under the 23.8 level that defines an overvalued equity market. See page 6.

Technical Indicators in Focus

The Nasdaq Composite index is the only index that has not broken below its 200-day moving average in the last week, although it did have an intra-day test of this long-term average recently. To date, it is unclear if this test will prove successful. The S&P 500 index rebounded after breaking below its 200-day moving average, but it is now trading only marginally above this long-term average. The Dow Jones Industrial Average and Russell 2000 are both trading below their 200-day moving averages as noted last week. Nonetheless, a break below the 200-day moving average is not unusual for a market that is in a long-term sideways trend. However, at 1679.50, the Russell 2000 is perilously close to key support at the 1650 level. This support has contained selling sprees in the past and it would be a major negative if this support level were broken. If it breaks, we believe it would be a precursor to further price weakness. See page 7

The 25-day up/down volume oscillator is at a negative 2.54 reading this week and neutral, but only after being in oversold territory for two consecutive trading days on October 20 and October 23. This follows oversold readings for three out of four trading sessions in early October. These oversold readings could be mirror images of the overbought readings seen in August, when no overbought readings lasted the minimum of five consecutive trading days. In short, August’s rally was unconfirmed. Now that this indicator has had oversold readings of minus 3.0 or less, the same is true – five consecutive trading days in oversold are needed to confirm that recent weakness is a confirmed downtrend. To date, there have not been five consecutive trading days in oversold, which means the decline is not confirmed and the longer-term trend remains vulnerable, but neutral. See page 8. We remain cautious but believe a buying opportunity could materialize before year end.

Gail Dudack

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Sure It’s the End of the World … Could it be Discounted?

Posted on 10/20/202310/20/2023 by Andrea

DJIA: 33,414

Sure it’s the end of the world … could it be discounted? So it might seem to look at the market’s resilience. It’s not just the Middle East, last week’s numbers weren’t exactly market friendly. Yet for the most part things have held together pretty well – ignoring bad news being a good sign, if you believe it’s the market that makes the news. More quantifiable, the A/Ds have been positive 6 of the last 10 days. And while a bit of a backhanded compliment, there have been no what we call bad up-days. When the market goes down, bad A/Ds are to be expected, it’s those up-days with poor A/Ds that cause problems. Meanwhile, since the end of July the market has been in what the textbook would call a correction in an uptrend – a correction that has held the 200-day in terms of the S&P. What’s needed is a little upside momentum, a push through the 50-day around 4400.

The market may make the news, but the news these days has made for some considerable volatility, and then there’s the bond market, pretty much responsible to the minute for Tuesday’s good start and poor finish. If war and rates were not bothersome enough, then there’s China. Markets are always rife with cross currents of sorts, this one perhaps more so than most. We continue to think Staples are worth a look, oversold doesn’t mean over, but in this case they are historically so. Aerospace/Defense shares have their obvious appeal, as well as the appeal of good charts. Oil also seems a hedge of sorts.

Is Gold the new Bitcoin? And if so, is that a good thing? Both have seemed a good hedge only against making money. To be fair Gold has regained a pulse of sorts, but it’s hard not to be skeptical. We like a market that can ignore the chance to go down, we don’t like that Gold has ignored many chances to go up. However, it has shown a better than typical response to recent events. And to look at the usual suspects like the ETFs, GDX (30) and GDXJ (35), they are at least back above their 50-day averages. Bitcoin has been worse than Gold, though it did come to life on the false rumor that a cash ETF was about to be approved. There is already an ETF based on futures, and with the backing of Blackrock, a former Bitcoin denier, approval eventually seems likely. A clear beneficiary here is Grayscale (22).

We place a good deal of emphasis on Advance-Decline numbers, that is, what the average stock is doing. It’s always relative, of course, relative to what the stock averages are doing. Even daily it’s not good to see the two out of sync. Down days in the Averages the A/Ds likely will be down as well. Up-days in the Averages the A/Ds should be positive as well. When they’re not, when there’s what we call a bad up-day it leads to problems, often sooner than later. While we argue down days and negative A/Ds happen, there is a caveat. And it comes about when as this last week you see a couple of outsized negative A/D numbers relative to the Averages. This leads to divergences that are difficult to correct, and divergences eventually lead to weakness in the Averages. The timing here is unknown, but with fewer stocks participating, it speaks to a difficult market in any event.

