DJIA:  35,603

Woulda, coulda, shoulda … but didn’t.  It’s more than a little pretentious to talk about what the market should or should not do.  Then, too, if you’re reading this it’s not your first day at the rodeo, and we all have a pretty good idea of how the market tends to react to news.  The market as measured by the S&P has had a 5% correction, but we would argue there has been news which could have sent prices quite a bit lower.  The Fed has said it will taper, yet there was no tantrum.  There are 100 ships waiting outside the port of LA compared to a pre-Covid average of 17.  Congress can’t get out of its own way, and the growth driver they call China has become a bit unglued.  We realize it’s a bit perverse to argue the market is going up because it didn’t go down, but sometimes that’s the way it works.

The correction saw its share of selling, including a fair number of negative days in the Advance-Declines.  When the averages are down, that’s just what happens.  Drops of 200-300 points in the Dow, for example, will see 2-to-1 down days but that’s not a worry. We don’t worry so much about the down days, we worry about the up days, that is, the weak rallies. Those were absent during the selloff —the up days saw respectable participation. That’s always important, but especially in the midst of a selloff it’s good to see demand not completely disappear.  Finally, there’s the idea that strength begets strength.  At the end of September 80% of the S&P component stocks were higher on the year, something that has happened only five other times in 40 years, according to SentimenTrader.com.  The others all saw stocks higher into year-end.

The S&P is up about 20% this year.  The real story this year, of course, is the S&P has been hard to beat.  After all, how much of the five stocks that dominate the index can you own?  As for the rest, they’ve come and gone and come and gone, something they’ve called rotation.  This isn’t the first time this year we’ve thought of just buying the SPY‘S (454) or the Q’s (377).  You might also look at something like the Momentum ETF (MTUM-187) with its 5% position in Tesla (894), and positions in financials, part of the leadership.  The ETF has made a new high, usually a good sign coming out of a correction.  Meanwhile, it has been more of a commodities market than stock market — Oil, of course, Uranium, Lithium, Copper and everyone’s holiday favorite, Coal.  Tech is mixed, even within the semis where we favor AMD (119) and Nvidia (227).  The FANGS, ex. Facebook (342), also have shaped up and would seem go-to stocks into year-end.

The much awaited Bitcoin ETF (41) launched on Tuesday.  If, as Jamie Dimon has suggested, it’s just the proverbial can of tuna, made for trading and not for opening, trade it did – some 27 million shares on the day.  We have nothing against bitcoin, and to look at the Grayscale (49) chart, though back to the resistance area of the old highs, it has acted quite well. The problem with ETFs like BITO is they are futures based.  Futures contracts have to keep being rolled over, and that costs money.  The United States Oil Fund (57), for example, is similarly based.  From a peak back in 2012, the fund is down some 83%.  Crude is not down 83%.  The SPDR Gold Trust (167) was devised by the gold mining companies to promote interest in gold.  It did not, but instead investors just bought the ETF.  Suppose the same sort of thing were to happen with bitcoin?

For the first time since early September the Advance-Decline index has made a new high.  It is almost without precedent to see the market averages peak before the A/D Index, and typically by several months, so it’s another good sign for the uptrend’s longevity.  Another good sign is the market’s momentum in just the last month.  From less than 10%, the number of S&P component stocks above their 10-day average has cycled to above 80%.  This is very unusual, typically only seen after significant declines.  It, too, suggests a durability to the rally.  While all seems well, of course there will be setbacks and the problem of the ever changing reflate or not reflate trade.  Then, too, we are nearing that wonderful time of year when October comes to an end.  The time of the year, too, when professional money managers don’t want to be left behind.

Frank D. Gretz

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DJIA:  34,912

Start being naughty … you just might get coal for Christmas.  These days coal is a good thing!  Coal has been on a tear, as have most energy sources.  And like most, it had been completely out of favor.  When we checked on what used to be a coal ETF, we found it no longer exists – that’s what we call out of favor.  Obviously the world has changed for these energy stocks, but the change is exaggerated by the fact that no one owns them.  As we pointed out last time, the same seems true of Staples, down to a market cap of only 6% of the S&P.  The charts here are not as far along as the energy stocks, but names like Hershey (182) and PepsiCo (159) are more than good.  Meanwhile, most of Tech has struggled.  They like to blame rising rates, to which we say hooey – a technical term.  In the case of Tech, just five stocks are 25% of the S&P, not exactly the energy sector profile.  Rather than under owned, for Tech you might ask who is left to buy.

The overall market seems stuck in what reasonably might be called October.  It’s a tough month, often weak, usually volatile.  We don’t usually place too much emphasis on seasonal patterns, but October is different.  So far it hasn’t been all that bad, which itself is a reason for optimism.  The market has had its chances to go down, but it has not.  We know this sounds a bit perverse, but we’ve found what the market doesn’t do often can be important.  Similarly, weakness happens, but weakness is not how markets get into trouble.  Trouble comes with weak rallies, as we call them.  So far rallies have come with respectable Advance-Decline numbers.  You don’t want to see the Dow up a 100 or 200 points with even flat A/Ds, and so far we haven’t.  Things could yet change but, as we’ve suggested, the market has had its chances.  And, October typically closes well.

