DJIA:  34,633 Either … or.  That pretty much is what the market has become.  The correlation between growth and value stocks has plunged to the lowest level since 1928, according to SentimenTrader.com.  It is in fact reminiscent of the “old economy” versus “new economy” divergence of 1999 – 2000.  Fortunately, not all divergences or non-correlations have had the same dire consequences as back then.  An important distinction between now and then is the A/D index. We consider divergences there to be most important, and were present then but not now.  Historically these low correlations have not meant much for the market as a whole.  If anything, these non-correlations have been a warning sign for growth – the idea of too much of a good thing.  Small-cap and large-cap stocks also are at their lowest correlation in 20 years.  This hasn’t been a difficult year for the market, but it has been a difficult market because of the non-correlation and rotation.

There’s plenty of speculation in this market, but while speculation may tell you something about potential risk, it alone doesn’t kill uptrends.  In terms of sentiment, what can kill uptrends is complacency, which usually comes when most are fully invested.  It just seems a bit ironic that complacency should be so prevalent when there’s plenty out there to worry about.  Inflation has been much discussed and for now the market is siding with Powell, it’s transitory. Some of the reopening bottlenecks may be transitory, but these labor shortages mean rising wages and inflation is always about wage inflation.  Then, too, were inflation at hand we would expect precious metals to be acting well, and they’re not.  Then there’s the problem of the Covid variants, a problem which seems very much here and now.  The vac maker Moderna (235) has gotten renewed attention and has broken out.  Another problem very much in the here and now is the potential for a cyber 9/11.  ETFs like HACK (61) and CIBR (47) could help.

When it comes to seasonal patterns best known is “sell in May,” though it’s not particularly accurate.  The inverse, ironically, is less emphasized and much more accurate – November–April – is up 80% of the time.  Even without the distortions of the pandemic, seasonal patterns always seem of dubious usefulness.  With this in mind, the period from July 10 to the end of August has produced some noteworthy weakness.  Also of some concern is the recent pattern within the S&P itself.  The index has reached new highs several times recently with less than half of its components above their 50 day average.  Components above the 200 day remain close to 90%, so it’s a divergence between short term and medium term trends.  In the past this also has produced some short term problems.  It’s difficult to place too much emphasis here, however, when the A/D index is bumping up against new highs.  That said, those numbers have flattened a bit as well.

In this past week’s Barron’s there was an article about Chart Industries (147).  A colleague is very positive on the stock, so we are familiar with the story despite it being that funnymental stuff.  Chart specializes in taking volatile gases and processing them so they can be contained and exported.  The interesting part is this profitable business is combined with the opportunity to bet on hydrogen and carbon capture as well.  The bad news, of all things, is the technical pattern.  It’s not that the chart is bad, it’s that it is in a trading range, and has been since early this year – not the worst thing, but still.  As we like to buy strength and sell weakness, this is the kind of pattern whose purpose is to take our money.  You might have made a fortune trading the stock from 130 to 160, but that kind of mean reversion trading eventually doesn’t work.  Those trades can be right 80% of the time, but eventually you lose 80% of your money, when finally there’s a big move up or down and you are on the wrong side.  Patience doesn’t happen to be one of our virtues, but we are waiting for a move above 160 – 165.  To see the potential here, look at a monthly chart, that is, a long term chart. 

Kicking and screaming, the S&P managed another new high on the last day of June.  It was lethargic and uneven, and again with more component stocks below their 50 day.  Stocks haven’t exactly surged following their breakout/new high.  Then, too, it’s summer.  What has surged is the buying of speculative call options by the smallest option traders.  Meanwhile, the SKEW (161) has surged, meaning hedge funds or someone is hedging against a decline.  The SKEW tries to measure the price of far out of the money puts versus calls, with high readings suggesting a higher probability of a big decline within the next 30 days. You’ll be glad to know the SKEW isn’t taken too seriously by most, but like the upcoming seasonal pattern, we mention it so you are aware.  More than the S&P, be aware the A/D index also made a new high, perhaps not so dynamically as in the past, but most days most stocks at least still go up.  Not how markets get into important trouble.

Frank D. Gretz

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DJIA:  34,196

It’s not the bad down days … it’s the bad up days.  For most of this year there have been few bad days either up or down.  That changed a bit last week when there was what you might call real selling, both Thursday and, especially, Friday.  The three day Dow loss of 1000 points is not the issue, it’s the one sided A/Ds, especially Friday’s 3-to-1 down day.  Weakness happens, especially when amidst complacency the Fed comes along with a little surprise.  Markets get over it, but it’s about how they get over it.  A big Dow comeback without commensurate A/Ds, doesn’t do the trick.  Indeed, that’s what we mean when we talk about a bad up day.  As it happens, so far so good.  Monday saw a near 600 point Dow up day with A/Ds near 3-to-1 – far from a bad up day.  The A/Ds don’t stand alone.  Analytically they need to be related to the market.  It’s important that those numbers keep pace with the market averages.

