DJIA:  34,678

The greatest trick bear markets ever play… is making you think they don’t exist. The original line from the “Usual Suspects” was about the devil rather than a bear market, but you can see a certain commonality.  Bear market rallies usually go far enough to make you wonder.  And while the war looks on going, inflation looks on going and rising rates look on going, who are you going to believe?  You are going to believe prices and prices are going up.  Opinions follow price.  We know of no rules as to how far these things can go.  Already through the 50 and 200-day moving averages, it is enough to make you wonder.  And while too good to die here, the rally will die as all do, with technical problems like divergences – when the average stock begins to underperform the stock averages.  So far so good, but look for a change to up in the averages and flat, let alone down in the A/D’s.

It’s that time of the year, or the cycle, when talk of the yield curve fills the air.  The yield curve is almost inverted, and parts of it are already.  We don’t pretend more than a superficial knowledge here and, therefore, have no strong opinions.  We will say, however, when it comes to the stock market anything so talked about rarely comes to much consequence.  It is also a bit ironic that an inverted yield curve and a recession should come to the fore in the midst of this rather spectacular recovery.  Isn’t it the market that’s supposed to be the predictor of such things?  Our two cents, and here you really do get what you pay for, is there will be a recession and the market will get around to predicting it.  In other words, this is a bear market rally.  Rather than the curve, we worry that the start of QT is the bigger concern.  In 2011, hints from the Fed that it wouldn’t expand its asset purchase program preceded a 19% drop in the S&P.  In 2015, talk of balance sheet shrinkage came before a 12% decline and a similar result followed in late 2018.

And then there were two – FANG stocks, that is, that you might want to own.  Amazon (3264) is the only one up on the year, though by the time you read this who knows?  And, who knows, by that time, Google (2781) could be.  We like to look at stocks like this on a monthly rather than daily chart which obviously dispenses with much of the volatility, and unimportant moves.  Amazon is a good example, having looked pretty poor a few weeks ago based on the daily chart.  A monthly chart, however, basically was that of a consolidation in the overall uptrend.  Granted there was a bit of a break in January, but these false moves or breaks often happen in these patterns and, indeed, you can see a lesser but similar break in March 2020.  The key is the stock didn’t linger there, it snapped right back.  What’s needed now is a move through the upper end of the pattern around 3600+.

So when you split a stock does that make it more valuable?  They say no but don’t tell that to Tesla (1078).  Tesla is another stock that always seems to tell a more accurate story on a monthly rather than a daily chart.  In this case, the pullback came to rest right on top of last year‘s eight month consolidation.  The daily chart would have worried you, the monthly not so much.  It is an example, too, that extended stocks do have their corrections – in this case some 500 points.  Meanwhile, is Tesla dragging those utilities with it?  The textbook says rising rates are bad for utilities as they are big borrowers.  While not a “Tesla” chart, XLU (74) has turned into one of the better charts around. As measured by the SPDR Real Estate ETF (XLRE-49), many REITs also are looking better and like XLU, there’s a respectable dividend yield.

Tuesday saw NYSE Advance-Decline numbers of better than 4-to-1.  This followed back to back 4-to-1 numbers a week or so ago.  These are impressive and an example of what we mean when we say the rally is too good to die here.  And it’s not just the strong up days, it’s also the lack of weak up days, those days up in the averages with flat or negative A/D’s.  Down days don’t kill markets, it’s the weak up days that do.  When it comes to that, it’s time to be careful.  Meanwhile, if you’ve been in the market for only the past decade or so this is frustrating.  This period has proven repeatedly that it’s right to be fully invested, and to buy the dips.  We would point out, however, that during the 2007-09 bear market there were 11 10% rallies. Meanwhile, some time ago we published a list of stocks with inconsistent long-term uptrends. One such stock which is now also above its 50-day moving average is Prologis (164).

