DJIA:  36,113

It’s a market of stocks … but this year those stocks could be different.  Last year Tech drove the market.  More specifically, six Tech stocks drove the market.  Those are the biggest, mostest, fastest, bestest– and they’re not bad.  It’s hard to say an unkind word about Tech, the companies.  The problem is most don’t distinguish between the companies and their stocks.  Most understand Tech is where you want to be.  The problem is most know it to the point they’re already there.  If six stocks are close to 25% of the S&P market cap, do you really think they’re on their way to 35–40%?  Anything is possible, but it’s also possible that everyone who wants in, is in.  Meanwhile, raise your hand if you own Hewlett-Packard Enterprise (18) or, for that matter, stocks like Cisco (62) or IBM (135). These aren’t exactly over-owned and have better charts than most of Tech. Emphasis in the stock market is always changing, and it could be doing so again.

Change in this market is more than just about Tech.  Change has had a lot to do with the bond market.  Bonds have correlated quite well with stock prices recently in that higher yields have meant lower prices.  Now that bonds seem in a clear downtrend, that should be a problem for stocks.  And the higher yields have been blamed for much of the trouble in Tech, though our view is over ownership is the problem.  And if a problem for Tech, higher rates have been a boon to all that is financial.  As you may recall, we don’t like banks – if they’re not lending to some Third World country they’re trying to rig LIBOR – really?  That said, we do like making money, and the banks and other financials look higher.  Going through the charts, there are maybe 50 or 60 you have to buy.  A couple of ETFs here are the SPDR Financial (XLF-41) and the SPDR Bank (KRE-78).  Somewhat forgotten is Berkshire Hathaway (321), the largest holding in XLF, a financial with a 20 percent holding in Apple.

Oil isn’t really new, the stocks had a great year in 2021.  Still with all the focus on EVs, and at only 3–4% of the S&P by market cap, the stocks still look dramatically under-owned.  The good charts here run the gamut, from Chevron (129) to Vermilion Energy (15). The other area that makes sense this year is Staples.  While Staples sounds defensive, there are those with growth stock long-term patterns, without the volatility.  If Tech generally underperforms this year, these stocks, and especially those in long-term uptrends, could do quite well.  Obvious names include Coke (61) and Pepsi (174), as well as Church and Dwight (104), Procter & Gamble (158), Hershey (197) and the like.  Last year it was all but impossible to beat the S&P unless you over-owned the five or six stocks that dominated that average.  This year could be quite different – it could be easy to beat the S&P.  If those five or six stocks underperform, that’s bad for the S&P.  If out of favor Tech, Banks, Staples and, especially, Energy outperform, they will hardly move the S&P needle, though there’s plenty of money to be made.

Amazon (3224) has become a bit controversial after its relatively poor performance last year.  And most technicians will tell you don’t look at the chart while dining.  But that’s the daily chart – each bar one day.  The monthly chart – each bar one month – is much different, and to our thinking a better way to look at the FANG and other stocks that trade erratically.  On that basis, it’s a consolidation, not unlike the pattern between late 2018, and early 2020.  Since the overall trend is up we would assume that like the last time the current consolidation will resolve to the upside, but we don’t anticipate.  We buy breakouts.  If we were to anticipate, we at least would wait for move above the 50 day around 3450.  Last time we listed a number of stocks in long-term /multi-year uptrends.  Even here we would buy when the stocks are above or recover to be above their 50 day average.  Included this week is Edwards Life (120) which seems to meet that criteria.

When it comes to the market overall, we’re still cautious.  We all know the first couple rate hikes the market typically ignores, but typically the market doesn’t ignore a taper, let alone a halt to stimulus.  Meanwhile, the Advance-Decline Index peaked in early November and fewer than 50% of stocks are above their 200 day average, that is, in medium term uptrends.  Against the averages, which are only a few percent from their highs, that’s quite a divergence, and divergences don’t end well.  There are many Financial and Energy stocks, and they are acting well.  If you’re thinking these may serve to correct the divergences, it’s possible but that would be unusual.  That said, divergences can linger, and that may well be the case this time.  Tuesday’s 3-to-1 up day leaves the feeling of a market with a divergence, but not diverging.  While the overall market trend is where we tend to place our emphasis, the money may well be in being in the right areas, hopefully the aforementioned retro-Techs, Staples, Financials and Energy stocks.

Frank D. Gretz

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DJIA:  36,236

Whether a trader or an investor, there’s reason to look to stocks in relatively consistent long-term uptrends.  The very term investing implies a need for stocks you really can buy and hold.  It only makes sense those are stocks in long-term uptrends.  Trading of course is anything but long-term.  Still having the long-term trend at your back simply adds to the probability of short-term success.

