DJIA:  35,111

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

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

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

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

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

Frank D. Gretz

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DJIA:  34,160

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

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

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

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

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

Frank D. Gretz

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DJIA:  34,715

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

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

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

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

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

Frank D. Gretz

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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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