Frank D. Gretz

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DJIA: 34,707 It’s a rally in a bear market… but we’ll pretend to be open-minded. A bear market is being defined these days as a decline in the S&P of 20%. That strikes us more like a definition for a bear market’s end. Down 20%, now you tell me it’s a bear market? And down only 8% or so in the S&P, this isn’t a bear market – tell that to the third of NASDAQ stocks down more than 50%. If you’re looking only at the market averages, you are looking at the wrong thing. And in bear markets looking at the averages is dangerous. Seeing the S&P down only 8% or so, there’s hope for all those losers you hold, hope the averages will drag them up. It doesn’t work that way. Eventually the weak drag down the strong, leaving you there with hope and a lot less money. When it comes to definitions, our favorite for a bear market – it’s when they sell my stocks. So maybe it’s not a bear market, they’re not selling those commodity stocks. Last week’s rally was impressive. It was, however, pretty much a rally in those stocks beaten the most, that is, Tech. We argued that in markets like this, where the weak get overdone on the downside, down the most turns to up the most. That we’ve certainly seen. When this happens it typically becomes either/or, in that what had been acting well falls from the forefront. And Oil and Gold and the other commodities did pull back a bit – but not much. If you look at the Metals and Mining ETF (XME-63), a veritable smorgasbord of commodities, it’s right back to new highs. In terms of leadership, that pretty much says it all. Though admittedly it could still be early. You can’t say the same of even the best of Tech. If there was a misunderstanding of Powell’s comments last week, that wasn’t the case this week – rates are going up. The market went completely unscathed last week and has done pretty much the same this week. And, in our gesture to being open-minded, maybe the market has gotten it right. Powell went to some length to counter the point that the central bank cannot hike rates enough to dampen inflation without causing a recession. And, indeed, there are “soft landings” where rate hikes did not cause recessions. The stock market, however, seems another matter. Higher bond yields tend to be bad news for stocks as they make high stock valuations hard to justify. More than rates, the eventual move to QT from QE could be what really does things in, so to speak. We just keep coming back to the tired but wise old saying, don’t fight the Fed. Let’s say you’re walking down the street doing your oligarchy thing and bam, your money is frozen. You’re probably wishing you had a little of that crypto stuff. We hadn’t looked at bitcoin, the only crypto we follow, in some time. We hadn’t paid much attention because stocks like Marathon Digital (30) and Riot Blockchain (22) have been in downtrends since late last year. Maybe it’s just coincidental with confiscation worries, but over the last few weeks these stocks have acted much better. Of course Gold has acted well and indeed, so too have most commodities. A stock like Archer Daniels (90) is trading at an all-time high, little wonder we suppose when you look at the ETFs for Corn (CORN-27)) and wheat (WEAT-10). After all the volatility in late February, Deere (432) now seems out of its nearly yearlong consolidation. There have been some impressive aspects to the recovery, and we’re not just pretending. When the market reversed a month or so ago, the day of the invasion, we expected a tradable rally, maybe back to the 50-day in the averages. We’ve done that and more in some cases. But it’s not what the market has done, it’s how it has done it. Last week saw back-to-back 4-to-1 up days in NYSE A/D numbers. Sure Wednesday was a bad Dow day, but not for the average stock – more than 1400 stocks advanced. We haven’t seen the kind of weak rally, up in the averages and poor A/Ds we admit to having expected. On the NASDAQ we’ve seen four consecutive 1% up days, very unusual and historically positive. Then there’s the backdrop – VIX down, stocks up, despite the risk of nuclear war? Correcting the speculative bubble of the last few years likely means more than 8–10% correction, but for now there’s likely more upside.