Frank D. Gretz

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DJIA:  36,398

It has been a great year … it’s hard to expect another?  The market hasn’t had more than a 5% correction in the last two years, can you expect another?  With inflation a serious practical problem for the first time in a generation, can you assume that still, “there is no alternative” for stocks?  Then there’s the taper.  In 2011, just 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 a balance sheet shrinkage came before a 12% decline.  In 2018, a comment about balance sheet unwind on “auto pilot” coincided with the near death of the bull market.  On the technical front, while the averages are at or near highs, the average stock has lagged.  Less than half of NYSE stocks are above their 200-day moving average, that is, in medium term uptrends.  All these things leave us cautious.  It’s ironic that everyone likes to make predictions this time of year when this time of year itself often offers important insights.  It’s a good time of year to be observing rather than predicting.  Besides, the best prophet, Thomas Hobbes once wrote, is the best guesser.

The idea that we could see three rate hikes next year so far has left the market surprisingly undaunted.  Then, too, we’re more concerned about the taper than the hikes.  Monetary policy may only shift to merely easy versus extremely easy, but what counts is the change at the margin, rather than the absolute level of stimulus.  Mike Wilson points out the Fed will go from a $1.4 trillion annualized pace of asset purchases to zero in four months.  This reversal of the extraordinary fiscal and monetary stimulus applied to fight the pandemic almost certainly will have an impact on multiples.  Beyond the Fed’s massive securities purchases since March 2020, Felix Zulauf points to the largely unrecognized impact of the Treasury’s sharp drawdown in its balance at the Fed.  The reduction, which has injected liquidity into the economy, is about to reverse.  At the same time, China isn’t recycling its US dollar holdings as it used to, further reducing global dollar liquidity.  Seems a bit esoteric, but not really.  It’s at the core of technical analysis, that is, supply and demand.

When someone says they’re bearish, we always ask does that mean you own few or no stocks?  Invariably the answer is – well, we do own stocks, but …  If you are really bearish you own few stocks.  Investor sentiment peaked earlier in the year amidst the speculative binge around meme stocks.  Many of these stocks peaked back then as well, of course the averages did not.  As the averages have moved higher, speculative buying as measured by Call buying has surged a couple of times.  One sentiment measure that has remained unimpressed is the AAII Bull Ratio, a survey of, shall we say, more sedate investors.  The AAII Bull Ratio has held below 50% for five straight weeks.  When below 45% while the S&P is above a rising 50 week moving average, the S&P has gained 91% of the time over the next three months, according to SentimenTrader.com.  And this is only the second time since the inception of the survey the ratio was negative for the first four weeks of December.  A possible caveat, their talking the talk – survey shows respondents cautious, but with a high allocation to stocks.

The S&P healthcare sector has pretty much kept up with the S&P Index itself.  Biotech ETFs, however, are not even in the black this year.  The XBI, an Equal Weight Index which focuses on small and mid-caps, is down more than 20%, and more than 28% from its 2021 high.  And the median stock in the group is down 50%.  Recently, fewer than 10% of the stocks were above the ten-day average, fewer than 15% were above their 50-day average, and fewer than 20% were above the 200-day average.  All these are within a few percent of all readings historically.  This says washed out.  Then, too, washed out is one thing, new uptrends can be another.  If washed out, the IBB (154) and XBI (113) should do something right, as we like to say.  For both, that would be a move above their respective 50-day averages.  For IBB, that would be above 156 which also would break the downtrend in place since September.  The XBI has broken the downtrend, but remains below the 50-day around 120.  A new wave of M&A could serve as a catalyst here.

Historically, it has been difficult to bring inflation under control unless interest rates rise to the point they’re above the rate of inflation.  That’s should mean lower bond prices.  The money out of bonds could flow to gold, not crypto, as an inflation hedge.  Bond prices have turned down, gold prices seem undecided.  In an inflationary environment oil should have another good year.  The spread between Staples and NASDAQ stocks in terms of their 50-day averages, 90% and 25%, respectively, is the most in 30 years.  We believe in Staples but leadership in the New Year is often unclear – back to observing versus predicting.  Insiders stand selling – assuming they know value, it’s not a good sign.  Tesla (1070) may be the greatest new economy stock but when the founder starts selling, for whatever reason, it doesn’t seem a good thing.  Like this year, where you’re in likely will be more important than whether you’re in.  Generally speaking, we like stocks in long-term uptrends regardless of their group or industry. An example we haven’t mentioned before is Prologis (168).  Meanwhile, with a divergence already in place, the Advance-Decline numbers will remain important.