It doesn’t seem the Fed has killed the market, but did they kill the inflation/reflation trade?  While these shares did pull back, and in some cases more than we expected, we doubt they’re done.  Most of that area has been stalled since early May, pretty much coinciding in the stall in the S&P itself.  The Fed seems an excuse for the market to do another little rotation, something that he has been doing all year.  In the process, Growth/Tech has reemerged, something that had begun just as the inflation trade was stalling.  We will take rotation over everything going down any time.  We don’t see this as something unhealthy, especially had you hedged those oil positions with a little Microsoft (266).  To Look at XOP (98), the SPDR Oil and Gas Exploration ETF, oil seems to have come through this little correction in good shape, which should prove a positive going forward.

Speaking of rotation, Cathie is back.  Well, not completely back, but those ARK funds at least are back above their respective 50 day averages.  The recovery hasn’t just been on the back of Tesla (680), though it, too, is above the 50 day.  If anything it has been on the back of Roku (424), which figures prominently in many of her ETFs.  That these are performing so much better seems testimony to the idea there’s little that’s still weak, a positive for the market overall.  This is even more dramatically clear looking at solar stocks.  As measured by TAN (85), the Invesco ETF, after a big run those stocks peaked back in January and fell more than 40%.  Among the better component charts there are SolarEdge (267) and Sunrun (53).  Both of which have broken their own steep downtrends.   Those other Tech stocks, Biotechs, also seem much improved.

Sentiment is always difficult to measure, and even more difficult to act on.  Investors are right in between, but wrong at the extremes.  And how do you know an extreme, especially when you’re part of it?  None of us are immune to good old greed and fear.  Theoretically, there are some measures thought to be objective, like the Put/Call ratios and investment surveys.  When it comes to market peaks, however, these can be over the top and stay that way until you just stop caring.  Worse still, these measures often improve before the market peaks. When it comes to speculative markets like this one, the speculation often peaks before the market averages.  That was the case in 2000 when the NAZ and dot.coms peaked before the S&P really started down, and it was true in 2007 when a little oil bubble peaked before the overall market.  This time around we have seen a peak in the SPACs and likely Bitcoin.  The MEME stocks should be next.

So the Fed may raise rates as soon as late next year.  Granted we sometimes tend to be short term in our view of markets, but exactly how do “soon” and “late next year” go together?  This week the market seemed to agree.  If anything, after Powell’s diatribe, the market may have become reassured they are not off the reservation.  A so-called taper is another matter, but taper does not mean stop.  More importantly, there seems no tantrum.  It also seems that if your particular stocks aren’t going up, just wait a week and they probably will – the rotation is such.  The rotation they will tell you is the market trying to work out the implication of the Fed’s seeming shift in emphasis.  Naturally, we have to listen to the Fed, but even recently it has paid to concentrate on the numbers.  This week again, most days most stocks went up, not how markets get into important trouble.

Frank D. Gretz

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DJIA:  33,823

There go those bonds again … trying to tell stocks what to do.  The economy is recovering, rates should go higher, bond prices lower.  Recently, it hasn’t quite worked that way.  The 10-year treasury yield had fallen to 1.5% from the 2021 peak around 1.75% in March, this amidst what seemed an inflation scare.  Investors it seems had come to believe the Fed, of all people.  As they say, the market isn’t always right, but when you go against it we’ve noticed they don’t give you your money back.  The consequence of this rate perception had been twofold for equities.  It means banks are between a rock and a hard place – the gap had narrowed between what they can charge for loans and what they pay on deposits or other short-term borrowings.  Another consequence of the changed rate structure was a recent better performance by Tech.  Tech is growth but who needs growth stocks when growth is everywhere. When growth is not there, then go to the companies that grow.

This is not to say the rally in cyclicals or commodities is over.  They have performed well and are entitled to a little respite.  While energy had lagged relative to spikes in copper and steel, it has performed well recently, suggesting the issue is not with the economic recovery.  This just seems about more rotation and rotation seems the year’s defining characteristic.  The market hasn’t had a 5% correction since last fall and, as we like to say, most days most stocks go up.  It seems the often annoying rotation has in its own way kept the market technically healthy.  Meanwhile, the option speculators of February are back, and “rumor” has it – to translate MEME to the Latin.  The VIX has dwindled to a pandemic era low of 15.7, suggesting complacency more than speculation may be the worry.  Then, too, the A/D index reached a new high just a few days ago, and momentum trumps sentiment.