Frank D. Gretz

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DJIA: 34,480

Down 20%… mea Coupa. Coupa Software (82) shares fell 20% Thursday after the company gave guidance that was below analysts’ estimates. The company said it was looking for first quarter revenue of $189 – $191 million, while analysts were looking for $191.4 million – quite the miss? Our favorite part in these things is Key Bank cut its price target for the shares to $125 from $175, once again, opinions follow price. To look at the chart, we would simply say welcome to the world of Tech over the last year. Granted Coupa may not be a household name, so try AMD (112) or Nvidia (248), both down some 40% from their highs. Tech is making the S&P look good this year, and the S&P is making commodity/value look even better. For Tech, days like Tuesday and Wednesday make hope spring eternal. Meanwhile, the best one day rallies are found in bear markets. So the market has held the January lows, but there’s a bit more to it than just that. Measures like stocks above their 50-day and 200-day averages, and the level of 12-month new lows held well above their own January lows. Divergences can be positive as well as negative, and in this case signaled diminished selling pressure into the decline. Add to that a market stretched to the downside, oversold as they say, and sentiment of doom and gloom, and you have the ingredients for a rally. We doubt this is more than another bounce in the downtrend, but we will concede the numbers haven’t been bad – 4-to-1 up days like Wednesday always get our attention. Had we seen strength in the averages along with flat A/Ds that would have been a real warning, and would caution in markets like this the numbers could change quickly. Bubbles are hard to recognize when you’re in them. When over, they’re embarrassing to recognize. Here in this happy place called retrospect, it seems clear we’ve had a few, most of which indeed are past tense. That’s not certain when it comes to bitcoin, though using Marathon Digital (27) as a guide, the move from 85 to 25 suggests it could be. Because of its relative obscurity, one of our favorite bubbles was that of the electric vehicle makers. We’re not talking Tesla (872) here, we’re thinking of Lordstown Motors (3), 31 to 3, Fisker (12), 31 to 10, or Canoo (6), 25 to 5. Another favorite would be the SPACS. Give money to someone to buy an unknown something and hope for the best. What could go wrong there? The Next Generation SPAC ETF (SPAK-17) has gone from 35 to 16, while an individual name like Skillz (3) has dropped from 46 to 3. And let’s not forget those Meme stocks. If the measure of bear market risk has to do with the speculation that preceded it, we would suggest there’s still considerable risk out there. Sometimes you have to ask yourself, do you want to be cool, or do you want to make money? We doubt many are comfortable bellying up to the local bar bragging about the utility stocks they own. And maybe that says it all. If you look at the XLU (71) chart on the other side, the SPDR Utilities ETF, you might mistake it for a Tech or, these days, an oil stock. Speaking of oil stocks, if you want an investment strategy that has worked pretty well over the years, follow the nice people at Dow Jones and Co. or, should we say, fade those nice people. They added Salesforce.com (210) to the Dow, now down about 35% from its peak, and deleted Exxon (79), recently up some 38%. It’s not the fault of the keepers of the Dow, they’re only human, and human nature typically dictates that you go with what is working at the time. Another reason to worry about Tech, and another reason to think of utilities. The news from the Fed could not have been much worse – seven hikes! Rather than selling on the news, Wednesday saw buying on the news. It seems more that the much anticipated news was discounted, as they say. When the market was in its uptrend and the Fed compliant, the cry was don’t fight the Fed. We suspect that still could be sage advice, especially as quantitative easing turns to quantitative tightening. Meanwhile, peace scares have played a bit of havoc with the commodities trade, that and the idea most of the stocks had become a little stretched. The uptrends remain intact. Particularly given the strength in oil, it has been surprising the solar stocks haven’t acted better. As measured by the Solar ETF (TAN-75), the stocks are down some 25% from their highs. To look at the ETF, however, there is the suggestion that things may be changing. The downtrend has been broken and most of the stocks are above their 50-day.

Frank D. Gretz

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Frank is traveling this week. Rather than the normal Market Letter, hope you enjoy this note from Frank on changing leadership and changing investment styles.

Who among us hasn’t had a bad year or two? If you’re one of them, go stand in the back of the room with the other liars. Not to be unkind, Cathie Wood has brought much of this on herself. The issue seems to be in understanding this is a market of stocks. Stocks are not companies, they are pieces of paper. The biggest best most innovative companies can have stocks that perform poorly, for any number of reasons. And as per what follows, investment styles do change. That’s what keeps the business interesting.

What follows is a paragraph from our Market Letter of March 5, 2021:

“Woodstock is a fond memory … will the same be true of Wood’s stocks?  Cathie Wood has garnered quite a bit of fame, and deservedly so.  Those ARK Funds which she founded were up a gazillion percent last year, but who’s counting.  Nonetheless, we always find it a bit risky when everyone knows your name, so to speak.  It certainly proved so for Gerry Tsai when, after his success at Fidelity, he founded the Manhattan Fund in 1965.  By 1969 the funds collapsed, losing 90% of their value.  While his was an aggressive style of growth stock investing, that of Bill Miller’s was a value style of investing.  His fame resided in his record of beating the S&P for 15 years in a row.  When the market turned against value in 2006, a run of underperformance left him lagging the S&P by 50%.  Changing fortunes in both cases were not a matter of intelligence, it was a matter of changing investment styles.  For now, it’s about reopen/reflate, if that can be called a style.  Cathie Wood isn’t exactly covered in that look.”

Frank Gretz

DJIA:  33,794

Bad news so bad… it’s good news.  This seemed the case last Thursday, the news being the Ukraine invasion.  With all due sympathy for those suffering, the news finally seemed to result in the washout a market like this has needed.  As we’ve noted many times sellers, not buyers, make lows.  It’s bad news that provokes selling, not good news.  When the sellers are out of the way, stocks can move up with relative ease, as they seem to do on Thursday. We doubt this is the start of a new bull market, and history suggests much the same.  Those “reversal days” are real attention grabbers, but as we’ve come to say about the car we’re driving – looks better than it runs.  When the market is down 5% or more in a calendar week, and then closes above the previous week’s close, in the next 2 to 8 weeks it has made a new low 12 of 13 times, according to SentimenTrader.com.  We have a low and probably more rally, but not a new Bull market.