Frank D. Gretz

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DJIA:  35,897

Sure it’s the end of the world … but we think it’s discounted.  A hawkish Fed is not the end of the world, and we do think it is discounted – at least it should be.  If you didn’t know it had become a more hawkish fed, you have to be under that proverbial rock.  And when it comes to the stock market, what we all know isn’t worth knowing – it’s discounted.  Sure the market could have reacted negatively to the meeting, after all, you never know.  But having sold off in the days prior to the meeting that seemed unlikely.  And the market could have taken the bad news as the bad news it really is, but that’s on the market – the market makes the news.  Half the news in a bull market is bad news but the market ignores it.  That the market seems to have ignored this particular bad news is a good sign, at least for now.  But it is bad news.  Don’t fight the Fed, and all that.

We first became involved with the technical analysis for a simple reason – we noticed when “the market” went up we made money, and in market corrections we lost money.  We decided a better understanding of what moves markets might be helpful, so we enrolled in the Bob Farrell school of technical analysis.  We’ve become somewhat proficient at recognizing market trends, not so good at recognizing their duration.  In any event, we believe things have changed, in part at least because of the significant degree of passive investing.  Back in the day market trend was most important – academic studies showed the overall trend accounted for as much as 50 to 60% of the movement in any individual stock.  Group performance was another 20% and fundamentals the rest.  We’ve seen no recent academic studies, but our take is those numbers may well be reversed.  Group behavior now seems to dominate.  Where you’re in has become more important than whether you’re in.

Tech has been the place to be this year, as it was for much of the 1990s, but it hasn’t always been that way.  Consumer stocks dominated the 1980s and back in the 1970s when inflation ruled, it was mining and energy stocks that performed well.  Coca-Cola (59) sold for 40x earnings in 1972 and only 9x earnings in 1981.  Had you bought Coke at the end of 1972 – a real buy and hold stock – you didn’t break even until 1985.  Leadership in the stock market does change, and we think an important one likely has begun.  We’re not saying sell your Apple (172) and Microsoft (325), but “multiple of sales” Tech is likely to lose out as consumer staples stocks likely continue to outperform.  Of the 33 stocks in the XLP (77), the Consumer Staples ETF, 10 have very positive charts – PepsiCo (172), CVS (101), Hershey (192), Procter & Gamble (161), Estee Lauder (363), Costco (533), you get the picture.  As for XLP itself, it has cycled from fewer than 5% of component stocks above their 10 day average to more than 95%.  That typically signals the start of an important move.

Aside from being in the right groups or sectors, the easiest way to make money in stocks is to be on the right side of the trend.  In this case we’re talking about the long-term trend.  Many claim to be long-term investors, yet they own stocks in long-term trading ranges.  You don’t need to predict here, just look for stocks in five year steady uptrends.  Those trends tend to persist.  And when your timing is a little off, the trend bails you out.  There are ample examples even in consumer staples, including Pepsi, Costco and Procter & Gamble.  Two others that qualify here are Accenture (401), which gapped higher Thursday, and Intuit (634) which is consolidating.  Even for those of us who don’t know the meaning of “long term,” trend is important.  The easiest way to make 50% trading is to trade stocks in the process of doubling.

In November the market worried inflation was out of control, now the market is worried the Fed will be out of control.  Despite the apparent demise of Evergrande, still no worry about China.  And still no worry about Russia and the Ukraine, though we keep checking those defense stocks for a sign.  It seems doubtful that financial conditions can tighten without some sort of market accident, and the technical back drop has begun to bear that out.  The A/D Index peaked in early November, this measure of the average stock typically does so well before the averages themselves.  More importantly, with fewer stocks advancing and in uptrends, it has become even more difficult in this already difficult year.  The for sale sign on most of Tech here at year end may seem a dirty trick, but more likely is simply about crowded trades.  And, did we mention, leadership does change.  Meanwhile, with the Fed worry out of the way, we expect the market for now to muddle through, including Tech.

Frank D. Gretz

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DJIA:  35,754

No cigar … but close enough?  Not every sell-off ends in a real washout, and this one did not.  Still, this seems a credible low.  Certainly the decline had its moments, including a couple of near 90% down volume days, important when you consider sellers, not buyers, make lows.  Lacking was an 80% up day or a 5-to-1 A/D day, achievable when sellers are out of the way.  Somewhat ironically, rather than momentum numbers it’s the sentiment or psychology side that says low.  The surge in the VIX (21) and subsequent reversal says there was panic, and it has now ended.  In a complete turnaround, the extreme Call buying turned to Put buying to the highest degree since the pandemic rally began.  And inverse ETF buying, today’s equivalent of short selling, reached 2.2% of NYSE volume, the most ever.  So no washout low, but likely one good enough for now.