Rather than stock exchange, of late the market has seemed more commodities exchange.  Oil, of course, has been the poster child here, perhaps the best example of what under owned/ under loved can do.  We’ve heard it said oil is peaking, to which we say we don’t see it, but who knows.  Being bullish, we do know we would rather have them call for a peak then call for $90-$100 oil.  We don’t remember anyone getting the peak in oil reasonably right over the years, but we do remember plenty of raised targets before any peak.  Meanwhile, there’s also Lithium and Uranium with their respective ETFs, LIT (85) and URA (28), and stocks like Lithium Americas (25) and Cameco (25).  Copper, while better of late, is still basically neutral, but gold finally is lifting.

If all of this sounds like inflation, it should.  The oil market clearly has garnered the most attention, but higher prices show up in other commodities, the labor market and complaints from businesses as they struggle with higher prices.  It shows up in other areas of the commodities market as well, more subtle in that they are not covered in futures markets.  The Commodities Research RIND Index covers a group of industrial materials which includes obscure commodities such as burlap, tallow and, our personal favorite, lard.  These may better reflect the pressures on supply and demand flowing into industry, rather than speculative flows, and this group is now near an all-time high.  Then there are the industrial metals, normally driven by demand from China.  While China has been trying to dampen speculation in metals, it hasn’t stopped surging prices, including the highest level since 2012 in the Bloomberg Industrial Metals Index.  It all sounds a bit more than transitory.

Amidst all this talk of commodities and inflation, did we mention AMD (112) broke out Wednesday, Nvidia (217) and Microsoft (303) Thursday?  Not all of Tech-land is so fortunate, but then there are some new Tech leaders, at least new to us, Snowflake (332), Data Dog (153) and Upstart (380), that are almost stretched to the upside.  The market is nothing if not confounding, but in this case in a surprisingly positive way.  One thing that never confounds is the ability of those banks to disappoint, even JP Morgan (163).  The amazing thing on Wednesday was thanks to the financials the Dow was flat but the Advance-Declines were 1.8-to-1 up – a strong weak day.  We used to say most days most stocks go up, but that hasn’t been the case of late – the market has been in a correction, though it has been more consolidation than correction.  We can say on the up days most stocks go up, and that has been important.  Rather than bearish we’ve been Octoberish, and October is winding down.  

Frank D. Gretz

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DJIA:  33,843

It’s the market that makes the news … or is it?  In good markets virtually all news is taken as good, bad news goes largely ignored.  That left Tuesday’s 500+ point down day as a bit of a conundrum.  We know the technical backdrop has turned less than perfect, but it doesn’t seem all that bad.  The idea the lights are off in parts of Europe and, more importantly, China was like waking from a coma – where did that come from?  Meanwhile, in the schizophrenic story of leadership this year, it has been a hate’m week for Tech, the blame being laid on the breakout in the 10 year yield.  We get that, but the idea the lights are off in China, where Tech is made, may be the more important factor here.  Most would argue it’s better to have a supply problem than a demand problem – we’re beginning to wonder.

The symbol for the Russell 2000 Index is “RUT,” and that pretty much says it all.  The index has gone more than 135 days without setting a 52 week high, yet it was down less than 10% at its worst point.  Part of the problem might be too much of a good thing earlier in the year, when more than 90% of its components were above their 200 day, the most in 20 years.  That AMC (38) remains the largest position in the index is a reminder of those days of Meme.  Meanwhile, stocks above their 200 day have drifted back to 40%.  The September-October period is a weak one for small-caps, as it is for most stocks, but that changes in Q4.  Over the last 30 years, when the RUT (2204) has gone this long without a 52 week high and without a 10% correction, it has broken out to the upside every time, according to SentimenTrader.com.  Then, too, we have all learned it’s tough to beat the S&P.

Someone lowered their price target for Amazon (3285)?  Is Bezos leaving, are they hiring a gazillion workers when wages are rising?  Or is it that the chart is bad, and which one?  Sure the daily – each bar one day – has turned a little dubious, but the weekly is just a consolidation.  It’s the monthly that seems important here – a consolidation in a big uptrend.  Amazon ran to September 2018, after which it consolidated until April 2020.  From the breakout back then the stock doubled.  When it comes out of this consolidation, good things should happen again.  If you like looking at these long-term charts, take it from us, you need to get out more.  That said, look at the monthly chart – each bar one month – of Tesla (775).  Stocks don’t go straight up, they consolidate along the way.  Tesla is trying to come out of this sort of pattern.  By the look of it, Cathie Wood may yet have a good year.