Biden warns don’t mess with Israel! What about messing with Taiwan? Who was thinking about Gaza a week ago? We haven’t even mentioned Iran – clearly there’s a lot going on. Contrary to the norm, this sort of news can make the market – the unknown, unknowns. Little wonder the S&P finds itself backing off of the 50-day and teetering in its recent range. Then, too, this seems as much about the other war, the bond market war. The 10-year Treasury Yield is now back above its level on the eve of the Hamas attacks. What happened to the flight to quality? The prevailing fear of many, recently articulated by Paul Tudor Jones, is that investors will grow leery of US deficits, and demand higher yields. That’s called a buyers’ strike, and still higher yields.

Frank D. Gretz

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US Strategy Weekly: Action/No Action

Posted on 10/18/202310/24/2023 by Andrea

There has been a lot of volatility in recent days, yet there was very little progress in the popular indices. This is not surprising to us. There are almost too many variables and risks to monitor at the moment and so the indices are whipsawed by the ever-changing news of the day. Aside from the economic backdrop, the Israeli-Gaza war creates a frightening and unpredictable global environment, and the sad state of affairs in the US House of Representatives — which seems incapable of electing a new Speaker — has put a dangerous halt to US fiscal and foreign policy. (Shouldn’t we stop paying their salaries until they do their jobs?) US border officials have released thousands of migrants onto the streets of the San Diego area and Russia states that it no longer needs to obey the UN Security Council restrictions on giving missile technology to Iran since the restrictions will soon expire. It does make your head spin.

The Magnificent 7

In times like these, it is always important to monitor earnings and valuation. In this regard, Refinitiv IBES, in conjunction with Lipper Alpha Insight, released an interesting study on third quarter earnings season. It included information reminding investors that the S&P Dow Jones earnings estimates are share weighted, not market capitalization weighted. It then looked at what they called the “Magnificent-7”. These are Apple Inc. (AAPL – $177.15), Amazon.com, Inc. (AMZN – $131.47), Alphabet Inc. (GOOG – $140.99), Meta Platforms, Inc. (META – $324.00), Microsoft Corp. (MSFT – $332.06), Nvidia Corp. (NVDA – $439.38), and Tesla, Inc. (TSLA – $254.85).

IBES noted that these seven stocks have a market cap weighting in the S&P 500 index of 29.9% — an all-time high — but have earnings and revenue weights of 15.6% and 9.7%, respectively. The Magnificent-7 also has an aggregate forward PE of 27.6 times, which represents a 55% premium to the overall index. A table from this report is presented on page 11 with the 11 sectors of the S&P 500, their market cap weighting, earnings share weighting, revenue share weighting, and forward PE multiples. It basically shows that the technology sector is by far the most expensive segment of the S&P 500, while financials and energy are the least expensive. It is an interesting macro view of valuation.

Given their excessive weighting in the S&P index, the earnings reports from these seven stocks will be important to monitor. Tesla, Inc. will be the first to report on October 18, followed by Microsoft Corp. and Alphabet Inc. on October 24, Meta Platforms, Inc. on October 25, Amazon.com, Inc. on October 26. Apple Inc. and Nvidia Inc. report on November 2 and November 21, respectively.

Economics in Focus

There were many economic releases in the last week which we would summarize as showing weakness in business and consumer sentiment, stickiness in inflation, resiliency in retail sales, and better-than-expected industrial production led by autos. All in all, these reports would probably lead to another fed funds rate hike in November, if all things were equal. But all things are not equal in the Middle East or in the US and as a result, we do not expect the Federal Reserve to raise rates. Keep in mind that another debt ceiling crisis will materialize before the end of the year.

The NFIB small business optimism index fell slightly in September, from 91.3 to 90.8; however, the business outlook fell from -37 to -43 and “expected credit conditions” dropped from -6 to -10. See page 3. Preliminary data for October’s University of Michigan sentiment survey showed a decline in consumer sentiment even though gasoline prices had declined. The main index fell from 68.1 to 63.0; present conditions fell from 71.4 to 66.7; expectations fell from 66.0 to 60.7. Conference Board indices fell in September and October data will be released at the end of the month. See page 5.