The market pretty much played doctor to start Monday’s 600 point rally.  While we didn’t hear anyone screaming the variant is not a problem, the market did just that – the vaccine stocks tanked and oil stocks surged.  This was, of course, just the opposite of the 900 point drubbing a week or so ago, when the markets seemed to be saying all was lost.  Markets are not always right and may not be again this time.  At least they are a reasonably fair game, and the market gets it right more often than most of us.  Hence, our predilection for observing and keeping the predicting to a minimum.  You didn’t have to predict the little correction we’ve been through, you just had to observe the S&P and NASDAQ dancing around their highs while the A/Ds were negative for seven consecutive days – that never ends well.  Even now those numbers will be important.  You don’t want to see strength in the averages against the pattern of weak or negative A/Ds.

Leadership this year has been fickle, to put it kindly.  For the most part there has been a division between stay or go, stay at home or don’t stay at home.  Of late there seems another division within stay at home – don’t get on an international flight or a cruise ship, don’t get on your Peloton but by all means go to McDonald’s.  And what does it mean when MCD (262) is acting better than Microsoft (333)?  Fortunately we’re not afflicted with the problem of figuring out why things are as they are, we just know when they are what they are.  Our two cents, and you get what you pay for, we could be about to see a shift away from stocks selling for a multiple of sales back to stocks selling for a multiple of earnings.  We are not suggesting you sell your Microsoft, but it may be time to take a hard look at stocks like McDonald’s or a Procter & Gamble (153), stocks where the long-term trends resemble that of Microsoft.

This time of year everyone tends to chomp at the bit to predict next year’s returns.  Interesting when you consider few predicted even the recent little setback, and when the start of the calendar year is often a predictor of how it will end – the old, as goes January thing.  Undaunted, and interesting for the call, are predictions of a negative return from institutions as big and influential as Morgan Stanley and B of A, both of whom it would seem have a vested interest in seeing prices higher.  Their concern is inflation and, therefore, rising rates.  As suggested above, we’re not fond of predictions and will wait to see how the now lagging Advance-Decline Index plays out.  Were we to venture on the dark side of funnymentals, it’s not hard to see trouble next year.  Rates seem headed higher, and “don’t fight the Fed” works both ways.  The real worry seems consumer sentiment where the numbers peaked earlier in the year.  They have an excellent record of preceding downturns.

After major declines, stocks bottom together – when the selling is done, it is as though there’s a vacuum on the upside.  Tops are completely different.  Stocks/groups peak a few at a time, typically the big first and, therefore, the divergences between the averages and the A/D Index.  Typical as well, speculative areas peak early.  Where did all those SPACS go, let alone those MEME stocks?  Certainly controversial and certainly an area of speculation is bitcoin.  We’re speaking here of the surrogate equities, like Riot Blockchain (26), Marathon Digital (41) and Coinbase (264).  We know they have survived this look before, but the charts here are not pretty.  As for the market, if the Fed meeting next week is as hawkish as expected, will that be a surprise?  Another time when the market will make the news, and a time to not predict but to observe.  Thursday was one of those bad up days of sorts, Dow flat, A/Ds 3-to-1 down. That’s not gonna get it done.  Down days happen, bad up days are a problem. We seem out of the woods, but watch those A/Ds.

Frank D. Gretz

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DJIA:  34,639

Don’t blame the Covid variant … blame the technical variant.  Blaming the weakness on the technical background seems a bit of a stretch, but not as much as you might think.  Against the backdrop of the S&P and NASDAQ dancing around their highs, NYSE declining issues outnumbered those advancing for seven consecutive days.  That’s a pattern that almost always leads to trouble.  Throw in the recent over the top Call buying, and risk increases all the more.  The Covid variant didn’t cause the weakness, it was instead an excuse for the weakness.  Similarly, Powell’s testimony Tuesday was yet another excuse for the day’s decline.  What is ignored in good markets gets punished in technically weak ones.  It’s the market that makes the news.  The market needs to get to the point where bad news is no longer bad.

