DJIA:  33,294

Four-to-one and six-to-one down … sounds like a shot across the bow.  Those were Advance-Decline numbers last Wednesday and Friday, followed by another five-to-one down day on Monday.   We know we said the bad down days aren’t the problem, but these kind of numbers get our attention.  A week earlier we had seen a couple of five-to-one up days.  It’s rare to see things change so quickly.  Through Monday the Dow had lost over 1000 points in four days, while the Advance-Decline Index lost 5000 net advancing issues.  That’s a lot to make up and it’s important that it be made up.  A weak rally, a few bad up days, and we will be left with a divergence – higher highs in the averages and lower highs in the A/D index.  Sufficient unto the day, but divergences rarely end well.  It’s no time for bad up days.

It’s not exactly raging, but the debate goes on – new bull market or bear market rally?  If you believe it the latter, you’re not too happy having missed the 17% rally in the S&P, and more in the Naz.  But to answer the question – who cares.  Back in June there was ample evidence stocks were washed out.  And the rally has turned out to be quite credible, call it what you like.  The S&P 500 is yet to reach a new high but an Advance-Decline Index of the 500 component stocks has made a new high.  This configuration has been followed by a new high in the S&P Index itself every time – more of the average stock leading the stock averages.  Yet, this time doesn’t have to be different for things to go wrong.  What could go wrong is simply a change in the pattern, not just for the S&P and its stocks, but for the market as a whole.  Bad up days mean a narrowing market, and narrowing markets lead to corrections.  Would you call down 10% a test of the low or a correction in a bull market, and does it matter.

Energy shares have had a good year, though not exactly one that could be called linear.  As measured by the SPDR ETF (XLE-84), the shares are up some 45% this year, including a little 26% setback from their June peak.  Having tested the 200-day a few times, earlier this month most recently, the move above 80 seems to have reestablished the overall uptrend.  At still only about 4% of the S&P by market cap, the stocks aren’t exactly over owned, despite their 9% share of S&P earnings.  It also seems worth noting the stocks are outperforming crude, which, based on the US Oil Fund (77) is in a trading range below its 50-day.  In our experience, when it comes to commodity versus stock disparities, the commodities more often than not follow the equities.  A similar pattern to that of XLE may be unfolding in the SPDR Metals and Mining ETF (XME-53) as it consolidates just above the 200-day.  A move above 53 would suggest a resumption of the overall uptrend there.

Peloton (11) could be the poster child for stay at home, and for its subsequent unwind.  The stock rallied 20% Wednesday on news of its hook up with Amazon (137).  We get the benefits but if you don’t want a Peloton, does it really matter who’s selling it?  We don’t mean to pick on Peloton, or for that matter, Zoom Video (86) which missed earlier in the week.  And we won’t even pick on ARKK (46) which is loaded with this stuff.  ARKK, however, has become interesting analytically.  The ETF itself was the poster child for the excesses of stay at home.  When it put in its low on May 11, well ahead of the S&P low June 16, that seemed encouraging – the excesses had been wrung out.  The near 50% bounce off the low also seemed impressive, though that retraced only a few percent of the stock’s decline.  More importantly, the ETF now is back below its 50-day, not a good sign for it and perhaps the market as well.

Finally it’s showtime!  Of course by the time you read this, it will be showtime dissecting time.  We find it hard to believe anything said will differ greatly from what the rest of the crew have been saying for a while now.  And historically these get-togethers have not been market movers, though most have not had the hype of this one.  The real point, however, is it doesn’t matter what Powell had to say, what matters always is how the market reacts to what he said.  The news doesn’t make the market, the market makes the news.  The market is entitled to the recent spate of weakness we’ve seen, it’s just that we didn’t like the character of the weakness.  Thursday’s 3-to-1 up day was a shift again, and more of what we would like to see.

Frank D. Gretz

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DJIA:  34,000

Forget the bad down days … worry about the bad up days.  Wednesday was certainly the former.  The Dow muddled around all day before closing slightly lower.  Advance-Decline numbers, however, were 4-to-1down, our idea of a bad day.  The market can live with that, it’s those days when the averages rise and the A/Ds are flat that cause problems.  This measure of the average stock has probably been this market’s best feature.  The A/D Index for the 500 stocks in the S&P just reached an all-time high, impressive in its own right, but more impressive is it has done so while the S&P Index itself remains some 10% below its own high.  This divergence, new high in the A/Ds versus the Index, has led to higher prices one year later every time, according to SentimenTrader.com.  Similarly, stocks above their 50-day average have moved above 90%, a level which also has led to higher prices every time.  Over the years betting “this time is different” has cost a lot of people a lot of money.  Then, too, you never know.  Heraclitus, the famed technical analyst of 550 BC once observed, you never step in the same river twice.  