To listen to the homebuilders, things could not be better.  The only reason they can’t sell more homes is shortages.  Somehow that doesn’t seem to fit with the recent collapse in lumber, but what do we know?  Then, too, back in 2007 their story over and over was they didn’t see a bubble, so what do they know?  Speaking of 2007, a ratio of home prices to rental prices is higher now than it was back then.  This could reflect the pandemic induced city exodus but still, stretched prices don’t usually stay stretched.  Meanwhile, the charts are looking a little the worse for wear, even including associated stocks as disparate as Home Depot (303) and Masco (59).  Getting back to lumber, the price of lumber is crashing relative to gold.  Lumber is considered a proxy for economic growth, while gold is considered a safe haven.  Previous extremes did tend to precede further declines in lumber prices as well as home building stocks, according to SentimenTrader.com.  Those homebuilding charts have begun to suggest the same could happen this time.

It wasn’t that long ago that $100 oil seemed almost laughable.  After all, the world was in lockdown, the roads empty, and flights virtually nonexistent.  Even now, $100 oil seems a stretch.  Yet Brent already has moved to $73, its highest level in two years.  It’s not that demand is that great, though it is growing, it’s more that new supplies have been slow in coming.  We’ve gone from 15 years of reserves to 10, and capital expenditures have gone to $100 billion a year from $400 billion 5 years ago, according to FT.   Jeremy Weir, executive chair of Trafigura, one of the world’s largest independent oil traders, told the FT Commodities Global Summit that the lack of spending on new supply was concerning, because the world is not ready to make the leap to clean energy and complete electrification.  Oil stocks, of course, have been on to this for some time.  Despite their performance this year they still seem underloved and, therefore, underowned.  Since opinions typically follow price, this seems likely to change.

So they’re talking about talking about.  Wednesday’s Fed meeting has resulted in a change in expectations, like everyone expected rates to stay low forever.  What it didn’t do was signal any real retreat from pandemic crisis measures, for now and for some time.  As seems his intention, Powell has plenty of justification to stay the course – employment is yet to improve that much and much of the inflation does seem about bottlenecks that should prove transitory.  That yields had fallen in the last three months, and did so again even on Thursday indicates what seems a prevailing belief the Fed won’t be panicked into tightening.  Similar market reactions – 0.5% declines in stocks, bonds and gold – followed other FOMC announcements in the past.  After some short term consolidation, what followed was higher prices.  Keep in mind, too, we came into this with a better than good pattern in the A/D’s, a pattern of higher lows versus the pattern of lower lows in the averages.  If you want to see a market with real credit restrictions, take a look at China.

Frank D. Gretz

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DJIA:  34,466

Hedge fund, or … hedge fun. Back when we frequented the Hamptons, we were impressed by those hedges surrounding, though not quite completely hiding, the Estates.  We also were impressed to learn the price of a trim, so to speak.  So much so, we came up with a name for our new, though theoretical business, something to do with fun.   The two things that worry us are not about technical analysis.  We worry about a cyber 9/11 and a variant the vaccines don’t overcome.  Both, of course, would do significant damage to share prices.  It’s a bull market, making hedging very difficult.  The cyber security stocks and ETF’s seem to make sense when it comes to hedging the likely ongoing threat there.  HACK, the Prime Cyber Security ETF (HACK-61) and CIBR (46), the First Trust Security ETF should be useful there.  As for a Covid problem, the VAC makers BioNTech (240) and Moderna (217) should be useful.

If be bearish you must, Goldman Sachs has a model which predicts the probability of a bear market.  The model is cleverly named the Bear Market Probability Model, and consists of unemployment, ISM manufacturing, the yield curve, inflation rate and P/E‘s.  As the model cycles from below 40% to above 65% the odds of a bear market are said to increase.  When above 65% the S&P has returned an annualized +3.4%, according to SentimenTrader.com, which hardly sounds like a bear market to us.  Then, too, that’s only a sixth of the return when the probability is below 40%.  Currently around 67%, the model is not high enough to be a major concern, but the model has cycled from below 40% to above 65% in just 11 months, the fastest turnaround ever.  The model, obviously, is based on those funnymentals.  As we mentioned last time, were we one of those types we likely would be more concerned about the Cyclically Adjusted P/E.  Instead, with the Advance-Decline index making new highs and 80% of stocks above the 200 day, that is, in uptrends, we think any bear market is yet some time away.