Hindenburg is back, the omen that is.  Scorned for its name, the indicator is as useful as most.  That’s because the premise is sound.  Markets internally out of sync are not healthy, and are a warning.  Divergences between the market averages and the Advance/Decline Index, for example, mean the large-cap stocks that dominate the averages are out of sync with the average stock as measured by the A/D Index.  The Hindenburg rather than looking at A/D’s, looks instead at 12 month new highs and new lows.  It’s not whether one is greater than the other, it’s when in an uptrend they are more or less equal. That’s a market divided, and you know how that saying goes. That equality in new highs/new lows took sides last week.  On the NYSE new lows were more than double the number of new highs and more than triple on the NASDAQ.  This speaks to the almost superficial aspect of the strength in the averages.

As a result of the above the market has narrowed.  In the process the Russell 2000 has forfeited its break out which had been so encouraging.  After some seven months of literal hibernation this measure of secondary stocks joined the S&P/NAZ party in late October and, as the chart shows, did so in dramatic fashion.  Now back below the breakout point, the rule of thumb says sell half, it’s unlikely it will work.  By the way, this applies to individual stocks with similar patterns.  The other part of the story here seems big is where you want to be.  It’s not the most healthy thing for the market, but it is what it is.  And when it comes to big, big Tech seems the place to be.  They held together in the heart of the pandemic, and by the look of Apple (164), Microsoft (329), and the semis, seem likely to at least outperform.

Cathie Wood of the ARK ETF fame has had a tough go of it this year.  So much so that new on the scene is the Tuttle Capital Short Innovation ETF (SARK-37) – payback time for the Everly Brothers.  The object of the ETF is to mimic ARK Innovation (ARKK-99) inversely.  After knocking the cover off the ball last year, Cathie has been a little out of sync this year, but who among us is without our rotation faux pas.  What is a bit troublesome here is that she seems to lean to “stay at home” stocks, like Zoom Video (192), Teladoc (97), Roku (210) and the like.  Come what may with the new variant, we don’t see anything like the previous lockdown when those stocks were big winners.  And the charts more than bear that out, as does the chart of ARK Innovation itself – and this despite a 10% holding in Tesla (1085). With its stay at home emphasis, news of the variant helped the fund last Friday, but that proved brief.  The variant doesn’t seem to be helping ARKK, its going away likely also wouldn’t help.

We have seen a couple of days of extreme selling – near 90% down volume days.  That’s a good thing when you understand sellers, not buyers, make lows.  Prices can move up with relative ease when selling is out-of-the-way.  You do need proof of that, however, like an 80% up volume day.  The spike in the VIX (28) is also encouraging, but it’s not the level per se that counts.  What is needed is a reversal from a high-level to indicate the panic has passed.  With fewer than 6% of S&P issues above their 10 day average, a rally of sorts was due.  THE low seems doubtful, but a big up day would change our mind.  They say never buy an up opening in a bear market.  Wednesday’s opening and dramatic reversal argue for a bear market.  Thursday’s up opening and decent close argue – never mind.  We expect this year to muddle through, talk of bear market possibly is next year’s story.

Frank D. Gretz

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DJIA:  35,870

The fear of missing out … and the fear of losing out. A little greed and the fear of job loss in part have combined to lift all manner of things to record highs.  The brevity of last week’s selloff we suppose will only reinforce the need to join ’em not fight ’em. Before its little pullback, the S&P last week finished its longest streak of record new highs since 1964. While the past isn’t necessarily prologue, the market has a lot going for it, including the time of year.  And there’s the technical backdrop – the recent new high in the A/D Index, thanks to that major break out in the Russell 2000.  Obviously it’s money driving prices, and in this case it’s a deluge of stimulus measures not just taken by the Fed but virtually worldwide.  If there’s any doubt as to the scope, even news of the taper caused no tantrum.  Do you really think this is just all about good earnings?

If the market has a problem it is not everyone is stuck on the sidelines.  Indeed, some may be playing a little too hard.  On November 5 a record amount of options traded in the US, the highest trading volume on record, according to Goldman Sachs.  Option trading volumes are now about 50% more in nominal dollar terms than all actual stock trading.  Most of the option trading is in Calls, and is now back to those decades highs at the start of 2021, not an auspicious time for share prices. That has pushed the P/C ratio to the lowest level since June 2000, just before the dot.com bubble burst.  Retail investors have been a major factor behind the surge in options trading, and a basket of stocks that are popular with day traders has gained about 150% this year, compared with the S&P’s 24%. Clearly there’s more than a little froth here.