So bad down days aren’t the problem, they are to be expected.  The market averages don’t go up every day and when they go down it’s more than likely more stocks will decline than advance.  A little less than 4-to-1 down would have been nice on Wednesday, but it’s more about the next up day and how the numbers recover.  Rallies quit when they start to lose participation.  Monday was a bit of an interesting day in that the Dow reversed to rally some 150 points while the A/Ds were barely positive.  The overnight China news sent oil and other commodities stocks lower, and financials seemed weak as well.  Simply put, there are a lot of commodity stocks and a lot of financial stocks to the point we were a little surprised the A/Ds were positive at all.  That said, you don’t want to start making excuses for the numbers.  And that said, typically it takes a pattern of bad up days to cause problems.

Last time, courtesy of the Leuthold Group, we pointed out that the S&P outperforms when Tech outperforms.  While that may seem obvious, less obvious is Tech performs best when it performs slowly.  The Nasdaq Composite and other Tech indexes have rallied more than 20% off their 52-week lows.  The rally took 40 days, relatively long by historical standards.  These rallies that took longer, however, had more staying power, according to SentimenTrader.com.  When we think of good rallies this seems somewhat counterintuitive – good rallies don’t give you a good chance to get in, and all that.  Especially when it comes to Tech, however, the quick rallies, even if 20%, often can be about short covering.  The more drawn out rallies are where, dare we say it, the fundamentals have a chance to evolve.  If you’re keeping score, this seems another plus on the rally’s side.

There once was a time we used to talk as much about volume as we do now about A/Ds.  That was when volume was NYSE volume, and that was pretty much it.  The importance of volume cannot be overstated.  The problem for us became, whose volume?  These days volume seemingly comes from everywhere.  For sake of consistency, and because it is in many ways THE market, we’ve been tracking SPY (428) volume, that’s volume in the SPX ETF.  The market and stocks should go up on rising volume and fall on declining volume, it’s that simple.  We recently resurrected an indicator combining volume with A/Ds.  By now you know we consider A/Ds more important than the averages, so we have an A/D index using only days when volume is higher than the previous day’s volume.  The indicator bottomed on 7/14, but it’s the direction that’s important.  Since then it has been in a consistent uptrend.

As the A/Ds would suggest, there’s more to this market than just Tech.  Indeed, at what might be thought of as the other end of the spectrum, Staples have performed quite well.  And utilities these days are not your father’s Oldsmobile.  In any event, on the back of green names like Nextera (90) and Constellation Energy (82), XLU (78) is probably outperforming XLK (151).  The area we really think deserves attention is energy, and probably commodities generally.  Energy led the market into early June before declining sharply into mid-July.  Since then most of the stocks, and ETFs like XLE (79) have moved back above their 50-day averages, which now should act as support on any pullback.  With the commodity itself having been under pressure lately, the hype seems to have corrected as well.

Frank D. Gretz

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DJIA:  33,336

New bull market or bear market rally… does it really matter.  This remains a technically sound rally.  Sure Wednesday saw the market rip higher, but with the Dow up only 29 points on Monday advancing issues outnumbered decliners by better than two to one.  That’s not how markets get into trouble.  Bear market rallies end but so too do bull markets.  Those numbers will flip – up averages and flat A/Ds – before important weakness.  The bear market rally thesis also seems to be flipping, in keeping with our long-held belief that opinions follow price.  And prices themselves are on the edge of being convincing.  As of last Friday the S&P had retraced 43% of its decline and was 13% off its low.  With maybe one exception, that doesn’t happen in bear markets.  Similarly, stocks above their 50-day average have cycled from 5% to 75%, a move that typically produces sustained rallies.  Call this what you like, it’s better than not bad.

When it comes to stocks above the 50-day average, the Holy Grail is 90%.  That has happened 30 times in 70 years, and since 1942 the market was higher one year later every time, according to SentimenTrader.com.  It’s the idea that strength begets strength, and strength begets opinion change.  There almost seems a little FOMO in the air.  It’s one thing to see stocks in general go up, it’s another to see stocks you wanted to buy go up without you.  Opinions certainly have changed in the world of option traders.  Not that long ago they were loaded for bear but lately have seen the light.  If this is a new bull market that’s not a problem, you have to expect traders to be bullish in uptrends.  If a bear market rally, that’s another matter.  But if the latter, we would have expected momentum to be changing around now as well.