Industrial production rose a better-than-expected 0.3% in September. Nonetheless, total IP was barely above the level seen a year ago, nondurable production was down 0.3%, but durables, led by auto production, rose 1.7% YOY. However, auto and truck production appears to be rolling over after its May-June peaks. See page 4.

Advance estimates for September’s retail and food services sales were $704.9 billion, up 0.7% for the month, and up 3.8% YOY. This was much better than the consensus expected; yet, after inflation, real retail sales in September were up only 0.1% YOY. At the end of August, real retail sales had been negative on a year-over-year basis for nine out of ten consecutive months. We believe this is an important point since year-over-year declines are typically seen only during recessions. See page 6.

The key reports last week were related to inflation. The PPI is usually a leading indicator of the CPI, and the good news was that core PPI, while still high at 3.4% YOY, appears to be decelerating. On the other hand, headline PPI, after being negative for months, has begun to uptick again and reached 2.5% in September. Similarly, core CPI, still high at 4.1%, appears to be decelerating, but headline CPI rose slightly in September to 3.7%. See page 7. Most of the major components of the CPI rose more than headline, both on a monthly and a yearly basis, and all items less food and energy rose 4.1% YOY. Stemming an even bigger jump in inflation in September were the declines seen in fuels & utilities and medical care. Still, since transportation costs typically lag the price of oil which has been rising, there is an upward risk to future inflation numbers. See page 8.

The Federal Reserve is most concerned about service sector inflation which eased only slightly from 5.39% to 5.16% in September. Owners’ equivalent rent inched down from 7.3% to 7.1% and rents of primary residences eased from 7.8% to 7.4%. Medical care pricing was negative for the third consecutive month falling 1.4% YOY. However, other services, with a 9.4% weighting in the CPI, are trending higher and were up 4.4% in September. See page 9.

The biggest risk to future inflation could be higher crude oil prices. This is likely given the chaos in the Middle East. After months of YOY declines, WTI rose 14.2% YOY in September and to date, is up 1% YOY in October. Equally important, the chart of WTI turned bullish once the price broke above the $80 resistance level. See page 10. Again, if it were not for all the domestic and global political risks, the Federal Reserve would likely be raising rates in November.

Technical Guides The Russell 2000 continues to trade below its 200-day moving average, the Dow Jones Industrial Average broke below its long-term average before recovering in recent sessions. The S&P 500 rebounded after an intra-day test of its 200-day average, which was technically impressive. The Nasdaq Composite, led by the Magnificent-7, continues to trade well above its long-term average. But overall, the patterns of the major indices remain characteristic of a long-term neutral trading range. This is best represented by the 1650-2000 range in the Russell 2000. If the Russell were to break below the 1650 support, it would be bad news for the broader market, in our view, but this is not our expectation. Our 25-day up/down volume oscillator was oversold for three of five trading sessions in early October but is now neutral. In short, it too suggests the market remains in a long-term trading range.

Gail Dudack

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Market Lows…They’re about the Sellers

Posted on 10/13/202310/14/2023 by Andrea

Market lows … they’re about the sellers not the buyers. Most think lows are made when the buyers step up. To the contrary, it doesn’t take all that much buying when the sellers are out of the way. No selling and prices move up as in a vacuum of sorts. And when are the sellers out of the way? There are a couple of ways to analyze that, and both seemed at play last Friday. Going into Friday the S&P was down only some 8%, while most stocks were down much more. Indeed, by the end of last week stocks above their 200-day had dropped from 38% to 30%, and that included Friday’s upside reversal. For the 200-day, that’s quite a weekly drop, enough to perhaps suggest much of the selling was out-of-the-way. By comparison, the declines in March and again in May saw this number around 36 – 37%. Being down a lot of course doesn’t mean they have to go up. Last October the number was around 17%.