Once upon a time utilities were thought to be safe – ah, the good old days.  Before Wednesday’s rebound, however, the S&P Utilities Index had dropped every day since September 9, a period of 14 trading days, falling some 8.4% along the way.  The losing streak was the longest since the utility stock average started in 1989, according to Bloomberg’s Dave Wilson.  It’s also twice as long as any other series of losses this year among the S&P’s 10 other main industry groups.  Lore has it utilities are interest rate sensitive, and so it would seem.  Utilities apparently do a lot of borrowing so there’s that.  What could be more at play is the sensitivity of utility stock buyers.  With rates now rising the 3.07% yield on the SPDR Utility ETF (XLU-64) isn’t what it used to be.  Meanwhile, if it’s an ill wind that blows no good, the rate sensitive banks have gotten a lift.  The overriding message here seems clear, rates are going higher.

When the S&P broke it’s 50 day a week or so ago, it seemed to get too much attention to be meaningful.  And sure enough, it’s snapped right back.  Now, however, the S&P is right back to those lows, and without so much attention – a worry.  It has been a bull market or a bear market depending on what you’re in, and pretty much the week you’re in it.  It’s a bull market if your long oil stocks, and better than that if your long the $5 variety.  Meanwhile there ain’t no sunshine in solar, and though we hardly feel safer, even the cyber security stocks have come under pressure.  Amidst the shortage of semis, the guys that make the stuff that make the stuff, like the ASMLs (748), also can’t catch a break.  Yet, even on a 500 point down day like Thursday, there was only garden-variety weakness in the A/Ds.  It’s hard to see a big move up here, especially since it’s October, and maybe that says it all – be defensive.

Frank D. Gretz

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DJIA:  34,764

They blame China for Monday’s selloff … why not blame Mother Teresa.  Sure China has a problem, in fact, a few problems.  The Evergrande problem has been in front of everyone for a month now, why on Monday did it become a problem worthy of a 3% selloff?  This isn’t the worst technical backdrop but it has worsened.  If you look at stocks above their 200 day moving average, that is, stocks in uptrends, it varies from 64% for the S&P stocks, 59% for NYSE stocks and only 42% for some broader databases.  On average, then, only a little more than half of the universe of stocks are in uptrends.  The market, not the averages but the average stock, already is in a correction.  Against this kind of backdrop days like Monday are just looking for an excuse to happen.  Blame China, whatever, in poor markets there’s always something.

As you know, we place a great deal of emphasis on the number of advancing versus declining issues, what we think of as the behavior of the average stock , versus the stock averages.  Everyone watches the averages, but it’s the average stock that tells the real story when it comes to the market’s health.  The cumulative total of the net number of advancing versus declining issues gives you the Advance/Decline index.  While the A/D index offers an insight into the behavior of the average stock, its analytical value comes when it is compared to the stock averages like the Dow.  In a healthy market the two should be in sync, so to speak, and problems arise when the A/D index lags the big cap averages.  The A/D index reached a new high on September 2 or, depending on your data source, it’s close.  That’s an important positive.

We are concerned, however, that the A/D index doesn’t seem to be telling the whole story when it comes to the average stock.  This index of advancing and declining issues is a measure of direction only, with no accounting for price change.  If you look at the number of stocks above their 200 day average, then you take account of price change and the direction of that change.  As suggested above, the numbers will depend on the database, NYSE stocks, S&P stocks and so on.  If we go with the NYSE stocks, the number at the end of last week was 59%.  While “rules” and the stock market are things that don’t usually go together, the rule is that when this 200 day number drops from above 80% to below 60%, it usually goes below 30%.  Forgetting that, the real point is that while most stocks may be advancing, barely more than half are advancing enough to be in uptrends.  With the market just a few percent below its highs, this is a concern.

Evergrande – now there’s a misnomer.  Monday’s decline was laid at the feet of this company, though Wednesday’s rally made that seem almost silly.  We wonder now if the pendulum may not have swung too far, in this case toward insouciance.  Most of the research suggests Evergrande won’t be China’s “Lehman moment” – investors are confident that a default or bankruptcy can’t trigger a crisis on the scale of the disaster that followed the Lehman Brothers collapse in 2008.  That said, BCA Research shows non-financial corporate debt in China is now on an even bigger scale than Japanese corporate debt before its economy lapsed into crisis in the 1990s.  According to Bloomberg’s John Authers, you can also draw a comparison with the peak in debt for South Korea and Taiwan in the late 1990s, on the eve of the Asian crisis.  Certainly most believe the Chinese authorities are determined to ensure some form of orderly workout, and they have the ability to do so.  Then, too, that just could be what most complacently want to believe.