Semiconductors remind us of that guy with a can of tuna.  The can keeps being bid higher and higher until finally he opens it to find – it’s just a can of tuna.  It’s explained to him it wasn’t for opening, it was for trading.  Semis never seem just right – there’s always too many or not enough.  Years ago we remember shorting Micron (62) because even we had figured out the so-called shortage then wasn’t real.  Even we had figured out everyone had double ordered.   Finally with the stock around 90 we gave up because the stock just wouldn’t go down.  We shorted it again around 30 when it was growing about 40% per year and selling for about four times earnings.  Yet that was a much easier trade.  It’s hardly an insight to say semiconductors are important in many ways.  It’s just that they sometimes trade like tuna.

In a database we use there are over 500 stocks in the category of Biotechnology.  After going through them recently we have two thoughts.  First, we really need to get out more.  The second, there are roughly 400 must buys.  Granted many of these you could buy by the handful – they are two dollar stocks.  And for most it’s just about sold out bounces.  But it seems more than just that, and in a way reminiscent of Energy at the start of the year.  To that point, how much Biotech do you own?  We are still positive on Energy particularly those that have moved above their 50-day averages.  We feel the same about Biotech, which really had become underloved and likely underowned.

A thought the other day was why not just buy Microsoft (287).  If we’re not going to overthink this bull market/bear market rally thing, why overthink what stocks to buy.  It may be hard to find a semi in a long-term uptrend, it’s not hard to find other Techs in long-term uptrends, and Microsoft is one of them.  And the fact is, market uptrends don’t get far without Tech.  Data from The Leuthold Group shows over the last hundred years, but who’s counting, the S&P 500 only outperforms when the Tech sector does so as well.  Of Tech’s leadership cycles, only the period between December 1964 to November 1967 saw the S&P make only modest gains.  The rest saw gains of up to 36%.  Meanwhile, the Fed seems to be going out of his way to lean against the rally.  Perhaps they’re human after all – they were late to tighten, they don’t want to be wrong again by being early to ease.  May be time to fight the Fed.

Frank D. Gretz

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DJIA:  32,530

The low was more than a month ago … but it had been hard to tell.  The averages are up some 10%, and the S&P is above its 50-day for the first time since April.  Moreover, more than 50% of S&P stocks are above their 50-day.  At the low that number was 2% – clearly the charts are improved.  However, what seemed to be leadership, pharma and the biotechs have stalled rather than lead.  When the leaders aren’t leading, it’s not much of a rally.  Being over the 50-day is like clearing an obstacle but no guarantee of success.  You’re over that prison wall, but still not in the clear.  For now there are many stocks still dancing around their 50-day averages.  Moving above that level may be no guarantee of success, but it does put the odds in your favor.

To the point “they have stopped going down,” the oil stocks provide an interesting example.  If you look at the Energy ETF (XLE-75), it peaked some 12 points above its 50-day, and for now seems to have bottomed 12 points below the 50-day.  We realize this is hardly in-depth analysis, and if were not above our pay grade percentages would be more appropriate.  Still, if only aesthetically you have to appreciate the symmetry.  Commodity types have suggested oil’s demise is more in the financial world, the futures market, then it is in the world of cash.  Most of us assumed it was about getting out ahead of the recession.  Cash suggests that may not be right.  Natural gas meanwhile is back to its highs.

When you get most people on the same side of the boat, it’s prime time for a little mean reversion.  And that’s pretty much what we have seen in investor sentiment, especially the all in Put buying by small options traders.  And now US consumers generally share that gloom.  The latest survey of households by the Conference Board showed that only 25% of consumers expect stock prices to rise over the next 12 months.  This reading is in the bottom 5% of all months since 1987.  Meanwhile, 46% of consumers expect stocks to drop, ranking it in the top 3% of all months, according to SentimenTrader.com.  The difference between Bulls and Bears is -21%, one of the worst readings in the survey’s history.  Even during some of the worst bear markets, the current level of pessimism has almost always preceded at least a multi-month relief rally

They say the only thing that goes up in a crisis is correlation.  It turns out that Bitcoin and other cryptos made that point. Their correlations to the stock market over the first months of the year have been striking. Despite the ambitious claims of crypto as a diversifying asset, Bloomberg’s John Authers points out it has been increasingly procyclical.  We have wondered in the stock market’s dark days of June, if there might not be a little causality to go with the correlation.  Consensus is the Cryptoverse is too small to have much impact, Bitcoin being only the market cap of a large US company and it would be ranked 10th in the S&P, between Nvidia (180) and Procter & Gamble (148).  According to Citi, most main stream financial firms are waiting for regulatory clarity and are only at early stages of exploring crypto investing, leaving it somewhat isolated from other financial markets.  If crypto’s troubles haven’t spilled over into other markets, it’s clear it’s not immune to those other markets and the factors driving them.