The other part of determining if the selling is out-of-the-way is pretty simple – have they stopped going down and started going up. Here we will make the point we always make about news like Friday’s Jobs number. It’s never about the news, it’s about what the market does with the news. Bad news and the market goes down, that’s what you would expect it to do, you learn nothing. Friday’s news was worse than bad, but after a down opening the market reversed higher. You never know, but you have to say that seemed a market that didn’t want to go down, a market that didn’t in fact go down because the sellers were out of the way? Not only did it not go down, it turned into a decent day to the upside – 3-to-1 up. Monday seemed less dramatic despite the horrible news and its far-reaching market implications, yet the market again managed to reverse higher.

With the market under some pressure recently, you might have expected defensive stocks to come to the fore. That has not been the case, rather just the opposite. To some extent the bond market seems at blame, especially when it comes to the Utilities. Staples have been under pressure as well, even prior to the obesity drug concerns. Meanwhile, the McClellan Summation Index for Staples, a measure of supply and demand, is near the worst levels in history, a level from which it tends to rebound. SentimenTrader.com shows one-year gains of 20% following such extremes. Interesting too, Staples have one of the highest ratios of Put/Call buying in a decade. At the same time corporate insiders have been buying shares and lessening their selling, pushing the Buy/Sell Ratio to one of the highest levels in more than a decade.
The stock market is a place where simple logic doesn’t work – Staples being yet another example. And for all the fuss over earnings, being in the right place always seems more important, though for sure that’s a movable feast. For now, the right place seems Tech generally, but most of FANG+ specifically. They seem and act like the new defensive stocks, giving up little in market weakness. And if higher rates were the problem, it too may now be a tailwind. Defense stocks have had a run, but Cyber stocks have seemed surprisingly dormant for a while. Perhaps no longer to look at names like Palo Alto (261) and CrowdStrike (188). We mentioned United Health (526) last time, noting the appeal of having the group as a whole acting well.

The devil is dancing in the Middle East. The question is how far? Yet the market had seemed to be taking it in stride, along with a less than friendly Jobs number, PPI, CPI and even the auction on Wednesday. This changed with Thursday’s auction when the market abruptly tanked. Are rates still that important, was the auction that much of a surprise? Or could it simply be the market being the market. The low last Friday and subsequent rally, though impressive made a setback likely. We believe they’re going up; we don’t believe straight up. The low last Friday is one thing, a new big uptrend another. The latter takes time, some backing and filling, call it what you like. On a very short-term basis, even when the Averages were up Thursday the A/Ds were negative – always something to note. One day is just that, but consecutive days of 2-to-1 up this week were impressive.

Frank Gretz

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US Strategy Weekly: Awaiting CPI Data

Posted on 10/11/202310/17/2023 by Andrea

Our heartfelt prayers go out to all those impacted by the barbaric invasion of Israel, and we are shocked by the unspeakable atrocities enacted by Hamas. If it is proper to measure people by their actions and not their words, it is clear that terrorists like Hamas, have no desire for peace but seek only to terrorize and control others. This should remind all Americans of the beauty of our Constitution, the purpose of strong borders, and the need to fight terrorism wherever it exists. We will never forget, and we pray for Israel and all those who believe in and fight for democracy and peace.

It is difficult to write about equities when the newswires are dominated by the war taking place in Israel. Particularly since Syrian shells, purportedly shot by a Palestinian faction, landed in Israeli territory on Tuesday and Israel responded by firing back. This points to the risk of the Gaza-Israeli war spreading in the Middle East, and as a result, it is currently overshadowing the Russia-Ukraine war, where again, a sovereign nation was invaded by Russia. Ironically, wars are not usually bad for equity markets, however, note that neither war has been good for the equity markets of any country involved. However, it is a positive for defense stocks, particularly for makers of bullets and missiles, and since both the Middle East and Russia are oil exporters, it has been good for energy stocks.

Israel has also pushed important news about China into the background. Country Garden Holdings Co. LTD. (2007.HK – 0.75) announced it had defaulted on a principal payment which sets the stage for one of the country’s largest debt restructurings. Simultaneously, China Evergrande Group (3333.HK – 0.265) failed to get regulatory approval for its offshore debt restructuring proposal which will likely lead to its liquidation at a hearing set for October 30. The potential debt defaults of China’s two largest property developers will have devastating impacts on stakeholders, customers, supply-chain vendors, China’s economy, financial creditors, and to a lesser extent, holders of China’s US dollar-denominated bonds. Therefore, we are not surprised that Fed officials are sounding more dovish this week. An unstable world is not the right environment for another rate hike, particularly since previous rate hikes are already having an impact on consumers.