News of the Fed’s taper, like the CPI and pretty much everything else these days, left the market unphased. Granted the Fed is only about to start reducing its monthly security purchases by just 15 billion at month’s end, therefore, still adding 400 billion to a balance sheet that has more than doubled since February 2020.  Back in 2000, the Fed was withdrawing liquidity after the world didn’t come to an end via “Y2K.”  In common with 2000 is an exceptional rise in the number of tech stocks, coupled with what seems more than a little speculation at the margin.   The frequent measure of choice these days is not price to earnings, but price to sales.  Bubbles always are difficult to time, they always can become more extreme.  In bubbles you’re not investing in Tesla (1096) the company, you’re depending instead that someone will pay more for that piece of paper called Tesla.  That shows up in parabolic charts, like that of Tesla.  What makes this market not a bubble, however, remains clear.  Bubbles are narrow – nifty-fifty, dot.coms and so on – this is not a narrow market.

When it comes to worries, inflation is all the rage.  Just look at those consumer sentiment surveys.  But here’s the point, what we all are worried about rarely is the problem.  Write down what you’re worried about today, six months from now you’ll likely find it unimportant.  And, at least for now, the market seems to find unimportant the inflation worry, taper and what the Fed might do.  That leaves one of our long-standing beliefs that it’s where you’re not looking that always gets you.  We have always found China prime time in that regard, because it has become more and more obvious the economy has trouble, and investors don’t seem to care.  That said, we wrote a positive piece a few weeks ago, all which still seems true.  Chinese tech stocks have become almost hated, and selling has reached washout levels.  Momentum measures have started to recover, as was the case in 2008 and 2011.

Sometime back in the 80s there was a year similar to this one in that it was difficult to beat the market.  It was difficult to beat the S&P back then because no one owned enough Microsoft (341).  Each day Microsoft seemed to gap higher three or four points.  It was almost too easy.  As it happens, Microsoft now is looking easy – not extended and breaking out.  And if you need to be invested, what could be easier.  Meanwhile, while speculation is over the top, we always contend momentum trumps sentiment.  Given the seasonally positive time of year and the professional need to perform, the market should be able to move higher.  There was, however, a little cautionary note this week when the Dow rose Tuesday and there were more declining than advancing issues.  Those “weak up days” usually lead to trouble.  Gold has a seasonal headwind but acts much better.  Those weak consumer sentiment numbers favor small caps and value.

Frank D. Gretz

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DJIA:  35,921

The running of the bulls… or is it the running-in of the bears?  It’s hard to sell anything when everything you have sold keeps going higher.  Then, too, that’s the sort of thinking that leads to days like Tuesday and Wednesday.   Prices are stretched which is hardly an insight.  Stretched patterns certainly are entitled to a little mean reversion but the current background is not one from which big declines begin.  Tesla (1064) and others may be subject to some gravitational pull, but a first leg down isn’t the one that finishes them.  There always will be a recovery/rally and if not back to the highs, then worry.  Like the market itself, these big uptrends don’t die easily.  Then, too, contrary to that sage Mae West, sometimes too much of a good thing is too much, and it’s time for a rest.  The seasonal pattern and, more importantly, the upside momentum still suggest more upside into year-end.

A friend of ours is an oil analyst and we always kid her – at least we say we’re kidding – that no one needs an oil analyst.  After all, when oil stocks are going up they all go up, and when they go down they all go down. It’s the most homogeneous group we know of, and it takes that to the extreme.  If the truth be known, the original saying was about technical analysts – in a bull market you don’t need them, and in a bear market you don’t want them.  Obviously, if only for job preservation, we beg to differ.  This year has been more about where you are in rather than whether you’re in, and where you are in has been a movable feast.  What brings this to mind is last week’s break out in the Russell 2000.  The index is one thing, the 2000 stocks something else.  Without wanting to be too dramatic, all the nothing burgers lifted — the Sally Beauty’s (20), American Eagle’s (26), Desktop Metal’s (8.5), and so on.  There were 3000 stocks up that day, a day you didn’t need a technical analyst

While the breakout in the Russell 2000 and the many secondary stocks should bring some new life to the market, some favorites of yore have had a difficult time recently.  Many, of course, are the pandemic stocks, a poster child of which is Peloton (51).  They loved it on the way up, now they’re calling it a clothes rack.  They, so to speak, can be fickle but this is hardly new.  Another name to be wary of is Zoom Video (248).  We can envision “zoom” becoming obsolete as a word.  And for both Peloton and Zoom there’s also the little matter of competition.  For a couple weeks we wondered what was wrong with PayPal (202) and now we know.  Meanwhile, as bitcoin soars, Coinbase (336) doesn’t seem a beneficiary.  A look at the chart of Interactive Brokers suggests there’s a little competition here.