Good rallies don’t give you a good chance to get in, they get overbought and stay overbought, and all the other technical clichés.  This hasn’t been that kind of rally, at least so far.  On top of that, the best momentum typically comes early, not six weeks after a low.  Yet the Naz just had its best day in years and that on the “good news” of a 75 basis point Fed hike.  Or should we give credit where credit is due.  Phooey on FANG, it was Microsoft (276) to the rescue.  And looking at the stock’s action going into those numbers, the news was quite a surprise.  Of course one day is just that, which makes Thursday’s follow-through impressive, that and the positive A/Ds.  Meanwhile, though not the oils or biotechs in terms of numbers, the solar stocks have taken on a whole new and dynamic character.

Frank D. Gretz

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DJIA:  32,036

We beseeched the Lord, we summoned the witches … and we finally got a 90% up volume day.  Let’s hope it’s not much ado about nothing.  To rain just a little bit on our own parade, some lows have involved a few of these 90% up days, interspersed with a couple of 90% down days.  Market bottoms can be a process.  Make no mistake, however, Tuesday’s 90% up day is a positive.  Two of the last three days actually have seen better than 87% up volume, and since 1962 that has resulted in double digit gains virtually every time.  Speaking of 1962, this year has its similarities.  Stocks were down almost 20% in the first half of that year, culminating in a similar pattern of 2% intraday declines.  Prices in 1962 went on to rally 15% in that year’s second half.  Even if this year does prove similar, you have to realize volatility is a given.

To go with Tuesday’s 90% day, the market indices were able to push through their respective 50-day averages where, as it often happens, they had stalled.  For the S&P it was its first time back above the 50-days since April.  A move through the 50-day by no means guarantees follow through, and several stocks including Microsoft (265) have danced around their own 50-day for a while now.  For the averages the move is another incremental sign of improvement.  Now it’s important to stay there – the 200-day is around 4350 which, speaking of no guarantees, the March rally briefly surpassed.  As we suggested above, expect plenty of dancing around, hopefully all of it above the 50-day.  Price objectives have never been one of our favorite endeavors.  We would rather go with the idea rallies end when they do something wrong, the obvious here would be lagging Advance/Decline figures against strength in the averages.

Tuesday’s 90% up day was made possible by those former leaders, the commodity stocks.  As measured by the Energy ETF (XLE-72) the peak here was early June, and relative to its 50-day it had become even more stretched to the downside than it had been to the upside.  Again, no guarantee, but something.  As measured by the Metals and Mining ETF (XME-45), commodities in general peaked in late April, found a temporary low in mid-May, and seem to have at least done so again.  What makes this important is that these commodity stocks are many.  It’s difficult to get a 90% up day while they’re going down.  There should be more to this commodity stock rally, if only because of what hopefully will be a rising tide.  Meanwhile, we don’t see commodities back to their leadership position which for now seems a role being played by Pharma and Biotechs.

This week’s positive price action comes against the backdrop of some extreme negativity on the part of traders and investors.  We pointed to the Citi Panic Euphoria Index and its reading of “panic,” and the panic of sorts in analysts’ downgrades.  And small option traders, among the worst market timers, are pretty much all in on a big leg down.  Anyone will tell you these measures of investor sentiment are not for market timing.  Still, if you’re buying put options chances are you have already sold a lot of stock, and it’s the selling that makes market lows.  To that point, the latest edition of Bank of America’s monthly survey of global fund managers finds they are now more underweight in stocks than at any time since March 2009, the month the stock market hit bottom after the financial crisis.

This Monday the market wiped out a 1% gain in the S&P, obviously annoying if not disconcerting.  Two weeks ago the S&P erased a 2% loss, meaningless like most intraday reversals.  It’s easy to be thrown off by the recent volatility, and it has been volatile.  The S&P has closed 1% or more above or below intraday levels the second most times in 40 years, according to SentimenTrader.com.  Sometimes it’s a wicked game the market plays, so when the real deal comes along it’s hard to trust.  This seems the case now.  When it comes to volatility certainly Amazon (125) and Tesla (815) come to mind, yet while positive they have been anything but volatile.  They act more like safe havens.  Meanwhile, many of those long-term uptrend stocks we often allude to have moved above their own 50-day averages, taking them out of the category of falling knives.  Long-term trends here are compelling, examples plentiful – Estee Lauder (263), Intuit (435), Dominos (406), Accenture (288), Zoetis (181), and Edward’s Life (104).  Get our list and check for the 50-day.

Frank D. Gretz

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DJIA:  30,630

You can summon the witches of the deep… but will they respond.  Shakespeare wondered, and we have begun to do so as well.  For a time now the market has seemed set up to rally, but no response.  The weakness this year has been about the contraction in P/Es, which some time ago we suggested would be temporary.  The contraction has been about the decline in prices, while earnings seemed sure to follow.  Wall Street analysts’ lowered price targets and earnings downgrades for stocks in the S&P jumped to over 500 in the past week, according to SentimenTrader.com.  Of course downgrades have been going on for months, but not to this degree.  Perhaps there’s a more acute fear of this earnings season.  There’s a limited sample size here, but similar period of analyst panic have coincided with market lows.  Yet another reason to expect the market to rally, but will it respond?