Over the last week or so we’ve argued the market had its chance to go up but did not – the benign jobs and CPI numbers.  Now it’s almost the opposite.  Whatever horrors may come out of Evergrande, the market seems good with it.  And it’s not just the market averages.  On a day like Tuesday when the averages gave up their big gain, the A/D’s stayed positive.  And Wednesdays 4-to-1 up day was anything but the weak rally about which we always worry.  The overall backdrop is far from perfect and it is still September, but as it has all year the market seems able to ignore the bad, including what’s bad technically.  Meanwhile, we find ourselves owning the strange combination of oil, lithium and uranium.  Sounds a bit like an inflation trade, but without precious metals.  The vac stocks like BioNtech (353) and Moderna (455) still look higher, if you can take the volatility.

Frank D. Gretz

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DJIA:  34,751

And the days, those up-days, dwindle down to a precious few…when you reach September.  A lyric, somewhat paraphrased, that’s borne out by history – September is a tough month for stocks.  How else would you explain a market that goes from 8 of 10 up days through September 2, to 5 consecutive down days.  The disturbing part of this change is it came on news we would argue should have been considered positive – a benign jobs number and, hence, a benign Fed.  The Labor Day holiday saw Europe higher, but no rally when NY reopened Tuesday.  It didn’t get better until Monday which itself was another of those mixed days – Dow up, NAZ down, and down big for some of those strong stocks.  The good news is the rally saw respectable A/D’s on the back of financials and energy stocks, of which there are many.  Still, the numbers are the numbers.  Rotation has characterized this market all year, but in this case risk comes with it.

In this market characterized by rotation, suppose we were to suggest Uranium is the new Bitcoin, and Oil is the new Tech.  We haven’t completely embraced this idea, but we can see the possibility.  To begin, as measured by GBTC (38), Bitcoin is stalled but still seems trending higher.  Meanwhile, Uranium has become the Bitcoin of yore – see, for example, the URA ETF (28) or the go-to stock here, Cameco (24). As for Oil versus Tech, it’s a stretch if not outright dubious, it’s tantamount to buying anti-growth versus growth.  To get there you have to make that leap that’s very difficult for most – you have to distinguish between companies and their stocks.  Not that long ago there were no oil stocks above their 50 day average, in a sector that is down to about a 3% weight in the S&P.  That strikes us as sold out, and that has begun to change – XOP (89), the S&P Oil ETF, now is above its 50 day.  At the other end of the spectrum, five tech stocks are a quarter of the S&P market-cap.

Tech/growth stocks are here to stay, and you can quote that.  The question is, which ones?  For now the FANG stocks and a few others are like bologna on Wonder Bread with Miracle Whip – they’re this market’s comfort food.  As long as the market holds together, it should stay that way.  What is of concern, though, is the idea of “durable technology,” an oxymoron if ever there was one.  RCA really did change the world.  Is it real, or is it Memorex? Burroughs and Digital Equipment – those were go-to stocks. And then there are the zombies of Tech, Xerox (21), Blackberry (10), Hewlett-Packard (28), Nokia (6) and so on.  Even when it comes to the best of Tech, you have to ask, when is too much enough?  Companies are not their stocks, stocks are just pieces of paper.  Even great companies can find their paper without anyone left to buy.

Lithium. It doesn’t quite have the ring of “plastics” in The Graduate.  Yet batteries are all the rage – they even have their own ETF, BATT (18) – and batteries are about lithium.  And yes, there’s an ETF here as well, LIT (84).  The problem here, and with BATT and other of these ETF‘s, many of the components are Chinese companies.  While we doubt Beijing is about to come down on lithium as they have Tech and now Gaming, who needs it.  Companies like Albermarle (231) and Lithium Americas (23) offer attractive alternatives.  Another play on batteries, rather than lithium, is Tesla (757), the largest position in BATT – together with other names you don’t say in polite company.  Somewhat ironically, most of the secondary EV makers, the Fiskers (13), and so on, do not look good.

The recent jobs numbers seemed benign enough to preclude any hasty Fed action. This Tuesday’s less than expected CPI number seemed the same.  Both, in other words, were numbers the market could have taken and run with.  The idea that the market did not and, in Tuesday’s case, declined sharply, is troublesome.  When good news isn’t good news, it’s a bad market.  For the first time in 10 months fewer than 75% of stocks in the S&P 500 are above their 200 day average.  This kind of change doesn’t kill uptrends, but it is a reminder of how dominant the S&P has been.  For all of the NYSE the number is only around 60%, while for an even more extensive database like that of Worden, the number is only 43%.  Wednesday’s rally was respectable – with A/D’s two-to-one up, not the weak rally about which we worry.  Thursday’s mess had the look of an option expiration week, which this is.  September is a tough month, we expect it to stay that way.