Energy is the best performing sector this year.  Like anything up, especially anything at 45%, most aren’t interested when you are positive.  This proved true in a recent discussion when the retort was just that – they’re up too much.  When we asked how many oil stocks this person owned, the answer was none.  And there it is.  When it comes to the oil stocks most own little or none.  They’re under-owned and that’s why they’ll keep going.  Add to that, as is always the case, now the news is getting better.  Activists are leaning on big oil to drill less, the rig count is down 35% from pre-Covid levels, oil inventories are below their five-year average – all this as demand continues to climb.  The news is better but the stocks are up too much to buy, most think.  When the stocks keep going the news will become almost compelling, to the point that you have to buy.  It’s just the way the market works. XOP (97), the SPDR Oil and Gas ETF is a good start.

Sentiment or market psychology is an important part of technical analysis.  Simply put, traders and even investors tend to be wrong at the extremes.  Sentiment, of course, isn’t easy to measure or to follow.  When bullishness is extreme we are all likely to be part of it, and hesitant to give up that lovin’ feeling that comes with making money.  And at such times, it’s nice to be around those who share a similar sentiment, so to speak.  This might explain the enthusiasm for last weekend’s Crypto conference.  Attendance was 12,000 versus 2,000 the prior year, and the $600 ticket price was selling for $1200 before the conference started – a better investment than Bitcoin recently.  The real concern here is the price action.  Using the Grayscale Bitcoin Trust as a proxy, it’s a look that can’t be described in polite company.  As for the market overall, it’s easy to say sentiment is over the top, but it’s difficult to measure.  Mechanical measures didn’t capture the dot.com’s back then, and now don’t capture Crypto, SPACS, and Memes.  Fortunately, momentum trumps sentiment.

We tend to fixate on the A/D‘s rather than the market averages.  The A/D index is at new highs, and the daily numbers have been positive nine of the last 11 days.  What’s not to like?  That said, even we are surprised at the lack of movement in the S&P – stocks go up most days but not enough to break out the average?  Of course, when they do break out the concern will be about a false breakout, one which quickly reverses.  Ever notice, there’s always something.  What has come to be of a bit more concern than the S&P is the Transports.  They peaked the middle of May and are now teetering on their 50 day average.  This doesn’t seem a concern for the market overall, but it is from a leadership standpoint.  We still believe leadership lies in Cyclicals and Commodities, but we would like a little reassurance from the Transports.  Meanwhile, annoying as the incessant rotation may be, it is at least intriguing.  One of the best acting Tech stocks these days is a little company that makes “business machines.”  And, by the way, war may be nigh to look at the defense stocks.                                                              

Frank D. Gretz

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DJIA:  34,464

P/E’s … or A/D’s?  P/E’s, even we know, are a measure of valuation.  Of course, we contend stocks sell at “fair value” twice, once on their way up and once on their way down.  The trick is to figure out whether they’re on their way to becoming more overvalued or more undervalued.  There are, however, some historical guidelines, and there the news isn’t so good.  Like many market measures, choose the one that suits your purpose. For P/E’s, you got your trailing, you got your forward and, you have which seems most reasonable, the CAPE.  Robert Schiller’s Cyclically Adjusted P/E is the price to average real earnings over a period of 10 years.  Currently around 37, it is far more expensive than any time with the exception of the top of the dot.com bubble.  So from a funnymental viewpoint, at least one viewed through the valuation lens of P/E’s, this would seem a time for some concern.

The good news – the technicals are here to save the day.  The P/E’s may be worrisome but the A/D’s are not.  Markets get into trouble when the average stock begins to lag the stock averages.  These divergences, higher highs in the big cap averages that go unmatched by a similar high in the A/D Index, historically have preceded virtually every important market decline, and most lesser ones as well.  The Advance-Decline Index just surpassed its peak of May 7, leading rather than lagging the averages.  Looking at this measure from a different perspective, there was a 2-to-1down day last Wednesday, and the 6-to-1 down day on the CPI news.  Both were followed by positive up days – positive Dow days and positive A/D‘s as well.  Even in the very short term, no divergences, no weak rally.  Weakness happens, it’s part of the whole thing, it’s something that alone doesn’t change the trend.  If followed by a weak rally, that’s different.