Decoding Employment Data

September’s employment report was a huge surprise, Not only was the addition of 336,000 jobs nearly double the consensus expectation, but revisions added 79,000 jobs in July and 40,000 jobs in August. This means that employment was 119,000 higher than previously reported, which makes one wonder how rigorous government data really is. Moreover, September’s year-over-year job growth was 2.1% in the establishment survey and 1.7% in the household survey. These percentages are both well above their long-term averages of 1.7% and 1.5%, respectively. See page 3. September’s 336,000 new jobs also lifted the 6-month average by nearly 20,000 to 233,670 which is well above the 50-year average of 128,000 new jobs per month. Charts of the labor force and employment show that there has been a steady increase in both since the end of the Covid lockdown. See page 4.

From a historical perspective, the US economy is at risk of a recession whenever job growth turns negative. But since job growth in September was definitely robust, it appears that the US economy is not at risk of slipping into a recession any time soon. This could support those who are expecting the US economy to remain in a lengthy period of stagflation.

However, some details in September’s job report tell a slightly different story. Multiple job holders increased by 368,000 in the month, suggesting that holding one job is not sufficient for some individuals and households. Meanwhile, those working part-time for economic reasons fell by 156,000. It is unclear if part-time workers found full-time jobs or are now holding two jobs. See page 5.

In September, average weekly earnings rose 3.6% YOY for all private industries and increased 3.7% YOY for production and non-supervisory employees. These statistics raised concern that wage growth is now fueling inflation. However, since inflation has accelerated in recent months it means that real hourly earnings have decelerated. For example, average hourly earnings grew 4.5% in August and 4.3% in September. This means that real hourly earnings rose 0.8% YOY in August and potentially rose 0.65% in September — if inflation does not increase from August’s 3.7%. See page 6.

The CPI for September will be reported later this week, and we fear it may be disappointing. After eight straight months of year-over-year declines in oil, the WTI rose more than 14% YOY in September. This jump in energy prices could easily create a higher-than-expected headline number in the CPI. In short, the 5-month stretch during which earnings grew faster than inflation may have come to an end in September. This will be a handicap for consumers.

September’s ISM data was interesting, and it showed a switch in the normal pattern. The ISM manufacturing index displayed more upward momentum than the service index. Yet even though the headline index for ISM manufacturing rose 1.4 points in September, its reading of 49 remained below 50 for the eleventh consecutive month. The headline ISM services index fell 0.9 to 53.6. Production, or business activity, rose 2.5 to 52.5 for manufacturing and rose 1.5 to 58.8 for services. New orders rose 2.4 to 49.2 in manufacturing but fell 5.7 to 51.8 in services. Manufacturing could get a boost from the defense industry in the months ahead and this could help both the economy and employment. See page 7.

Consumer credit growth slowed significantly in August. Overall credit balances grew 4.0% YOY versus 4.9% in July. Revolving credit grew 8.6%, down from 10.5% in July, and nonrevolving credit growth rose 1.8%, down from 3.1% in July. On a six-month rate of change basis, revolving credit contracted 0.2%, the first contraction since May 2016. It is not surprising to see credit card, or revolving credit, decline given that interest rates on credit card plans at commercial banks rose to 21.2% in August. However, it is important to note that sharp declines or contractions in consumer credit are signs of a recession. See page 8.

Technical Update

The Dow Jones Industrial Average and the Russell 2000 index are trading below their 200-day moving averages, the S&P 500 recently tested its 200-day average on an intra-day basis and Nasdaq Composite continues to trade well above its long-term average. Nevertheless, the major chart patterns remain characteristic of a long-term neutral trading range, best seen by the 1650-2000 range in the Russell 2000. If the Russell 2000 breaks well below the 1650 support, it would be bad news, but this is not our expectation. The 25-day up/down volume oscillator is at a neutral reading of negative 1.92 this week but has been oversold for three of the last five trading sessions with readings of negative 3.0 or less. This oscillator failed to confirm the July advance and we would not be surprised if it fails to confirm the recent decline with five consecutive oversold days. To date, the longer-term trend remains neutral.