Frank D. Gretz

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DJIA:  35,213

The trick divergences play… they make you think they’re not working.  If you prefer the movie version, in The Usual Suspects, the line was the biggest trick the devil ever played was making you think he doesn’t exist.  So what’s a divergence, and what do we mean by not working?  The divergence in this case is between the large-cap averages, the Dow and S&P, and the average stock, measured by the Advance-Decline index.  As demand lessens the average stock and, hence, the A/D index peaks, while large-cap winners continue to climb higher.  As we have suggested before, the A/D index is more than just another technical indicator, it’s an insight into demand.  It takes money to push up 2500 stocks every day.  As demand lessens so, too, will the number of advancing issues.  Eventually the bad drag down the good, the average stock drags down the stock averages.  All well and good in both theory and reality, the problem comes down to timing.  In 2018 a few days resulted in a 20% decline, in 1987 the divergences lasted months.

Therein lies the problem.  There’s risk in a backdrop like this, a two month plus divergence between the averages and the A/D index, yet there’s plenty of money to be made.  By definition, the big stocks go up – will Nvidia (221) ever stop?  The dangerous part is that if you’re not in Nvidia, Microsoft (299) or the S&P, but instead you’re in the average stock, you’re in the A/D index.  You’re not making money but it’s okay because there’s hope.  As long as the S&P moves higher most days, there’s hope, hope your stocks will catch up.  Hope is a virtue in life, but a curse in the stock market.  The virtue in the stock market is discipline – stay with uptrends, cut your losses.  Divergences can go on and you can reap the S&P, or you can hope for the rest.  The longer these divergences last, the more you come to believe they don’t matter.  We’re not saying do nothing, we are saying whatever you do, do it carefully.

The market has taken on a better tone in the last few days, as often has been its way.  Just how it can go from three consecutive 2-to-1 down days to three consecutive 2-to-1 up days in a market that really isn’t trending, is a bit of a mystery.  Then, too, this market has tended to dodge technical pitfalls all year.  That said, there are still technical issues.  In a market that was at or near its high, NYSE new highs and new lows were even last week, while on the NASDAQ new lows were close to 3-to-1the number of new highs.  If you look to the percent of stocks above their 200 day average, that is, in uptrends, the number is around 50%–60% depending on whether you’re looking at NYSE stocks or a broader measure.  The markets, the big stocks, are making new highs with limited participation.  As a practical matter, to participate you pretty much have to go big.

A colleague recently pointed out a couple of stocks that no longer are what they may seem – in this case, a good thing.  SVB Financial (561) recently dropped “bank“ from its name, appropriate since the long term chart here looks nothing like that of a bank.  The chart is more that of a Tech stock, fitting given the former name of Silicon Valley Bank.  If not share alike, seems SVB has contrived to share and not just bank.  Another company possibly misunderstood is Honeywell (231).  It seems there’s more here than just the thermostat on your wall – not very techy, tech, as Penny would say.  Seems they’re now big in quantum computing, whatever that is, and other things that are techy, tech.

If you’re reading this hot off the presses, so to speak, Jay Powell may well be offering his much anticipated comments at Jackson Hole.  Nothing dire is anticipated, not even mention of “taper.”  Still, if he mentions the Fed balance sheet something could be made of that.  It has been pointed out that there is a correlation between the Fed’s balance sheet and the performance of secondary stocks, and we know the Russell 2000 has gone nowhere since early February.  The overall backdrop also makes his remarks worrisome – it’s one of those, the market makes the news sort of things.  The S&P is making new highs while there are as many 12-month lows as highs, and only about half of stocks are in uptrends – you don’t need us to tell you that’s not healthy.  Yet there are stocks acting well, the Big, making it hard to keep your hands out of the cookie jar.  Just know there’s a risk.

Frank D. Gretz

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DJIA:  35,499

Good … but no DiMaggio!  Some degree of adulation has been placed on the S&P, by the media at least, for its 47 new highs this year.  DiMaggio’s streak was 56, and it was consecutively!  And they don’t mention there was a similarly long streak before the crash of 87!  Let us hasten to say, this isn’t 87, but what’s important here is the trend, and not every tick in that trend.  This streak is easily explained by the fact we haven’t had a 5% correction since late last year, and that is impressive.  If you never go down, it’s not all that hard to make new highs.  We are all for uptrends, but we prefer the good old days pre-July 2, when it was the A/D index seemingly making daily new highs.  There’s more to those numbers than technical analysis Voodoo.  It takes money to push up 2700 stocks as was the case Wednesday.  The numbers are an insight into supply and demand.

It has been tough to know the players even with a scorecard.  Or has the distinction between re-open and stay-at-home simply become blurred?  Last week’s payroll number was taken to signal re-open, and bonds were sold.  The beneficiary here were the Financials, which had been more or less holding but clearly lagging.  The change was dramatic, with 60% of the sector hitting 20 day new highs, and names like Goldman Sachs (415), Morgan Stanley (105) and Wells Fargo (51), of all things, scoring impressive breakouts.  Another impressive move this week was in Steel.  Even Copper has acted better, despite the apparent slowdown in China.  Oil, too, with his own set of problems, has stabilized.  If all this speaks well to re-open, stay-at-home and, specifically, work from home, hasn’t exactly suffered – there’s an ETF for the latter.

