DJIA:  33,917

He’s behind the curve … but not for long.  They berated poor Powell for being late to deal with inflation and rising market rates.  Then as he seemed to favor the idea of bigger rate hikes in a speech last Thursday, the Dow fell close to 1000 points the next day.  Is it be careful what you wish for, or for the stock market does bad news only matter when the market says it does.  Sure it was just a day, but a different day.  If rates suddenly matter, can’t wait for the day QE turns to QT, long our bigger concern.  In a way we almost find more worrisome last week’s reversal in the commodity stocks.  Sure it was related to China’s problems, but it seems more a matter of the market making the news or, in this case, not looking beyond the news.  Commodity stocks have been the market’s leadership, and when the market leaders stop leading it’s not a good sign.

The market opened higher both Wednesday and Thursday on the numbers from Microsoft (290) and the beleaguered Meta (206).  We briefly thought we had missed the cease-fire in Ukraine, news inflation is under control, and the Fed won’t raise rates, the things that matter.  Markets rally, even bear markets.  However, bear markets don’t end on good news.  They end on bad news because it’s bad news that begets selling and getting the sellers out-of-the-way is what ends bear markets.  Recall the day of the invasion back on February 24.  After a consistent two weeks of decline, the Dow was down more than 800 points before reversing to close higher.  Sellers not buyers make lows, so we particularly don’t like to see up openings.  Regardless of whether the market is sold out, you can argue Tech especially is due for a bounce. Both Microsoft and Meta have rallied back to but not quite through their respective 50-day averages.  These seem key points.   

Together with most commodities, Gold reversed last week and the Gold Miners ETF (GDX-35) dropped below its 50-day average.  The metal itself had made a run at $2000, a level above which it has closed only once, back in August 2020.  The recent weakness makes it easy to dismiss this latest run as just another in a series of such moves over the years.  When most think of Gold they think of inflation and there’s plenty of that.  Gold, however, can be a hedge against many things, just ask your local oligarch.  Back in 1929, a period of deflation, a 10% holding in Homestake Mining would have hedged the rest of your portfolio.  Gold coin sales rose about 48% in 2021 from a year earlier, data from the US mint show, while purchases of gold ETFs hit a record last month, according to a recent Barron’s piece.  Technically speaking, the miners have gone from fewer than 10% above their 200-day average to more than 90%.  Similar cycles over the past 40 years have led to medium to long-term outperformance, according to SentimenTrader.com.

Aerospace/Defense stocks seem a good hedge, perhaps not so much for what’s happening now, as for what may come to pass in terms of an escalation – Nuclear/Bio.  As for what is going on now, we wonder.  The logic is simple enough – war, missiles, these stocks makes sense.  The problem is, who hasn’t thought of that?  The charts here are good enough, so perhaps we shouldn’t go looking for trouble.  Still, we always hesitate when it comes to easy trades, and against the war backdrop, buying Aerospace/Defense stocks has to be up there when it comes to easy trades.  There was a time not all that long ago it was easier to buy Twitter (49) than to buy Tesla (878), and we all know how that worked out.  We also recall losing money in Aerospace/Defense after 9/11 when the stocks initially rallied, and then went dormant, to put it mildly.  It gets back to our basic belief that when it comes to the stock market, what we all know isn’t worth knowing.

It’s one thing to talk about getting the selling out of the way, how do you actually know when the selling is out of the way?  One measure is what they call 90% down days.  These are days when 90% of the volume is in stocks down on the day.  Until last week we had gone more than 350 days without one.  The catch is there is usually more than one of these days before a low, and you need a similar day to the upside to confirm the low.  The theory here is if stocks are sold out, they should move up easily.  Another way to view stocks as being sold out is when extremely few are in uptrends.  On the NASDAQ the other day only 14% of stocks were above their 10-day average.  Unfortunately, there are no magic numbers here and stocks above their 50 and 200-day averages still have room to the downside.  Of course, this doesn’t rule out interim rallies, though they’re likely rallies to sell.  Meanwhile, did Teladoc (33) split 10-for-1?  Stay away from stay-at-home.