Thinking about buying a little Microsoft to hedge your commodity holdings?  We still favor the re-open/reflate, cyclical/commodity trades.  They have, however, stalled a bit of late.  There is the threat of Iran coming back online hurting Oil, and China leaning on commodities generally.  Given the news backdrop, it’s impressive the stocks haven’t given up even more, especially after their run.  A good guide here might be the Dow transports.  They had a down week last week for the first time since early February.  A drop below the 50 day – around 265 – in the IYT ETF (275) would be cause for concern.  Meanwhile, after a few poor rally attempts many of the Techs have improved – stocks like Microsoft (249) and Adobe (498) fall into that group.  The stay-at- home variety of Tech is a different story.  The semi’s are a house divided, with equipment makers like Applied Materials (138) better than the rest.

An area we haven’t given its due is healthcare.  Many stocks here are acting well, virtually all are acting better.  Healthcare typically isn’t concerned with inflation or rising rates, and for the most part are consistent growers – a compromise in the growth/cyclical debate.  To look at the hospitals like Tenet (66) or Universal (159), they seem to be out of the pandemic woods and then some.  The same can be said of stocks like UnitedHealth (413) and Centene (74). The Healthcare Providers ETF (IHF-271) pretty much covers you there.  Then there is the SPDR Healthcare ETF (XLV-123) which includes UNH and many of the major pharmas.  Johnson & Johnson (169) is nearly 10% of the ETF.  Teladoc (149) is among the top 10 holdings, but not one of our favorites. Down about 50 percent, it’s also one of the top holdings of Cathie Wood who continues to add to her position.

Don’t fight the Fed, don’t fight the tape, don’t fight the A/D’s.  The average stock matters more than the stock averages.  For all the jockeying around between growth and cyclicals, most days most stocks go up – not how markets get into trouble.  The market has had a couple of days of selling, but has come right back.  It’s a perverse way to look at things, but we are impressed when the market has a chance/excuse to go down, and does not.  The market hasn’t had a 5% correction in six months, one of the longer such streaks.  This may seem a concern, but these periods more often are followed by choppy action rather than weakness.  Choppy seems a good description of what we’ve seen lately.  It’s summer and probably a good time not to expect too much or push too hard.  Don’t forget gold and silver.

Frank D. Gretz

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DJIA:  34,021

The trend is your friend … provided it’s an uptrend.  We always contend the easiest way to make 50% trading is to trade a stock that doubles.  Sure investing in those stocks would have done a little better, but that misses the point.   Being on the right side of the trend is the easiest way to make money.  As a trader, the trend bails you out when your timing is off, as often is the case.  Meanwhile trying to do that mean-reversion thing can end up more mean then reverting.  All this may be well and good, but you still have to find an uptrend and, hopefully, identify it early.  This year the easiest trend to identify has been that of the S&P itself, the easiest to trade has been the Transports – up 14 weeks in a row.  For much of the rest of the market it pretty much has been a Rorschach test.  Likely because of that, now the uptrends have come into question.

The Advance-Decline index reached a new high virtually minutes ago.  That’s not the backdrop for important weakness.  Indeed, important weakness typically only follows months of diverging action between the market averages and the average stock, that is, the A-Ds.  In April an average of 96% of the S&P component stocks were above their 200 day average, the best ever for a calendar month.  That number is consistent with a start of a bull market rather than with one’s end.  The Dow Jones hit an all-time high 24 of 87 trading days through Monday, the sixth best start to any year, another sign of great momentum.  The problem is that after four months of this kind of momentum, markets tend to cool off.  It’s not about “sell in May,” it’s about four months of this kind of strength.

Given the numbers alluded to above, you might argue the market’s problem is simply too much of a good thing.  This idea showed up again recently in terms of 12 month new highs.  Last Friday nearly one third of the S&P components reached a new high that single day.  Monday followed with another big number, even after Friday’s reading had been matched only seven other times in 20 years.  Each of those seven, however, preceded a loss over the next month, according to SentimenTrader.com.  Impressive, however, was the performance over the medium term, where there were only a few losses.  This seems to confirm the concept that impressive momentum and broad participation rarely precede large losses or bear markets.  The short term is another issue, especially against the backdrop in sentiment which is more like that at the end of a bull market.

The consequence of the Friday-Monday excess was Monday’s reversal, causing a spike in the number of stocks having a buying climax.  This occurs when a stock hits a 52-week high, and then reverses to close below a prior day’s close.  These reversals work unless they don’t, if you catch our drift, but in large numbers can be a sign of buyer exhaustion.  This, again, is short term stuff.  Together with other signs of excess, the spike in new highs and Monday’s reversal, point to a difficult short term.  Overall momentum, however, will keep the bull market intact.  As is always the case in these short term, “healthy” corrections, something comes along to make you wonder.  That seems to have been the case with Wednesday’s CPI number.  The market can live with inflation, but not inflation that will change the mind of the Fed.  The mind of the Fed and the talk of the Fed, by the way, often are two different things.