The vaccine stocks Wednesday caught a downgrade by Isaac Newton, something about that gravity thing of his.  We mentioned on our Tuesday call that for Moderna (391) to be some 80% above its 50 day average was obscene.  Of course, there are no magic numbers here, we were more thinking along the lines of Supreme Court Justice Potter Stewart and his description of obscenity, “I know it when I see it.”  Down 77 points on Wednesday looked like a real buying opportunity, but down 30 seemed the same.  This latest move/break out was around 250, and carried to roughly 500.  A 50% retracement would be around 375, and Wednesday’s low was 372.  Were it that easy, this would be coming to you from the South of France.  If you would rather not sleep like a baby, that is, wake up crying every five minutes, you might consider the comparatively boring iShares Biotech ETF (IBB-169), where both Moderna and BioNTech (375) are among the top 10 holdings.

Speaking of gravity, Cathie Wood has had a tough go of it this year, understandable when Tesla (722) goes trading range on you and it’s 10% of several of her portfolios.  And to our thinking, stocks like Teladoc (145) and Roku (369) give her a leaning toward not “work from home,” but stay-at-home.  A move through 720 should get Tesla going again, and in her Ark Next Generation ETF (ARKW- 150) she has taken a liking to bitcoin, or cryptos in the form of COIN and GBTC (37).  As it happens, by the end of last week we had as well.  To use GBTC as a proxy, these stocks peaked in April coincident with the IPO of Coinbase (257). After basing for a couple of months, the gap above the 50 day caught our attention.  The stock recently seems to have resolved a little consolidation, as the 50 day begins to curl up.  After bottoming in May, COIN has stumbled around, but the recent move above 260 seems important.

August, September and October are a tough three months for the market, averaging less than a 1% gain in post-election years.  It’s even tougher for Ford (14) whose cumulative return since 1972 is minus 92% – your $1000 would have become $77, according to SentimenTrader.com.  The period might explain the lagging A/D’s since early July, though the better action in Financials should help – there are a lot of them.  Still, we are never comfortable with A/D’s diverging and would become particularly wary of up days in the averages with negative or flat A/D’s.  It’s easy to say the trend is up, but what trend?  The only real consistent uptrend has been in the S&P, as everything else just seems to rotate in and out of favor.  As the S&P’s performance would suggest, big has been better.  Even on the NASDAQ, 70% of stocks in the NASDAQ 100 are above their 50 day average but within the broader NASDAQ Composite, fewer than 40% of stocks are above the 50 day.  This speaks well of Tech, as does the S&P itself.

Frank D. Gretz

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DJIA: 35,085 It’s tough to beat the S&P 500… even S&P stocks can’t do it. We’re thinking here of the S&P 500 Index as we know it, versus the 500 or so stocks which comprise it – the S&P Equal Weight Index (RSP-153) where market cap is not a factor. The S&P makes new highs seemingly most days, the equal weight version has gone nowhere since early May. The Russell 2000 (IWM-223), that measure of secondary stocks that everyone loves to love, has gone nowhere since February. So where is the big bull market? Arguably it’s in five stocks, Apple (146), Amazon (3592), Alphabet (2733), Facebook (359) and Microsoft (287). As of last Friday these five account for 22.9% of the S&P‘s market cap, the highest combined market cap of any five ever. Given all five are pushing twelve-month highs, and given their market cap weight, you kind of have to join ‘em to beat ‘em, or to even keep up. There are stocks and groups which have outperformed from time to time, but the frequent rotation has made it difficult to keep up. And, realistically, it’s not what most do. Is piling into five stocks healthy? In the early 70‘s at least there were 50 of these little darlings. And the dot.com’s obviously saw many more. The answer, of course, is it’s not healthy – extremes rarely are. Divergences, in this case within the S&P itself, are never healthy. And they’re not without risk. If you don’t care about valuations, how about simple supply and demand – after a while, who is left to buy? Certainly these all are great companies, but so too were GE (13) and Cisco (55) back in 1999 when they were among the S&P‘s top-five by market cap. The saving grace now, what makes this time different, dare we say, is the overall background, specifically the Advance-Decline index. Unlike those other periods, this market still has decent, though deteriorating, participation. Facebook beats! The most advertised or anticipated “beat” in the history of markets? Who is to say, but if the stock can survive this kind of anticipation and the temptation to “sell on the news,” indeed, we will be impressed. We pointed out many times, stocks that outperform are those where analyst estimates are too low and, of course, vice versa. So is a match as good as a beat? As it is one of the chosen, could be. If instead it is priced in/discounted, that tells us something as well. It’s the market that makes the news, even for the chosen few. When good news isn’t good news, it’s time to think about it. By definition, in divergent markets the strongest are the last to give it up – therefore, the market averages versus the AD’s. If Facebook and Apple can’t right themselves after these little reporting setbacks, it’s something to think about. Then, too, a little rest for these will not hurt. Investor sentiment or psychology is always difficult to measure. Even indicators like the VIX (18) which seems objective, over the years has ranged from 30 to 80 at market lows. And when it comes to the investment surveys, they are notoriously early. By the time it’s time to worry, most have stopped doing so. We’re also thinking here of those intangibles which escape measure altogether and, hence, no pretense of objectivity. How, for example, would you have measured the bubble that was the “nifty 50” or the dot.com’s? Being there you couldn’t help but know it, but with no objective measure it was easy to ignore. This seems the case now, one could argue we’ve seen several bubbles – the SPACs, the MEME stocks and even bitcoin. Easy to think Robin Hood will be some seminal event, but we suspect it’s more the big picture – the top five of the S&P reach 30% plus? A final thought on bubbles. From the King Report, banks are giving families with wealth of 100 million or more the ability to borrow at less than 1%. We remember, or think we do, back in the days of “Japan Inc.,” a business woman being denied a loan. The same bank a couple years later approached her with double the amount if she wanted to join a golf club. There are plenty excesses in the market and the economy. Problems in the technical background are increasing, including the recent lag in financial stocks. The ratio of financials to the S&P is at a 90 day low, a condition that typically has bled into the overall market over the next 2 to 4 weeks. Despite the strength in Tech, there were more twelve-month new lows than new highs on the NASDAQ last week, and despite the S&P strength, only about half the stocks there are above their 50 day. Most important seems the lagging A/D‘s. It would be nice to get back to those days when most stocks went up.