Gail Dudack

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Rates, Rates, Rates … We Hear They’re Going Up

Posted on 10/06/202310/06/2023 by Andrea

DJIA: 33,119

Rates, rates, rates … we hear they’re going up. In fact, that’s all you hear. Having reached the mainstream media, perhaps it will do what talk of $100 Oil did for Oil. The yield on the 10-year Treasury has reached an extreme, or has it? In any event, it’s hard to argue this has been anything but bad for stocks and most of the commodities. We had thought the market could live with higher rates, of course that was when the market was acting like it could live with higher rates. It has since become less technically healthy and remains so. You would think those Regional Banks would be a particular concern, given what happened in March when rates were not even this high. Not surprisingly the charts there are not so wonderful. It may not be the level, but the abrupt change in rates that causes something to break. We wonder if rates had anything to do with the hit to Oil recently or look at American Express (147). It’s not unusual to find out only later who is vulnerable, who was swimming without their suit as Buffet likes to say.

We had looked at this weakness as your garden-variety correction, a correction in an uptrend. After all, on the whole this year has shown some impressive momentum, the kind that doesn’t turn easily or quickly. In terms of the Averages, it still falls in that category. However, the intensity of the selling, if that’s the term for it, makes it look possibly different. In terms of the A/Ds the market fell for nine consecutive days through September 27, and likely 4 of 6 through Thursday. Two of this week’s down days were 5.6-to-1 and 4.6-to-1, not exactly garden-variety selling. Mercifully, the A/Ds were respectable in Wednesday’s rally. These numbers are a bit worse than those in the March weakness, then too it may be too soon to say. At issue here is a garden-variety decline versus something more severe. The former is a gradual move to a sold-out turn, the latter a more violent one. More days like Wednesday would argue for the former.

For all of the market’s problems, there are a few stocks/areas that are interesting. In corrections, the good guys stand out, if only because they either stop going down or never went down. The most obvious here is Nvidia (447), interesting in the sense it arguably got the correction going. You might recall – good news and the stock reversed lower back at the end of August. That it has been holding the last couple of weeks, against a weak market for Tech, seems interesting. It’s toying with the 50-day, while a move above it would be positive for it and the market. A kindred spirit here is Super Micro (288), which is already above its 50-day, at least for now. Then there’s Tesla (260) which failed a couple weeks ago, after we praised the pattern, now again above the 50-day. And finally, there’s United Health (516), which because of some violent moves always seems difficult. It’s back to recent highs and with the group seemingly behind it, impressive in this market.

IBD will tell you as much as 75% of the movement of any stock is a function of the market’s overall trend. We couldn’t agree more, and that’s why we got into this business. We noticed our wonderful stock picks somehow did better in good markets. They seemed to go up and down with the market, which made us think this market thing might be worth looking into. To get to some point here, given the recent A/Ds, 75% might be a little light. This tide has sunk most ships. To us the market is about the A/D numbers. Easy to be a good trader on those 5-to-1 up days versus those 5-to-1 down days. We’re happy with 2-to-1 up days. Easy to be a good trader when 70% of stocks are above their 200-day, that is, in uptrends versus 30% now. As per the above, there are some things to look at here, but it’s best to have that market wind at your back.

If we had a brother at the Labor Department, and knew ahead of time the Jobs number, we pretty much wouldn’t care, especially this month. After all, in this environment what is a good number? A bad number, that is one good for the market, means the Fed can stop raising because the world is coming to an end. A bad number, the economy is still humming along, but the Fed will keep tightening. Then too, thinking what we’ve already been through, a little more selling could put in a low. Keep in mind, it’s selling not buying that makes lows. When the selling this out-of-the-way, you don’t need much buying to lift prices. We’re not predicting the number and we’re not predicting the outcome. The real point is it’s not about the news. It’s about the market’s reaction to the news. The best outcome might be a number the market shouldn’t like, but it rallies anyway.

Frank D. Gretz

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