Last Friday’s employment report was said to be a sign the recovery had stalled, a sign to get back to stay-at-home/ growth stocks. Indeed, they had a great day. Almost unnoticed, however, was the re-open commodities/industrials also had a great day.  These still seem the leadership, and likely so for some time.  The recent weakness simply seems part of the market’s nature, a nature about which we warned last time.  The A-D index just made a new high, but the reality is this is a market divided, and that’s never a good thing.  To look at a chart like Nucor (101) is to look at how most of Tech used to look.  The same could be said of most Copper, Ag, Industrials, re-open stocks.  We never think of losing money as healthy, but a correction would relieve some of the excess.  Buying the dip Tuesday worked, but not so Wednesday.  That might continue for a while. The market needs time to settle and, as they say, time takes time.  

Frank D. Gretz

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DJIA:  34,548

Those planes and trains … they keep on trucking.  And, they do so with amazing consistency.  The Dow Jones Transportation Average has been up each of the last 13 weeks, a streak beyond any in recent memory.  We all know these streaks don’t last forever, and a small sample size makes it difficult to project otherwise.  This, however, may miss the point.  There may be no other group more representative of “re-opening.”  And re-opening seems clearly in the forefront of the market’s attention.  Monday’s market seemed a perfect example here, in that despite 2800 NYSE advancing issues, it wasn’t all that easy to make money.  You had to be in the cyclical, industrial, and commodity stocks, and avoid most of Tech.  Rarely do we recall a market this extreme and difficult, yet at the same time so simple.

Ask not for whom the bell tolls, it tolls for Tech.  And the bell tolled pretty loudly late last week.  All those over-owned Tech stocks reported and, with the exception of Alphabet (2325), did nothing or went down.  Our initial concern was about the market.  If it’s the market that makes the news, a market that ignores good news isn’t a good market.  There may be something to that, but more likely the good numbers are simply about why the stocks are where they are, rather than where they’re going.  That they are unlikely to go up, let alone lead, is about the market’s change in focus.  This re-opening idea isn’t just about stuff that’s heavy to lift.  After dealing with COVID for some time, hospitals now seem poised for more profitable business – see, for example, Universal Health (154) and Tenet (65).  This should also be helpful to companies providing largely ignored medical procedures, like Intuitive Surgical (836) and Edwards Life (91).

We tend to use “Tech” rather loosely, while we find Tech to be of two varieties.  There is the Tech that is out of favor for now, but not going away, and there’s the Tech that for investment purposes, could go away.  As the economy reopens, wouldn’t most go to their own doctor, or their own doctor online?  What do we know, but to look at the chart of Teladoc (151) it would seem so.  Or, for that matter, to look at the aforementioned hospital and medical device stocks, it also would seem so.  And then there’s Peloton (83).  Gyms are re-opening, outdoors is re-opening, is Peloton still a must have?  As often happens in the stock market, news follows price – the company has recalled 125,000 treadmills, citing risk of injury or death, according to Market Watch.  Then there’s Zoom Video (289). Video conferencing may be here to stay, but will we Zoom?

When it comes to this re-opening idea, there are a number of ETFs which as a group, or even individually, seem to get the job done.  Several we mentioned last time, including Materials, XLB (87), Industrials, XLI (103) and Infrastructure, PAVE (27).  Two others we might highlight are Metals & Mining, XME (45), and Steel, SLX (64).  We do so as steel has acted particularly well recently, as has ancillary stocks like Cleveland Cliffs (20) and Vale (22).  And, of course, there is an ETF for those seemingly irrepressible Transports, IYT (273).  Meanwhile, does oil know something the rest of these re-open stocks are missing?  We doubt it and, indeed, the energy stocks also have acted better.  For oil there is XLE (52) and XOP (84).  Individually, it’s a group that when they go, you can pretty much throw a dart.  Then too, hopefully our dart might land on Diamondback (82), Pioneer (164) or Northern Oil & Gas (15).

There is a cliché that comes around this time of year, one that most of us have come to hate. Then, too, there is the reality of summer months when we’ve seen the kind of four months we’ve seen.  This pattern correlates well with years like 2013 and 2017, according to SentimenTrader.com, two other years that were well-suited for trend followers of the S&P, and difficult for everyone else.  The Advance-Decline index just reached another high, and you know how we feel about that – no big problems.  Still, the market divide is a worry.  The bad have a way of dragging down the good.  The obvious excuse for any weakness is a Fed which seems awash in that river in Egypt – DeNial.  It has been suggested the next Fed appointee should be someone who goes grocery shopping.  Then, too, the Fed has little choice, as any admission of inflation would imply a need to tighten.  That’s not what the market wants to hear.