Frank D. Gretz

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DJIA: 34,823 From worst … to first. That was the pattern Monday and Tuesday. The 700 point Dow loss on Monday made the headlines, but as always we are more about the average stock than the stock averages. Monday’s bashing saw Advance-Declines 5-to-1 down, and up volume less than 15%. This, of course, cannot be called a complete surprise. The A/D numbers had flattened recently, negatively diverging from the averages like the Dow. The S&P was making new highs with fewer than 40% of components there above their own 50 day average. On the NASDAQ, a new high with more 12 month new lows was another warning. This deterioration simply caught up with the market on Monday. Monday did see a spike in Put/Call ratios and the S&P did hold its own 50 day average. Then pretty much out of the blue came Tuesday’s rally. It was not your dead cat bounce. The Advance-Declines cycled to 4.5-to-1up and up volume was greater than 85%. Since 1962, this kind of reversal has led to higher prices a month later every time, according to SentimenTrader.com. Covid seemed to catch the blame for Monday’s selloff, though we easily could have blamed China. Covid isn’t new, why was it important Monday? That’s just the way the market works – news follows price. The selloff was about the technical deterioration, specifically those A/D numbers. It’s important to look at them in conjunction with the averages. If the Dow is down 200 points the A/D’s will be negative, and they should be. If the Dow is up 200 points and the A/D’s are flat, let alone negative, that’s a problem – Thursday was that kind of negative day. As we pointed out last time, the performance of the “average stock” has been the best feature of the technical background, and now that seems to have changed. This also shows up in the Equal Weight S&P which has gone nowhere since early May, and the Russell 2000, a measure of small caps, which has gone nowhere since mid-March. Both are concerns, but alone are not uptrend killers. Rightly or wrongly, the Dow Theory doesn’t get much attention these days. Wrongly, because over time it has been quite often accurate. Rightly, because in recent years, not so much. The concept is sound enough – if you’re making the stuff you should be shipping the stuff. The transports should confirm the industrials. These days, of course, the Industrials are as much financials and the Transports have their airlines. And while the concept is simple enough, the nuances of the theory are a bit more complex. In any event, what seems important is that the transports peaked in early May, pretty much when the reflation trade peaked. If not a good indicator of market direction, they have seemed a good indicator of leadership, broadly speaking. Looking at the 20 component stocks, it’s a stretch to find a good chart. That’s even true of the truckers, which should come as a surprise if you have driven the Northeast Corridor lately. Breaking the downtrend here might suggest a move back to that reflation trade. The rotation, meanwhile, has become seemingly daily. Some of this, of course, is Covid related. The recent better action in Procter & Gamble (138) is a reminder of those bad old days. Most of the other staples aren’t on a par here, though Coke (56) and Pepsi (155) both have had upside breakouts. Seasonally it’s a good time for staples generally. Yet to get going are stocks like Zoom Video (361) and Teledoc (152) – guess they’re just not Domino’s (544). The industrials have had a tough go of it, but have come through so far more neutral than negative – see for example, XLI (103). It’s the metals and energy stocks that have taking the biggest hit. Together with bonds, a seeming telling commentary on inflation. Somewhat contradictory, economically sensitive real estate has done quite well. All hail the 50 day! Where would we be without it? That’s easy – lower. We are referring to the S&P and its 50 day moving average, though most apply it to individual stocks as well. Including a few minor dips below it, the S&P has bounced off its 50 day 13 times in the past year. It’s enough to make you wonder – could there be more chart guys than funnymental guys? You have to pay attention if only because most do. It’s with rare exception that we buy or hold a stock below its 50 day. Everyone likes to talk about the 200 day, but in an uptrend like this, by the time you get to the 200 day you have given up, or lost a lot of money. That said, the 200 day is important. It’s important in that it’s your last chance to remain solvent. The S&P remains some 11% above its 200 day, versus an average 13% in this year‘s first six months. Perhaps more importantly, the 50 day is some 8% above the 200 day. All the money is made against this backdrop – the 50 day above the 200 day. Frank D. Gretz