With all the talk of inflation, let alone its reality, it has been surprising gold/silver hasn’t done better.  This seemed to change with Wednesday’s inflation number.  Just why the number was such a surprise is hard to say, but the metal did react.  GLD (174), the Commodity ETF, moved above a five month trading range, GDX (35), the Miners ETF, hasn’t quite made it.  Both remain in overall downtrends and much the same is true of silver.  There seems plenty of potential in these patterns, though it could take time.  The Wednesday action does seem an important start.  And the multi-year perspective here really isn’t bad.  The GDX ETF showed an 18% annual return in the three years through November 4, despite a -17% return in the last 12 months, according to Morningstar.  Some contend bitcoin is the new gold, but with bitcoin’s volatility we don’t see it.  It also has been surprising that negative real rates haven’t given gold more of a boost, but that may be yet to come.

Uptrends have their corrections, even the best of them.  Stretched markets and stretched stocks are always vulnerable to a little untoward news.  When Tesla came down the other day, they found ice on it.  Every stock is different, but at close to 50% above the 50 day average, it had pretty much gone vertical.  They’ll blame the correction on Musk for selling some, or should they blame him for creating the monster?  It’s funny how the market’s little correction of less than 1% seemed like more, perhaps because a couple of the sacred were hit.  And Wednesday did see the A/D’s at better than 2-to-1down.  As we always say, we don’t worry about the weak down days, they happen.  We worry about the weak up days, the days with the DJ +300 and the A/D’s flat or worse.  With the Dow down 150 points Thursday, the A/D’s were positive, a good sign.

Frank D. Gretz

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DJIA:  36,124

From Facebook to META … too bad Philip Morris was taken.  As is typical of most renamings, this one has its critics.  Professionals find “META” (336) already a fairly common name, and it’s one that ties the company to a very specific future in the augmented/virtual reality space – about which most were unaware.  What may capture the spirit of the many cynics, it’s like a restaurant that fails its health inspection and changes its name in a rush, said Ryan Goldstein of A. P. Keaton.  As the saying goes, a rose by any other name is still a rose.  It’s one thing to have the government on your case, something else when even your employees turn on you.  For all its troubles, recent weakness is a mere flesh wound to that long-term chart.  A move down to 300, a break of the uptrend, would be a different story.

For the market overall the backdrop has lined up pretty well for a good fourth quarter.  From last Thursday, the 208th trading day of the year, the odds of a 5% or greater decline through year-end are only about 15%.  The odds of a 20% correction are more like 2%, according toSentimenTrader.com.  Speaking of seasonality, Staples have a win rate of close to 85% this time of year.  We mentioned before when 80% of the S&P components were up on the year at the end of the third-quarter, as was the case this year, the market was higher in the fourth quarter each of the five other times.  And the S&P component stocks have cycled from fewer than 10% of stocks above their ten-day average to more than 80%.  When this close to new highs in the averages, returns were positive several months later.

If that’s the backdrop, the market action itself has lived up to it.  On Monday with the Dow up only about 90 points, there were 3000 stocks up on the NYSE.  That’s almost remarkable.  It’s the sort of number you expect to see at the start of a bull market rather than one this far along.  The Advance-Decline Index is at a new all-time high, leaving less than a 5% probability of a 10% or greater decline in the next few months.  The reason for Monday’s unusual number was the strength in so many secondary or mid-cap stocks.  The Russell 2000 (238), a measure of secondary stocks, finally has broken out of what pretty much has been a year-long trading range.   Inasmuch as secondary stocks typically peak before the large-cap averages, leaving divergences in the A/D Index, this seems another positive sign in terms of the uptrend’s longevity.

They say in a bull market you don’t need a technical analyst, and in a bear market you don’t want one.  A day with 3000 advancing issues does not a bull market make, but it is a day when you don’t need anyone to tell you what’s going up.  That said, the various commodity groups – oil, lithium, uranium and probably gold, still appeal to us.  And if those underinvested pros are about to get run-in, you have to think Tech, including FANG, and Google (2965) especially.  Meanwhile, Tesla (1230) can’t go up forever, or can it?  At almost double its 50 day, history says time for a rest.  We find interesting an ETF with one of our favorite symbols, MOO (97).  This AG Business ETF in its top holdings covers a couple of excellent charts in diverse areas – Zoetis (218), a drug company, and the retailer, Tractor Supply (218). The ETF is consolidating just above its base pattern.

Taper without the tantrum?  It’s not so much the market got what it wanted, it got what it expected.  It was a “nothing to see here” sort of fed event.  If good enough for the market, it’s good enough, but still.  The market’s fixation on rates and when they will rise seems a little misplaced when historically markets rise well after the first right hike.  Meanwhile taper means money is coming out of the demand equation and that would seem to matter.  But, sufficient unto the day is the evil thereof.  Here again, pay attention to those Advance-Decline numbers.  If there’s less money to push stocks higher there will be fewer and fewer advancing issues.  Instead of Monday’s 3000 advancing stocks, there will be a rally in the averages with just as many declines as advances.  That’s when trouble starts.  Taper is our idea of bad news, the market ignored it.  That’s what good markets do.