Sysco is the largest stock by market cap?  Actually, that was Cisco Systems (56), and that was 22 years ago.  Meanwhile Sysco Corp. (87), the distributor of food and related products to the food service industry, hit a new all-time high this week.  As they say, things change.  It’s a bit ironic too, this food distribution company should be acting so much better than the food sellers, that is, most of the restaurants.  It is, however, the kind of steady almost defensive sort of stock which, together with names like Coke (62) and Hershey (208), have done quite well this year.  Overall, of course, commodity stocks rule.  Oil is the most obvious and it’s not just about the Ukraine.  We pointed out in early January that when oil starts a year strongly, it goes on to lead.  Gold finally has come around, copper, steel and aluminum have acted well for some time.  Ag stocks are acting well – Archer Daniels (82) is making new all-time highs. Even coal stocks act well, and we’re not even close to Christmas.

Those surging commodity prices have made stellar performers of the related stocks.  This, in turn, has been beneficial to resource rich economies such as Brazil.  And, as Barron’s points out, the hostilities in the Ukraine have enhanced the outlook for price hikes in everything from oil to wheat and corn.  Part of the appeal of Brazil and other emerging markets is that they have underperformed for so long, but that may be about to change.  The McClellan Summation Index for Brazil has turned up, following this momentum indicator’s long streak in negative territory.  While some short term pullback is possible, since 1997 this configuration has produced a positive annualized return of 29%, again according to SentimenTrader.com.  By contrast, when this indicator is negative returns were -2%.  Aside from the country ETF (EWZ-35), a couple obvious beneficiaries here are Vale (20) and Petrobras (15). Normally the latter’s 14% yield would be enough to scare us away, but it just might be safe, at least as safe as anything can be in Brazil.

Has comfort gone out of style?  Purple Innovation (7) is a name you might not know.  The company designs and manufactures a range of branded comfort products, including mattresses, pillows, cushions, sheets and other products.  Since March of last year the stock hasn’t exactly been comforting, falling from around 40.  What we find fascinating here is that a brokerage firm has cut its price target to16 from 22 – mind you, the stock was 5.  At least they maintained their overweight rating.  Sure Purple Innovation isn’t exactly a household name, so let’s look at Block (114), formerly Square.  A few days ago the price target was cut to 175 from 275 –the stock is 115.  The point here is that opinions follow price – opinions chase the price.  And this is not just true of companies and it’s not just true of price weakness.  Those many who would not touch oil $20 lower now see reason for it to move higher.  When Goldman starts calling for 150 – 200, as they did back in the summer of 2008, time to really worry.

At the end of last week the market looked ready to rip higher.  After the initial shock of Russia’s invasion, the S&P rallied more than 6% in two days.  Things, especially Tech things, had gotten stretched and, as is typical, down the most turns to up the most as the spring uncoils.  Although not a new Bull market, there should be more recovery. We would look to the 50-day as a guide, both for the market, 4530 for the S&P, and for most of the rebounding Tech stocks.  As always, the Advance-Decline numbers will be important.  They have been almost surprisingly positive, but in a market like this they can change quickly.  Just a few days up in the averages with flat, let alone negative A/Ds would be a real warning.

Frank D. Gretz

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DJIA:  34,312

Good news is nice … but it’s not how lows are made.  Peace in Vietnam, or wherever it is this time, we’ve seen before.  Peace rallies never seem to last.  Start bombing, then maybe you have something.  Lows after all, are made by the sellers rather than the buyers – bad news begets the selling.  Still, Tuesday’s rally was noteworthy not for its 400 DJ points, but for the 3-to-1 A/Ds.  One day is just that, but in real bear markets technically good days are not so easy to come by.  Wednesday was impressive in a different way – weak averages but positive breadth most of the day.  We doubt this changes anything in the grand scheme of things – even bear markets don’t go straight down.  Beware an outbreak of peace, whereas conflict likely would provide a better turn.

Despite some surprising strength this week, the overall downtrend should be the focus.  Then, too, had we seen decent upside in the averages and flat or negative A/Ds, that would have made it easy – weakness in an already weak trend.  Should that pattern yet come to pass, and we suspect it will, that should be a real warning.  And by the way, don’t expect those commodity stocks to survive a big downtrend.  Oil had an even better rally in the summer of 2008, amidst talk of $200 crude.  We know how that ended.  Things can change quickly in the direction of the overall trend.  Meanwhile, we may just see a blow off sort of move in some of these commodity stocks, a tantalizing temptation.  To paraphrase The Usual Suspects, the greatest trick a bear market can play is make you think it doesn’t exist.