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DJIA:  34,987

All good things must end … the odds are.  The good thing in this case is the pattern in the S&P.  The index has spent the entire first half above its 200 day, by an average of some 13%.  This has happened only 34 times since 1929, according to Bank of America’s Steven Suttmeier.  The problem is only 13 times did the pattern continue through the second half.  The odds, of course, are often to be defied.  It is a concern, though, that only about 60% of S&P stocks are above their 50 day average, indicating weakness short-term versus the longer-term strength.  This becomes even more worrisome against the backdrop of new highs in the index itself.  Another little divergence comes in the form of the Equal Weight S&P, which has gone nowhere since early to mid-May.  None of this is reason to sell everything, but together it’s beginning to add up to an increased likelihood of a correction.

The divergence that most concerns us is one which has developed between the Dow and the Advance-Decline index.  What’s going on in the “average stock” as measured by the A/D index, we consider of greater importance than what’s going on in the stock averages.  The A/D index recently failed to match the highs in the averages.  Granted this is very short term stuff, and last Friday’s 3-to-1 up day wasn’t exactly the feel of a divergence.  Still, the divergence is there, and what seems important is the change.  The A/D‘s had been outperforming the averages, now they’re lagging.  It is relatively minor – a strong, broad rally would resolve the problem. Then, too, back in October 2000 it took only three days of this kind of action to lead to a 20% correction.  There also are concerns about the NASDAQ, despite growth’s clear revival.  Last week’s new high saw only 31% of stocks advance, and more twelve-month new lows than new highs.  That’s a pretty thin new high, and worrisome.

Whatever happened to the rebounding post pandemic recovery?  Since the beginning of last month bonds have rallied and the yield curve flattened, suggesting little inflation and a less robust economy.  For stocks, value has outperformed growth for the year to date, but concerns about that trade have come to the fore.  Clear examples are the airlines, hotels, resorts and cruise lines.  All were hit by the pandemic and sold off sharply last year, but rebounded strongly in February.  Since then they have seriously lagged the S&P.  Meanwhile, growth stocks, bought when growth is thought to be scarce, have performed well compared to value.  Whether correctly or not, concerns about the economy and, therefore, about the reopening trade now seem to dominate the thinking.  Time will tell, to coin a phrase, but there’s reason not to give up on the value/reflation trade.  Over the last month or so the ratio of value to growth stocks has plunged.  The drop, however, is in the context of a long-term trend.  Previous drops have tended to resolve in the direction of that trend.

The background worries seem obvious – the economy, inflation, cyber and Covid.  These we all know.  What always seems to cause the problems, we’ve noticed, are the worries we don’t know or we know but don’t consider worries.  We’re thinking here of China.  Recent headlines have been full of China’s latest clampdowns on companies and their listings, its growing attempt to eradicate bitcoin and the hassles for Tesla (651).  The impact on stocks like BABA (215) and the others has been noticeable, not to mention the recently listed DiDi (12).  To look at both manufacturing and services data, one could conclude China’s rebound is over.  As the country that led the US, Europe and the rest of the world into the Covid-related slow down and out of it, and as the driver of much of the world’s growth, this is not good news.  Technical patterns there, of course, have turned very weak.

It has been a good market, but not always good when it comes to making money.  Many hedge funds, for example, have had a tough start to the year.  From the Wall Street Journal, “Morgan Stanley and Goldman Sachs showed that fundamental stock-picking hedge funds posted negative alpha – trader talk for poor performance – in the first half of the year.  Part of the challenge for professional stock-pickers is that markets have been heavily rotational, several hedge funds said.  Markets this year have whipped back and forth between growth stocks and value stocks, making it difficult for managers to find winning trades.”  For now growth seems to hold the upper hand – see, for example, the SPDR ETF (XLK – 152) where Apple (148) and Microsoft (281) dominate.  And the recent breakouts in Amazon (3631) and Google (2540) are impressive.  In market corrections, however, it’s rare they don’t get to everything.  Meanwhile, bubbles are coming undone – the SPACS, Bitcoin, AMC (36).

Frank D. Gretz

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