They say the market runs on greed and fear.  Actually the market runs on trends, greed and fear are important in recognizing when trends may change, and sometimes to what degree they might do so.  The end to downtrends has nothing to do with buying, it’s all about getting the sellers out of the way.  And when do sellers really sell, they sell when they’re scared, even panicked.  There is a relatively obscure measure for this called the Citi Panic Euphoria Index, and can be found in Barron’s.  While the calculation is not known, the composition includes the usual suspects, options trading, short selling, fund flows and the like.  In the early part of this year this measure reached a new high, even taking out the high of 20 years ago during the dot-com bubble.  The higher the model the more investors are euphoric, and lower returns can be expected.  Low values, particularly below zero, suggest panic and higher returns can be expected.  The recent reading was -0.07, a level which historically has resulted in higher prices over the next 3 to 12 months.

Evidence of fear and panic is important.  That translates into selling, and we’ve seen evidence of that in the many 90% down volume days.  We’ve yet to see evidence that the selling is completed – a 90% up volume day.  Most of us think that’s important, and historically it has been.  However, we have begun to wonder just a bit.  There could be too many of us on the same side of that boat, and mechanically it’s simply difficult with the commodity stocks under the pressure they’re under.  Meanwhile, most stocks have stopped going down and areas like drugs and biotechs have performed quite well.  On the NYSE, Advance-Decline numbers have been lackluster, no doubt due to the commodity stock weakness.  Meanwhile, on the NASDAQ the A/D numbers have outperformed – commodities are lacking there while biotechs are plentiful.  This switch in the Advance-Decline numbers is relatively rare.  Whatever the reason, the poor NYSE A/D numbers are always a concern.

While even the good days haven’t been that good, a couple of areas have been.  Standing out there has been Pharma, a term typically preceded by BIG.  However, it cuts a pretty broad swath these days, as evidenced by the Small Cap Healthcare ETF (PSCH-142).  And the Healthcare Provider ETF (IHF-258) also has moved above its 50-day.  Humana (473) more than the obvious United Healthcare (502) stands out there.  Many food stocks also have improved, thank you General Mills (75), though that can be taken as just defensive and not such a good sign.  Still, we’ll take any improving charts, especially in a market which seems unable to get out of its own way.  We often mention the 50-day moving average which seems particularly important since so few ETFs are above that measure.  However, it’s certainly no guarantee of success.  Microsoft (254) recently nudged above the 50-day and took a particularly hard hit on Tuesday to fall back again.  The same was true of Thermo Fisher (526).  Both are among those stocks in long-term trends, making the action disappointing.

This market has been about correcting the excesses of the bull market.  When it comes to excesses/bubbles there have been several, but our favorite remains giving money to someone to do whatever – the SPACS.  The real poster child for excess, however, might be Cathie Wood and her ARK ETF (ARKK-43), which is about growth/innovation at any price.  And it may be the poster child for the market now.  ARKK put in a low in mid-May, tested that low in mid-June and in recent days even has managed to move back above its own 50-day.  A look at the chart, however, says at all – it has stopped going down, but it’s not going up.  We believe in two types of “stops,” price and time.  Even when the price doesn’t go against you, given enough time it probably will.  This market may need another washout phase of sorts and a break in ARKK should be predictive.  Or did the CPI selloff serve that purpose?

Frank D. Gretz

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DJIA:  30,779

Oh Lord, we beseech you… send now a 90% up volume day.  The Psalm gets right to the point – “send now prosperity,” we’re going with the idea that’s where a 90% up volume day will lead.  This up one day, even when up big, down the next isn’t getting it done.  The numbers say most stocks have bottomed, but not going down isn’t the same as going up.  With only one percent of stocks above their 10-day average recently, the backdrop would seem auspicious.  Stocks above their 50-day average are around 2% versus 1.2% at the lows of March 2020 and December 2018.  NYSE stocks above their 200-day reached 13%, a level from which prices were higher 12 months later almost every time.  We are not anticipating an end to the overall bear market, more a summer vacation.  Meanwhile, we need a couple of those show me the money days.