Frank D. Gretz

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DJIA:  34,060

It’s not easy … but it doesn’t have to be complicated.  From the lows this year the most important technical tool may well have been a ruler.  All you had to do was draw a line under the S&P lows, and follow the bouncing ball.  Another simple approach to trend analysis might have been to watch the number of advancing and declining stocks.  The market is about supply and demand.  As supply begins to outstrip demand, fewer and fewer stocks advance.  The large-cap stocks that drive the averages continue up, the ranks of the average stock begin to diminish.  It may continue a bull market in the averages, but not so in most stocks.  Rather than think of the Advance-Decline index as just some technical indicator, think of it in terms of supply and demand.  When there are 2000-2500 advancing stocks most days, that takes money.  When there’s still that kind of money out there, the uptrend should continue.

It’s only human nature to worry about a market up this much, and to look for problems.  We are as guilty as anyone, including a recent concern about the defensive parts of the market suddenly taking the lead.  How often do you hear “overbought” or “extended,” a 10% correction would be healthy?  We get the point here, but losing 10% has never made us feel particularly healthy.  It has been the kind of market where the simple stuff has worked so well, most of the complicated technical stuff has not.  Out of 22 technical trading strategies followed by Bloomberg, only seven have shown a profit in 2021, among the lowest in 25 years.  Bloomberg notes, “It’s testament to the straight up trajectory of stocks that virtually all signals that told investors to do anything but buy have done them a disservice this year.”  So there, you technical so and so‘s.  Every sunken ship had a chart room.  Then, too, that could’ve been about the guy reading those charts.

All of this, of course, misses what might be the most salient feature of the market this year, the rotation.  It wasn’t hard to just buy and hold the market this year, but it was hard to just buy and hold almost any group.  The FANG stocks have outperformed recently, for example, but this after a few months where they pretty much just yawned.  Solar was one of the best groups early in the year, but has suffered since February.  The same might be said of the software stocks, at least until recently.  It may not have been complicated, but it hasn’t been easy.  Easy has been buying the S&P.  Recently there were 85% of S&P components above their 50 day, while only 50% of the NASDAQ and Russell 2000 components were above their 50 day.  That makes it hard to beat the S&P without owning it.

All this having been said, there’s little question that where you’re in the market can be as important as whether you’re in.  To speak generally, we still favor the re-open stocks, the commodities and industrials.  Copper had a great week and got all the attention, but Steel was just as good and there are many of them.  Relevant ETFs here are COPX (41), SLX (61), XLI (103), XLB (84) and PAVE (26).  They don’t have the volatility of Tech but, hey, they’re in uptrends.  Fans of low price stocks that we are, Wednesday’s pickup in the energy sector caught our attention.  There are many of these which might help explain Wednesday’s unusual configuration – the Dow down 165 with 700 net advancing issues.  Of course, Microsoft (253) didn’t help the Dow.  The stock market has its own logic and oil can have many influences. Still, oil seems an obvious re-open play.  We would also note the improvement in precious metals.

Last Thursday afternoon the Dow dropped some 300 points and there were almost 900 net declining issues.  The tax news was hardly a surprise, but the announcement timing was.  Weakness isn’t a problem, it happens.  The problem is when weak rallies follow.  The next day saw the Dow rally 200 points, with a net of some 2200 advancing issues.  That’s not the weak rally about which we worry.  Meanwhile, we confess to a knee-jerk negative reaction to the market’s poor response to some seemingly good earnings numbers.  If, as we strongly believe, it’s the market that makes the news, in a good market good news should be treated as such.  The answer may be simple – the numbers we’re seeing are why the stocks are where they are.  The numbers, in a sense, are just catching up to price.  These poor responses, by the way, pretty much are confined to Tech, which no longer seems the real leadership. They’re selling on the news to move to the cyclicals/commodities?

Frank D. Gretz

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 DJIA:  33,815

Give us a lot of money… and we’ll buy you something nice.  We’ll buy you something nice but we can’t tell you what it is.  We can’t tell you what it is because we don’t know what it is, yet. Doesn’t that sound like a good deal?  Deals like this are called SPACs.   And they laugh at the dot.coms.  There may be a difference between the SPACs and the dot.coms but they are similar in an important way – speculation.  Speculation is the dark side of this market.  The level of speculation now is what you would expect to see at the terminal stage of a multi-year bull market.  The saving grace is the market’s other side, the momentum side.  Measures like Advance-Declines and the percent of stocks above their 200 day average are those of a new bull market.  Since momentum typically trumps sentiment, and has done so to date, we don’t see any big risk to the uptrend.  More choppiness and rotation, however, does seem likely.