Frank D. Gretz

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DJIA: 35,730
Still looking for a 20% correction… that could be your career flashing in front of you. That’s true for the
professionals, many of whom already are lagging. And it could give new meaning to, “buy don’t bid” as the year
comes to a close. Imagine, Tesla (1077) up every day? More modestly, we wouldn’t expect too much trouble going
into year-end. It’s a seasonally positive period, but almost more importantly the harrowing month of October is
ending. We have mentioned the Advance-Decline Index once or twice, in this case to point out its new high. This
measure of the average stock tends to lead the stock averages prior to important corrections. Since 1928, the S&P was
five times more likely to see a 10% decline within three months if the A/D Index was not at a multi-year high. When
it did break out, as it has now, there was only a 4.6% probability of a 10% or greater decline in the next few months,
according to SentimenTrader.com.
Whether it’s a drift or a sprint higher, where you’re in likely will remain as important as whether you’re in. The
market has favored commodities and financials over most, but don’t tell that to stocks like Advanced Micro (121),
Nvidia (249) and Microsoft (324). And just when you think there’s nothing new under the sun, so to speak, Solar
comes along with a blowout move on Wednesday. Solar is a good example of how hard it has been this year to
settle on leadership. Until February it looked like the real deal, and by May it looked like the great meteor was on
its way. Overall, at least to look at TAN (98), the Solar ETF, it seems to be coming out of a lengthy base pattern.
Yes, more rotation, but probably not to the detriment of Oil. Lithium and Uranium also are two areas we favor, LIT
(91) and URA (27), respectively, are the ETF’s there. And, there’s Gold.
Bitcoin has garnered renewed enthusiasm in part on the back of the new ETF, Bitcoin Strategy (39). We’re
exaggerating just a bit, pun intended – talk is Bitcoin to the moon. Here at a modest new high, you have to admit it
has fulfilled previous expectations, defying naysayers. Meanwhile, Bitcoin has its skeptics, but so did Amazon
(3468) and Tesla. Then, too, there’s a graveyard of stocks, especially in Tech, where the skeptics had their day. We
have no strong overall opinion except to notice while never lacking for enthusiasm, Bitcoin does seem to have its
bouts of over-enthusiasm. One of those was when Coinbase (319) came along last April. From its high back then
COIN dropped some 50%. More to the point, if you use Marathon Digital (50) or Grayscale (49) as a proxy, the
enthusiasm COIN engendered at the time finished the rally in Bitcoin. Just as COIN was thought somehow to
legitimize Bitcoin, the same is now being said of the ETF. We wonder if it may not play out the same, at least
temporarily.
To dampen your enthusiasm just a bit, you might consider “the economy” section of last week’s Barron’s. The
article recounts a paper earlier this month by David Blanchflower and Alex Bryson in which they show that
consumer expectation indexes from both the University of Michigan and the Conference Board predict downturns
up to 18 months in advance in the U. S. They found that all recessions since the 1980s have been predicted by at
least a 10 point drop in these indexes. The Michigan gauge peaked in June and fell 18 points by August, while the
Conference Board measure peaked in March and then fell 21 points through September. While they call the
economic situation in 2021 “exceptional,” downturns in consumer expectations in the past six months suggest the
economy is entering a recession now, they say. Why the consumer gloom? Surveys show inflation is the
consumer’s top concern, something even Powell last week suggested may not be transitory.
The market has ignored /survived a lot of bad news, including last week’s word from Powell that inflation may not
be transitory. The surprise isn’t that he seems wrong – he admits to it! It’s possible the market may run in the
underinvested, but if it’s only a muddle higher, so be it. To whatever degree, higher seems likely. Aside from the
stocks we’ve mentioned, in a get-me-in market, if it goes that way, Google (2917), Tesla and Microsoft seem
indicative of where money might easily go. And so it did Thursday with Google. Curiously, the market’s initial
response to numbers from both Google and Tesla were tepid at best, and then the stocks blew higher – part of the
get-me-in? It will be interesting to see what comes of the likely Amazon (3447) and Apple (153) dips. Amazon
doesn’t seem immune to the world’s problems, but will the buy the dip stock do the same? Meanwhile, it’s a
Gambit, if you catch our drift.
Frank D. Gretz

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