Prices are compressed, but there seems no consistent buying.  Beneath the surface, however, there are some positive signs.  Looking at stocks above their 50-day average, from the low of 2%, one of the lowest in 70 years, the number has move to above 20%.  In recent years going from 2% to 20% has meant the end of important declines.  Going back to 1950, of the 13 occurrences only one didn’t lead to higher returns a year later, according to SentimenTrader.com.  So stocks not only have stopped going down, to some degree they’ve started to turn up.  It often happens that many stocks bottom before the averages, just as they peak before the averages.  So this part is encouraging.  A perhaps more esoteric positive is the better performance of growth versus value, with the ratio of growth to value at a recent 30-day high.  When growth out performs value it suggests a higher level of investor confidence.  Again encouraging, but no substitute for that 90% up volume day.

Nike (103) shares fell in Tuesday’s particular weak session, this after it reported what most judged to be strong earnings.  Even taking into account a stronger dollar, global sales rose 3%.  The problem was China, where sales fell 20% and the Company gave a downbeat forecast.  Sales in the region made up 19% of revenue last year.  One might think Covid-related lockdowns there are not forever, and the market might have given the stock a pass, but it’s a bear market and Tuesday was a bad day.  Somewhat ironically, Chinese stocks have acted much better.  Stocks there bottomed in March, tested the lows in May and most are at their best levels since February.  A top executive at JD.com indicated Tech regulation is getting more “rational,” and charts like KWEB (32) show it.  It will be interesting to see how quickly Nike might recover from the setback, particularly given what remains an excellent long term chart.

One of the best acting areas is big Pharma.  Lilly (324) probably leads, but Bristol-Myers (77) which has frustrated everyone for, let us count the years, has come out of a multiyear base.  They all pretty much now have good patterns, ironically better than the XLV ETF (128) which includes most of them.  The XPH ETF (42) is a bit better here.  Humana (468), the healthcare insurer, broke out this week, while United Health (514) has lagged but is above its 50-day.  Both are in big long term uptrends.  McKesson (326) is another potentially interesting chart, though it’s yet to break out of its three month base pattern which would occur around 340.  It’s part of IBD’s wholesale drug and supply group, which ranks 14 among 197 groups.  The stock rates above 90 on IBD‘s EPS and relative strength ratings, and the Company has recorded a three year EPS growth rate of 22%.

They say volatility occurs at tops and bottoms.  Over the past five weeks the S&P has swung by 5% more than four times.  That makes this the second most volatile period since 1928, according to SentimenTrader.com.  Indeed, volatility is a hallmark of market lows, but it’s no 90% up volume day.  We are looking for a summer rally and obviously that’s frustrating.  We find ourselves trading our opinion, and that’s never good.  Best to trade what you see and not what you want to see or think you see.  The market for now is barely worth the effort, but just as you think that things often change.  Meanwhile, keep thou beseeching, and just say yes to drugs.

Frank D. Gretz

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DJIA:  29,927

Sometimes you get the bear… and you know the rest.  The rest was last Thursday and Friday, and Monday as well – the kind of pattern typically indicative of a bear market.  A few weeks ago 12-month New Lows showed a market that look to be washed out, and the pre-Memorial Day buying seemed to confirm that – but, apparently not.  It was one of the fastest ever reversals of a 7% recovery, also indicative of a bear market.  While the bear market seems alive and well, it doesn’t necessarily mean we accelerate to the downside just now, at least if past patterns like this are any guide.  Measures that address oversold levels aren’t of much help in markets like this.  However, the idea that only 1%, that’s one %, of S&P stocks are above their 10-day average tells you prices are stretched.  While bear markets will do what they do, they also don’t necessarily go straight down.

At issue is whether this is another case where it’s so bad it’s good?  More than 98% of volume was in declining stocks on Monday.  Only 16 other days since 1962 saw such overwhelming selling, after which the S&P rose 14 times, according to SentimenTrader.com.  The three day up volume dropped below 7% for only the second time in 60 years.  To get to numbers like this takes some pretty bad news and not just inflation, which may have taken its toll last week.  Monday it was crypto’s turn, the last of the market’s many bubbles to finally give it up.  Whether crypto is fraud or real we don’t much care.  We do know the weakness has its impact, at least psychologically.  Then, too, whatever it takes to get the selling out of the way is a good thing.

The market usually isn’t slow to catch on, so to speak.  Indeed, it typically discounts well ahead.  Until recently, however, the market seemed to miss the likely problem for the home builders and ancillary businesses.  It was almost as though the market was listening to homebuyers, and their clamor to buy.  For sure the stocks are well off their highs but after several months, only this week have the shares moved to New Lows.  Of course, this follows a 22-year low in mortgage applications, given rates that hardly seems a surprise.  The builders, of course, have poor charts, but so too do shares of companies like Sherwin Williams (219).  Meanwhile, when it comes to shares of Home Depot (273) and Lowes (172) we’re not quite sure if they’re suffering along with the builders, or whether they are suffering from the stay-at-home hangover, but they’re suffering.