Barron’s refers to Deere (380) as the “Tesla of farming.”  With a long-term perspective, it could be the Tesla (876) of charts. Having recently hit an all-time high, part of the strength has to do with comments from competitor Case New Holland. That company noted the average fleet age for farm equipment is at a 20 year high, so demand for new equipment is set to rise.  Aside from its own higher guidance in November, Deere unveiled an autonomous tractor in January at, of all places, the Consumer Electronics Show in Las Vegas.  According to Barron’s Jacob Sonenshine, industrial companies such as Deere are often able to pass on higher material costs, particularly as Deere’s tech-enabled offerings come with greater efficiency.  Meanwhile, while the stock is trying to come out of a little consolidation just at the 400 breakout point, it’s the longer-term chart we find intriguing.  The stock broke out of a multiyear base back in 2020 and more than doubled by mid-2021.  It since has been consolidating, but now looks poised to extend the overall uptrend.

Speaking of Tesla, much like the FANG stocks our take depends on your perspective.  Tesla is below the 50-day, so from that perspective we would take a pass, at least for now.  The same can be said of Amazon (3093) which, despite the big rally, has seen fit to stop just below its own 50-day.  To look at Tesla on a monthly chart, each bar one month, it’s close to the support of the last base/consolidation around 800, and it all looks to be another consolidation in the uptrend.  Amazon, on a long-term chart, appears to have broken below its own consolidation or base, and only has rallied back to it – a time will tell pattern.  We’re always inclined to give the overall trend the benefit of the doubt, and the gap higher was impressive.  The real point is that for these stocks especially, perspective seems important.  If you’re a long-term investor, the long-term pictures should be where you’re looking.

A recent Bank of America survey of global fund managers showed their greatest worry was that central banks would go too far.  Their second greatest worry was they would not go far enough.  Contrary thinkers should take heart– they just might get it right?  In this case contrary thinking goes against most of the Fed’s history, and also the recently released minutes.  They show the risk of inflation tilted to the upside, and seem more prepared to hike too much than too little.  That should make for a tough environment for stocks, though the market’s reaction to the minutes on Wednesday was surprisingly positive.  Key in all of this, of course, is inflation, and positive action in commodity stocks is everywhere, even Coal.  Speaking of contrary opinion, Coal is so out of favor they killed the ETF for lack of interest.  There is still one for Steel (SLX-57) and Copper, (COPX-41) which seems particularly positive.  And so Gold, finally, and as always Oil.

Frank D. Gretz

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DJIA:  35,241

Meta drops by $250 billion, Amazon adds back $280 billion… pretty soon you’re talking real money.  They do say it’s a market of stocks.  Still, given they are both part of FANG, the dichotomy here seems a bit bizarre.  Even a bit more bizarre is that Amazon (3180) arguably had the worst chart of the group, though Netflix (406) and FB (228) certainly were no prize.  After its gap higher at the start of the month, Google (2772) landed in resistance and has sold off almost every day since then.  These stocks, of course, have not suffered alone.  High real yields have meant an exit from growth stocks toward value.  While there’s always more to the value/growth story than just rates, over the last few months there has been a close link.  What we find a little disconcerting here is what this means in the overall scheme of things.  Sure these stocks over the years have had their corrections, but more or less they have led the bull market.  If that has changed, it probably isn’t the best sign for the bull market itself.

When the market turns up out of a relatively violent decline like January’s, down the most often turns to up the most – compression rules.  And so it seems so far when it comes to Tech.  Fewer than 25% of Tech shares were above their 200 day a few weeks ago, and after Thursday’s rally the number had recovered to close to 50%.  So, oversold snapback, or sign of an important turn?  As is true of many market indicators, momentum is everything.  Outcomes are better when the numbers are better.  When this number reaches 60% or more, stocks saw their best returns.  No surprise that strength begets strength.  So far it’s still more relief rally than major turn, but the worst should be over for now.  Meanwhile, the better parts of the market, those not compressed, so far have held their own.  This suggests strength in Staples/Value is more than just defensive.

When it comes to leadership, the dichotomy between the Invesco Pure Growth ETF (RPG-185) and the Invesco Pure Value ETF (RPV-85) makes clear what we still believe is an important change.  The charts of stocks like Hershey (203) and McCormick (100) look more “growthy” than your favorite growth stock.  Even in Tuesday’s Tech rally, it was a stock like Coke (61) that made a 12 month new high.  Not be forgotten in this discussion, of course, are the commodity stocks, where strength is pretty much universal.  Oil is obvious, but aluminum, copper and steel have rallied.  Commodities conglomerates like BHP Group (70) also have acted better as has even Ag Commodities.  Meanwhile we’re still waiting on Gold, which could be confused with Waiting for Godot.  Inflation is all the rage yet Gold barely has a pulse.  Those bonds seem to get it, and we wonder when some of that money will be leaking into precious metals.