Frank D. Gretz

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DJIA:  34,792

It was the best of times… really?  Things are so good the market rallied 500 points on Tuesday and another 250 on Wednesday?  Let’s see, there’s been a record surge in credit as consumers resort to almost desperate measures against an inflationary backdrop.  And there were those healthy-looking retail sales numbers which actually would have been down without gasoline sales.  Scarier still, however, might be the 50% drop in trucking activity in a recent week owing to flat retail sales and already excessive inventories.  Some would say all this says recession, as has the thoughtful though often gloomy David Rosenberg. The Consumer Sentiment Surveys say we’re there and have been for some time.  Then, too, is the market looking beyond all this?  Or, is it that some of the best one-day rallies happen in bear markets?  Time will tell, to coin a phrase. We are still pretending to be open-minded.

It’s a market with more than a few cross currents in terms of what’s working and what’s not.  At the start of the year, we sort of divided the world into Tech and Staples, and Staples morphed into Commodities.  After a March fade Staples have come back on again, and then some.  Meanwhile, after their March relief rally, Tech has turned weak again, especially anything to do with stay-at-home.  The other broad area that can’t find its way is Financials.  Not surprisingly, all this has left the overall market background a bit mixed but with a clear negative leaning.  Anytime you have the S&P down only a few percent but only about 40% of stocks above their own 200-day moving average, you know the averages are masking a lot of weakness in the average stock.  This doesn’t end well.

Utilities have been on a tear, something the textbooks used to say was not supposed to happen when rates were rising.  Right now, however, higher yields are the result of the Fed trying to slow economic growth, and that’s making investors think of defensive areas like Utilities.  A slow down would hinder profits in most cyclical sectors, while Utilities earnings should be stable as they can keep raising prices.  Analysts actually expect earnings here to grow almost as fast as the S&P’s 10% rate.  So the fundamentals seem fine and so far so too do the charts.  The problem might simply be too much of a good thing.  The XLU (76) has enjoyed its second largest 30 day rate of change in 20 years, and half the stocks recently reached new highs in a 10-day period.  That’s a 23-year record according to SentimenTrader.com.  Momentum extremes like these, in the past have caused problems – just saying.

If any questions remained about stay-at-home stocks, Netflix (217) answered that.  To look at Disney’s (122) hit, the problem doesn’t seem one of competition.  And to look at Etsy (102) and Peloton (20) before it, it’s the concept and not the companies.  Worried about competition, maybe we should be worried about Tesla (1009), Tesla at least is the only major car company that doesn’t have to spend time transitioning to EVs.  Another big difference, the stay-at-home stocks all have had terrible charts, Tesla does not.  If there’s a silver lining to the Netflix news and the reaction of the stay-at-homes, it does seem tangible evidence of reopening post-Covid.  It also seems a reflection on human nature as it relates to the stock market – investors were pricing stocks that did well in the pandemic on the assumption that lockdown behavior was forever.  Who knew – things change.

Nice to see the market is doing its job if, as they say, the market’s job is to confuse the most number of people.  It was certainly easy to be impressed by Tuesday’s 500-point Dow rally, backed up by Wednesday’s 250-point gain.  And both saw advancing issues near 2-to-1 versus those declining, not blowout numbers but decent.  It wasn’t quite clear why the strength just as it wasn’t quite clear why Thursday’s weakness.  Perhaps most disturbing about Thursday’s weakness is it met our criteria for a bear market – they sold our stocks, the commodity stocks.  One day is just that, but this could mean we’ve entered a new phase of the bear market.  The better than 4-to-1 declining issues also suggests a seeming new urgency to sell.  This is the way markets go.  Bonds have been weak for a while now.  It’s not as though we don’t know rates are going higher.  Sometimes things just don’t matter until they do.