When was the last time you thought about buying Oracle (69)?  Looking at the chart, it’s understandable.  The stock was one of Thursday’s best performers, up nearly 10% on a beat.  It seems worth noting the stock held up that day, despite an otherwise volatile market.  We are not here so much to praise Oracle – it’s still a poor chart.  It brings to mind, however, another large cap with little attention which does have an improved chart – IBM (136).  As you cringe, we realize there have been more than a few false dawns here.  But consider the price action especially relative to that of the market, and Tech.  Speaking of Tech they were great when they were on our side, but not so much now.  Stocks like Apple (130), Microsoft (245), Nvidia (156), seven altogether, have accounted for more than 40% of the points lost in the S&P since January.  Maybe it’s time for an IBM type of Tech.

So the Fed meets and there’s something for everyone – something for everyone not to like.  The attention grabbers wanted a full point, some more thoughtful believe inflation through natural forces will be peaking, and too much tightening runs its own risk.  The Fed has a “dual mandate,” but seems to have decided its sole task is to limit inflation.  They admitted inflation is a problem, and seem prepared to raise rates to eliminate it even if it means higher unemployment.  Yet Powell is good at managing expectations.  The last eight FOMC decision days saw good gains on six and flat action the other two.  Then, too, this is within the context of a 20% decline in the S&P.  Rising rates are not good.

Frank D. Gretz

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DJIA:  32,272

A bear market rally… isn’t that how every bull market starts?  We agree any strength in coming weeks is likely a bear market rally, but we are struck by the seeming universality of the call.  As such it seems one based on the crummy fundamentals – record inflation, rising rates, a war, the pandemic, the China rivalry and so on.  What’s to like?  Then, too, that’s why the S&P has had a 20% decline and the average stock even more.  The news is never good at a low, and that’s how stocks become washed out/sold out.  And it’s selling that makes a low.  We’re just not sure stocks are bear market sold out.  Stocks above their 200-day only got down to 24% versus a more typical 18%.  And the bear market is unwinding five or more bubbles, something that seems unlikely complete in just a five month decline in the S&P.  Then, too, they do seem washed out enough for more rally, maybe even enough to question, it’s a bear market rally.

Remember global investing?  How’s that going?  Yet here we are with an office full of globes, looking more vintage all the time.  Or how is diversification working for you?  It has been a tough year, even for those diversified.  As an example, Ruffer LLP looks at returns from a range of 11 different global indexes of stocks and bonds, including the S&P, the Russell, the 30 Year Treasury, the MSCI World Index, and so on.  The first quarter of this year was the first in more than three decades none of them gained.  Duncan MacInnis of Ruffer has called this the illusion of diversification – the balanced portfolios were not balanced.  The diversification turned out to have higher cross asset correlations than thought.  They were all subject to the same problem, the problem being inflation and the pressure it put on rates.  That has had a negative effect on everything except inflationary beneficiaries like oil and commodities generally.

Bloomberg’s John Authers argues this pattern of rising rates and rising commodities can’t keep going on.  Were commodity prices to continue higher it would become that much more difficult to contain inflation.  And higher prices would stifle demand, as would higher rates.  All too true though, again, it’s about the timing.  Argue as you might what a peak in oil prices might look like, so-called fair value is likely a poor guide.  Sentiment or psychology likely will play a bigger role.  In the summer of 2008, in the midst of that bear market, it wasn’t until you started to hear of $150-200 that oil peaked.  We don’t think we’re quite there yet.  And back then there was plenty of speculation.  You can’t exactly call oil stocks undiscovered, but unlike back then they’re not exactly parabolic either.  And there’s a bit of an exogenous factor this time around, oil this time around is still only about 4% of the S&P by market cap.

The market for now is both good and bad.  The good is stocks have stopped going down.  By that we don’t mean the averages, we mean literally most stocks.  A few weeks ago nearly half of NYSE and NAZ stocks reached 12-month New Lows.  This past week the number was a fraction of that. Surprisingly, there were actually more NYSE new highs versus New Lows last week, unusual in a bear market.  The Advance-Decline Index, another proxy for the average stock, reached a low May 12 and held against lower lows in the Dow and the S&P.  These positive divergences, even those relatively minor, often can be significant.  It’s opposite the pattern back in December and January when the averages moved to new highs against weakness in the A/D’s.  The bad news is that holding up isn’t going up.  Other than the few good days before Memorial Day, and they were good days, the market has been unable to put much together on the upside.