Thankfully we’re not economists, and we hesitate to walk on that dark side.  That said, there are a few problems out there beyond the technicals.  Pretty basic is the idea recessions have followed 11 of the last 12 Fed tightenings.  And to go by the consumer sentiment numbers, one likely already has begun.  When the pandemic hit, the Fed embarked on massive QE, resulting in 25% money growth.  As Milton Friedman predicted, prices react with a lag.  Like Arthur Burns before them, the current Fed is ignoring a sharp increase in money supply and has tried to blame external factors.  As 2022 begins, inflation is blowing out.  Yet the Fed continues its policy of buying billions of treasuries and mortgage backed securities every month.  Perhaps they remain the “Fed put” realizing if they go to zero asset purchases it’s all but certain to impact multiples.  The technicals offer some reason for optimism now, but it’s important to watch for signs the rally is failing.  As usual, advancing versus declining issues will be important.

We don’t see this turn as the start of a major new uptrend.  Despite the selling, this market never quite made it to extremes typical of a major low.  What we see is what can happen when prices become stretched to the downside, and investor psychology almost historically negative.  And the rally has been good but not great.  Even Wednesday’s 3–to-1 up-day in advancing issues fell short of what you might expect out of a major turn. And, of course, that was followed by Thursday’s better than 3-to-1 downside. Then, too, strength in the averages against flat A/Ds would have been, and still could be, a real warning.  In an unusual pattern, The VIX has dropped 25% from its high, while bond market fear is near 52-week highs. Usually a non-event, this pattern has preceded some significant declines in stocks.

Frank D. Gretz

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DJIA:  35,111

We have four… do we hear five?  Estimated rate hikes seem where the real growth lies.  It’s almost surprising the market has dealt with the dreaded news this well.  Or has it?  Good markets ignore bad news and all that, but rather than ignore, January seemed to have discounted it.  Pick your term – washed out, sold out, even our least favorite, oversold.  January seems to have checked all the boxes.  Last week the NAZ saw a jump in stocks down 50%, a spike in 12 months new lows and a rise in the number of lows for the S&P.  Add to this a drop in sentiment to historic extremes, including record buying of Inverse ETFs and Put buying.  Extremes can always become more extreme, so you never know.  That said, what we have seen so far is the stuff rallies are made of, but unlikely lasting lows.

When in conversation someone says they’re bearish, we can’t help but ask if that means they own no stocks.  Invariably the answer is well, we own this and that, for this and that reason.  Depending on our mood we think or say well, you’re not really bearish – if you’re really bearish you don’t own stocks.  Technical indicators come in two main varieties.  There are momentum indicators, which measure the strength of a market move, including the A/D Index which measures strength by looking at the breadth of a move.  And then there are sentiment or psychological indicators, which measure investor reaction to a market move.  The sentiment measures themselves can be of two varieties – as per the above, the talkers, and then there are the doers.  We prefer the doers like the Put buyers – small option traders spent a record amount on protective puts last week.  However, the talkers, the various investment surveys, also reached some interesting extremes last week.

The AAII, or American Association of Individual Investors Survey, seemingly has been around forever, and the rap on it is so have most of those they survey.  That said, there’s always something to be said for a long history.  This is one of the few times in the last decade that bears are more than 50% of respondents.  When not in a recession, the market rallied the next month 21 of 22 times, and that sole loss was reversed the next month.  The AIM Survey looks at a handful of sentiment surveys and calculates the amount of optimism in each.  It is below 50% which represents only one percent of all days since 1990.  When below 5% the annualized return was 72% versus -1.6% when the model was in the top 1%.  This was the first reading of pessimism in three months.  Following similar spikes in pessimism the market rose 11 of 12 times over the next three months, all this according to SentimenTrader.com.

The thermos might be the greatest invention ever.  It keeps things hot, it keeps things cold – how does it know?  Second best might be the 50-day moving average.  It stops rallies, it stops declines – how does it know?  Amongst the many examples, most recent is FB (238) – we hesitate to say Meta Platforms, since after Thursday’s performance it may be time for another name change.  In any event, the recent strength here pretty much stopped right at the 50-day.  The 50-day moving average is not the riddle of existence, though at times we wonder.  It’s a tool in what is the riddle of stock market existence – discipline.  Not long ago we spoke well of the Biotech ETF (IBB-130), but cautioned wait for a move above the 50-day, then around 153.  A little discipline here would’ve saved about 20 points.  In this business it’s not the big money you make, it’s often about the big money you avoid losing.  Stay with stocks above the 50- day, certainly those above the 200-day.