Frank D. Gretz

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DJIA:  34,584

Elon Musk a passive investor … and do you wanna buy a bridge?  Can’t wait to hit that edit button.  His 9% position in Twitter, the ultimate tweet of sorts, helped the NDX by 2% on Monday, rendering new hope for the forgotten, downtrodden, etc., that is, beaten up Tech.  Not quite the same as landing a rocket on a dime, but impressive.  And the other company, Tesla is it, isn’t doing so badly as well.  Names like Tesla (1057), Amazon (3153) and Google (2717) pretty much all peaked late last year.  After their hibernation, the irony might be they come back to outperform in a poor market, not exactly what most would expect.  That said, we still see what we’re calling the commodity stocks the likely ongoing leadership.  Exacerbated by the war, commodities across a broad range are in short supply.  The stocks themselves have another edge, they’re in short supply, that is, they’re under owned. News of Russian coal sent those stocks higher Tuesday, while not that long ago the Coal ETF was dissolved for lack of interest.

You say either we say ither. The debate eternal always seems to be between growth and value. You might also debate just what is a value stock and what is a growth stock. The good people at Invesco have done this for us with the Pure Value ETF (RPV-85) and the Pure Growth ETF (RPG-180).  As it happens we don’t particularly agree with either list, but at least here is something objective and from a credible source.  To look at the charts, clearly value is kicking growth, and we suspect it will continue to do so.  Our idea of growth is a bit more techie, and our idea of value is a bit more about commodities.  We should add some defensive names like Hershey (223) and Church & Dwight (103) act well.  If you compare the Tech Software ETF (IGV-336) with the Metals and Mining ETF (XME-60) the picture is the same, though the XME outperformance is more dramatic.  Again, we expect this to continue.

We have long thought where the stock market tells its economic story is the Transports.  Originally, and the theory behind the Dow Theory, both the industrials and the transports were supposed to tell the story.  This, of course, was when the Industrials were industrials, hardly the case these days.  Granted the “Transports” aren’t exactly the rails of old, they still pretty much get the stuff around.  Looking at the Transports relative to the S&P, last Friday’s weakness was the seventh worst day against the broader market since 1928.  When looking at other occurrences, this kind of move was associated with the most traumatic episodes in US market and economic history, according to Bloomberg strategist Cameron Crise.  While last Friday’s otherwise up day didn’t seem that traumatic, the trauma may be yet to come.  Meanwhile, as a proxy for economic activity in the US, the weakness in the transports is of some concern.

They say the consumer is in good shape.  That’s not exactly what those consumer sentiment surveys say.  They’re worried how high prices are going, and everywhere.  Even demand for products which target a more affluent consumer recently has fallen.  It’s a mystery what keeps home prices so high when you look at those homebuilder charts and associated names like Home Depot (303).  Wage increases, while enough to pressure businesses and keep pressure on the Fed, aren’t enough for consumers to keep up with inflation that is running close to 8%.  A report also shows real, or inflation adjusted disposable personal income per capita fell for the seventh straight month as rising prices outpaced employment and wage gains.  And they say we’re not even in a recession, though based on those consumer sentiment numbers, we would contend we are.  And while there are “soft landings,” there are none we know of when inflation was above 5%.

We’ve seen this recovery as a rally in a downtrend, a rally in a bear market.  We also see this rally, technically speaking, as better than we might have expected.  Then, too, bear market rallies usually make you wonder.  As often happens in these recoveries, things change quickly as was the case this week, going to a 4-to-1 down day Wednesday versus a 4-to-1 up day last Tuesday.  There were no divergences going into this weakness, weak up days, for example, so that may be yet to come.  Or this time was that hit to the Transports the warning.  Where would we be without Lael Brainard to tell us rates are going higher? Though, the mention of QT might have been the real culprit.  Whatever the case, the market lost something this week, and if a bear market rally that’s particularly worrisome.  Meanwhile, just say YES to drugs, those made by Lilly (309), Pfizer (55) and others part of the XLV (142) ETF.

Frank D. Gretz

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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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