So missing is the MO – not Altria, upside momentum.  Tuesday’s rally was unimpressive, except for its reversal aspect.  And no follow-through.  To borrow from the movie line, it’s time to show me the upside.  Meanwhile, you would be applauding rather than crying at the pump if you owned a little Valero (143) or one of the other refiners.  Then, too, any food stock would leave you crying all around, despite higher prices.  Go figure.  In early January we published a list of stocks in long-term uptrends.  The idea of the list being these are stocks you want to own when they give you a chance.  In the subsequent five months of bear market they’ve given you a chance, and then some. We prefer to buy stocks when they’re above their 50-day moving average and there are a few from the list that fall into that category – Adobe (426) and Estee Lauder (259) have had big declines and are above the 50-day.  Accenture (295) and Intuit (401) also have had significant declines, and are just below their respective 50-day averages.

Frank D. Gretz

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DJIA:  32,637

Down 20% so it’s a bear market… now they tell us.  Why didn’t they tell us when it was only down 5%?  Just the other week more than half of the stocks on the NYSE and NAZ were at 12 month lows – no kidding it’s a bear market!  Now that it’s more or less official, now we’re supposed to sell everything?  Or now that it’s more or less official, does that mean it’s more or less over?  Trying to define this or any bear market is almost tilting at windmills.  We will stick with our definition which is – how’s your portfolio doing?  It was looking fine if you only owned Hershey (210) – whoops, until last week.  And so it goes in bear markets, they get to everything.  It’s all well and good until they get to your stocks, especially those you’re “never going to sell.”  That, of course, changes to “they’re down too much to sell.”  Finally comes bad news in that stock you’ll never sell, now you have an excuse to stop the pain, and you sell.  That’s how bear markets end.  Is that what we just saw?

Other than we all need something to write about, we don’t understand these downside price targets in the averages.  Are we really supposed to believe even 30, let alone 500 stocks know at what level they’re supposed to stop going down?  Some specific level is supposed to be “fair value” as the funnymentalists like to say.  Stocks trade at fair value twice, once on their way up and once on their way down.  What’s important is to figure out whether they’re about to become more overvalued or more undervalued, in other words, the trend.  To go by value, stocks are getting cheaper, but that’s an illusion.  They’re getting cheaper because of the P in P/E, not the E.  They will become less cheap later because of the E.  We don’t have targets on the averages but we do have a target idea on indicators like the percent of stocks above their 200-day average.  Our target there is somewhere around 15%, making our Dow target wherever it happens to be at that time.

All of this is not to say we can’t see a decent interim rally, maybe even something similar to that 10% rally in March.  You don’t have the washout sort of numbers in the VIX (28), but sentiment is otherwise pretty negative, in this case a good thing.  That’s what happens when you get to that get to everything phase.  If you look at the charts of the various ETFs on the other side, Energy is pretty much the only one still standing.  And now divergences are beginning to show up on the positive side.  There were those washout numbers in New Lows a couple of weeks ago and only half that number last week, despite lower lows in the S&P and DJIA Thursday and Friday.  And despite lower lows in those averages the Russell 2000 held it low of a couple weeks ago and so too did the Advance-Decline Index.  It’s all still tentative, but the potential is there.  Encouraging was 3-to-1 move up after those not so wonderful Fed minutes, and the better than 5-to-1 follow through on Thursday.

Energy and pretty much Energy alone is where the best charts are to be found.  The global slowdown could dampen the outlook here, a China re-opening the opposite.  We also worry about our unanswered “get well” card to Putin.  His demise likely would result in a knee-jerk selloff in Energy stocks, but a knee-jerk rally in markets overall.  We think stocks like Chevron (107), Devon (74) and pretty much the gamut look higher.  As you might have guessed, refiners like Valero (128) and Phillips (99) also are among the best charts.  Given the overall market weakness and the “get to everything” recent nature of the decline, good charts are not so easy to come by.  A few big Pharma names do stand out, Lilly (313) and Merck (92) specifically, and Johnson & Johnson (179) and Pfizer (54) have improved.  When it comes to Tech, now we’re starting to learn why the stocks are down so much.  But they are down, and should do their typical Tech rebound as the overall market gets a lift.

Buy good sound stocks, hold them until they go up.  If they don’t go up, don’t buy them.  Such was the investment strategy of Will Rogers.  Ours is only slightly different.  Buy anything you like as long as it’s in an uptrend.  When it breaks that uptrend, sell it.  While they may seem different the strategies are basically the same – don’t hold losers.  Everyone makes money in the stock market, the reason they don’t make more is they give too much back.  On the premise you’re buying stocks in uptrends, how do you know when the trend is broken?  One very complicated and sophisticated method involves an expensive and hard to use device – a ruler.  If you find rulers too intimidating, recalling your time with the nuns, moving averages work just as well.  For most, a 50-day should do the job, or if you’re truly a long-term investor, then the 200-day.  For those of us who find instant coffee not fast enough, there are the exponential 10 and 21-day moving averages.

Frank D. Gretz

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