Anything worth doing is worth doing to excess, should be the market’s motto.  Markets often go to extremes, and those can become even more extreme.  It’s the nature of markets.  Only 55% of Tech is down 50%, while the last two bear markets saw 80% down that much.  Stocks above their 200-day typically fall to less than 20% and often to 10%, versus the mid- 20s now.  That said, last week’s extremes were enough for a tradable rally and we’ve seen one, which is not to say the rally is over.  We can say the rally was enough to work off some of those extremes, so the easy part likely is over.  We are still bothered by the Ukraine situation – did Putin go to all that trouble just to walk away?  And, therefore, our added interest in oil, in this case as a possible hedge.  As important as the downside is so too is the upside.  Tuesday’s 200+ Dow rally with only flat A/Ds doesn’t exactly scream sold out, on the contrary.  Those A/Ds are still important.  The weakness there and in the Russell is a bear market pattern.

Frank D. Gretz

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DJIA:  34,160

Oversold … it doesn’t mean over.  Oversold is a technical term we pretty much dislike.  Among other things, it’s completely overused – two days down, all you hear is oversold.  It’s also what they call “mean reverting.”  When the market is oversold you’re supposed to buy, and when overbought you’re supposed to sell.  Do that for a while and you’ll be broke.  Oversold can become more oversold and overbought more overbought.  Very bad and very good markets tend to do that.  What you want to look to are the trend following indicators, that’s where the money is made.  The easiest of these are the moving averages.  Stick with stocks above the 50-day and by all means stick with stocks above their 200-day.  For the overall market, all the money is made when for the S&P the 50-day is above the 200-day.  The S&P is below its 200-day around 4450, but the 50-day remains well above there.  That’s not the case when it comes to the Russell 2000 – that’s a bear market.

After all that – the market is oversold.  While our saying it doesn’t change the above, we know oversold when we see it.  An amazing 42% of NASDAQ stocks are down 50% from their 52-week highs, a quarter of them are at 52-week lows.  That’s on a par with the worst numbers in 20 years.  For the S&P, fewer than 8% of its components were above their 10-day average.  That’s oversold.  Perhaps as impressive has been the sentiment side.  Put buying and buying of inverse ETFs were both at record levels.  This rapid swing to bearishness is surprising and typically a good contrary indicator.  The VIX hit 39 Monday before reversing to 30, a sign of panic and an end to that panic.  All of this led to Monday’s impressive reversal.  The problem is one day is just one day, and one day reversals rarely prove reliable.  That said, we are oversold and sentiment has turned negative.

We’re fond of most things retro, and have come to stretch that fondness to stocks as well.  So you can only imagine how pleased we were to see IBM (133) finally get out of its own way.  Part of our investment theme is to always look to stocks that are under owned and vice versa.  At something like 3% of the S&P market cap, what could be more under owned than oil.  We don’t know what the number might be for retro Tech stocks like IBM and Hewlett-Packard Enterprises (16), but our guess is it’s small and, therefore, the potential.  And, of course, the charts have shaped up.  At the other end of the spectrum is biotech, where the charts have not shaped up.  Indeed it’s a group so bad it’s good.  More than 60% of biotech shares are down 50% or more, something that has only happened 14 other times.  A month later the shares were up each time, according to SentimenTrader.com.  Obviously there are few commendable charts here, but at the least this might not be the best time to sell.

Despite the market weakness and plenty of exuberance, there doesn’t seem much talk of a bubble.  It’s likely true in part because bubbles are hard to define, especially when you’re in them.  And this bubble is different.  It’s not a housing bubble or a bubble in dot.com’s.  There have been a series of bubbles, making it hard to call “the market” a bubble.  Happy Anniversary, by the way, to the MEME bubble – how’s that GameStop (93) working for you?  If that was just an aberration, how about those SPACS?  Lend money to someone to buy something and hope for the best – no more tulips please.  By the time most of us figured out what EV stood for, it was over.  And the IPOs act like IOUs.  Finally, and still controversial are the Cryptos, loved by some smart people, thought to be a Ponzi scheme other smart people.  Who are we to say except to say, history doesn’t usually smile on markets like this.

There’s one thing the market should like about the Fed meeting – it’s over.  Another should be no real mention of balance sheet reduction.  We didn’t expect a rate rise, but a little QT, versus QE, seemed a possibility.  If you want to see what QE has done for the market, and could possibly undo, see the chart on page 7 of last week’s Barron’s. With the meeting out of the way and the market still oversold, some recovery makes sense.  However, the technical backdrop is what got us in this mess and it’s still not pretty.  Declining stocks have outnumbered those advancing for 10 consecutive days.  The A/Ds lead the stock averages.  Despite the tailwind of higher rates, financials have not acted well, perhaps sniffing out a weak economy.  Staples still makes sense, as does oil.  The latter also might provide some hedge against the problem in the Ukraine, which everyone now seems convinced is not a problem.

Frank D. Gretz

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DJIA:  34,715

A stock picker’s market … let’s hope not.  The idea of a “stock picker’s” market seems one which is narrow and selective, one in which we are supposed to be smart enough to pick the relatively few winners.  To that we say – good luck.  In Barron’s 2021 forecasting challenge, the toughest question was predict the best Dow stock.  Mind you, we’re not talking about the whole market, just 30 stocks.  It was Home Depot (350), which less than one percent got right.  Under 2% correctly forecast the worst, Disney (148).  Forget stock picking – it’s hard.  Give us instead those days of 2000-3000 stocks up every day.  That’s when we’re all good stock pickers.  Those days may be gone for now, yet the concept could be alive and well in a somewhat different format.  It could be easy to be a good stock picker provided you’re picking a Regional Bank, Oil or a Staple.  There are plenty of stocks here, and they all look higher.

It’s a bit of a stretch to expect most to back off of Tech – there’s not even a 12 step program.  And it’s probably not all Tech, it’s the price to sales Tech you probably want to avoid.  And if Tech underperforms, it’s likely the S&P will as well.  If you find that hard to believe, there are studies about the first week of the year that seem even more of a stretch – the idea that five days have predictive value for the year.  The numbers, however, back that up.  In this year’s first week Energy was up 11%, Financials 5%.  The rest of the year Energy was up 90% of the time for a median gain of 19%.  Defensive stocks were up 82% of the time for median gain of 14%.  Against this backdrop the S&P had median loss of 2.3%, according to SentimenTrader.com.

If Tech/Growth is to underperform, a flat to down S&P would hardly come as a surprise.  Last year to outperform you had to over own the five or six stocks that made up 25% of the S&P market cap.  If they come in flat this year that would make outperformance easier especially if Oil, Staples and Financials follow the pattern described above.  But there’s more to this than just relative performance, this year should offer some real upside, provided you’re in the right areas. Those areas, however, could be very different than those last year.  In chart form, what rather dramatically says it all are the Invesco Pure Value ETF (RPV-83) versus the Pure Growth ETF (RPG-183).  The Value Index might be compared to the SPDR ETF (XLP-76) and the growth matches up with any number of those for Tech.  The other area to look to is financials, preferably ex stocks like Goldman (348) and JP Morgan (148).  The SPDR Regional Bank ETF (KRE-73) would seem to work here.

Money has come out of bonds and doesn’t seem to have gone to Crypto.  That’s not much of a surprise since Crypto seems a world unto itself, unrelated to rates or the dollar. We thought the bond money could go to Gold because they’re both inflation related, but that hadn’t been the case until this Wednesday, when most precious metal shares were at least able to move above their 50 day averages.  Like oil, this is a fairly homogeneous group, where getting the trend right is more important than stock picking.  Now that they at least are above the 50 day, the uptrend has a start, and the dynamic nature of the moves Wednesday also seems a positive sign.  As it happens, should we be right, money from inflation fearing bonds could move to inflation loving Gold.  The difference in the size of those markets would result in a significant move in Gold.

The Advance-Decline Index peaked in early November while the market averages subsequently continued to bounce around their highs.  Divergences here don’t end well.  Hope may spring eternal, but rarely are these divergences self-correcting.  Divergences can linger however, and last week’s 3-to-1 up day and Thursday’s 400 point decline with modestly negative A/D’s made a trading range a possibility.  This week’s 5-to-1 and 3-to-1down days, and the break in the NAZ and Russell, suggest a low will await more pessimistic extremes – a VIX (26) in the low to mid 20s won’t get it done, despite an already oversold market.  Tech and, therefore, the NAZ is where the greatest weakness lies.  Thursday’s rally was impressive, while it lasted.  Bear in mind, and the pun is intended, most of the best one day rallies happen in bear markets

Frank D. Gretz

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