In yet another seeming leadership change, last week‘s best performing group was the utilities.  Or, shall we say, the utilities?  Add to that the staples, see the XLP ETF (70), and big Pharma, see the XLV ETF (123).  Why did the market suddenly go so defensive?  What does the market know the rest of us don’t know?  We can’t exactly point to any numbers here – utilities outperform and the market goes down, or anything like that.  When the market turns defensive it makes us want to be cautious.  It also wasn’t the best of signs last week when most of the banks reported generally better than expected numbers, and yet went nowhere or down.  If it’s the market that makes the news, when good news isn’t good, that isn’t good.  Economically speaking, we all know the second half is supposed to produce blow out numbers.  In the stock market, what we all know isn’t worth knowing – it’s discounted.

Suppose the economy isn’t as good as it looks?  That makes for interesting contrary thinking, but, the price action doesn’t really back that up.  As measured by the various ETF‘s, the Metals and Mining ETF, XME (40), Materials, XLB (82) and Infrastructure, PAVE (26) still act well.  An exception to the strength in commodities has been oil where we are still hopeful.  A little strength here would go a long way.  Meanwhile, gold finally has come to life, ironically as Bitcoin has come to struggle.  Everyone loves Coinbase (295), including Cathie, but the float here we understand is some 56 million shares while there are some 149 million shares outstanding.  We doubt staples are a new leadership just when for most their costs have begun to rise.  Still, you can’t argue with the charts here, or those of the utilities.

Last time we spoke of Tesla (720) as agnostic when it comes to most background noise – vaccines, war and peace, that sort of thing.  This week it appeared agnostic even when it comes to itself – the fatal crash and the China auto show protest.  Then there’s that overriding sort of negative.  Superior though it may be, it’s no longer the only EV game in town.  Ah, but can they send a rocket to space and land it on a dime in the Pacific Ocean?  Success always creates competition, though until this quarter it never seemed to bother Netflix (509).  If it’s not the competition, which is somewhat formidable, maybe it’s the going away of staying at home.  We see Zoom Video (328) as the poster child here, and it has basically been cut in half from his peak last October.  Netflix isn’t nearly as bad, as Wednesday’s weakness only knocked the stock to the lower end of the nine month trading range.  While you don’t want to see it slip below 460 – 480, the lower end of the range, we would rather not sit through the slog back to the upper end either.  We’d rather Tesla there.

Following the Monday and Tuesday weakness, the market came storming back on Wednesday.  The storming part was in terms of those Advance-Declines – 4-to-1 up and close to 2600 net advancing issues.  It’s not weakness that is the worry, it’s the weak rallies that follow, and that was anything but a weak rally.  Wednesday, however, did have a surprisingly negative characteristic.  For the S&P 500, 85% of the components ended above their 50 day average, while for the NASDAQ and Russell there were less than 50%, a historically large divergence.  Things may be changing, but we’re far from anything serious.  Pretty much most days most stocks go up, and that means no big problems.  Thursday afternoon happens when too many are on the complacent side of the boat, and there’s a negative surprise.  There was always going to be a tradeoff between stimulus/infrastructure and taxes.  The market knew that and the market quickly will figure out it knew that, and can live with it.  Thursday just seems more of the recent choppiness.

Frank D. Gretz

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DJIA:  33,502

Gap and go, or … gap and go nowhere.  Monday’s low in the S&P futures was 0.5% above the prior day’s close. It then rallied another 0.5%, seemingly a set up to gap-and-go. Like most such patterns, the follow-through has been mediocre at least so far.  Another seeming anomaly was the Monday action of a week ago, which saw the Dow rise about 100 points while only 35% of stocks rose.  When this close to an all-time high, this was the worst configuration in more than 60 years, according to SentimenTrader.com.  The market subsequently was lower both one and two months later.  Recently, the Russell 2000 dropped below its 50 day average for the first time in three months.  When after a five-year high it typically leads to a prolonged period of underperformance, though in this case the index continues to dance around that 50 day.  Then came Thursday a week ago, which saw a 4-to-1 up day in Advance-Declines, numbers we just can’t fight.

While the bull market is the ongoing market story, as much a narrative has been the jockeying for leadership.  Whether it’s correlation or causality time will tell, to coin a phrase, but the stabilization in rates seems to have stopped the bleeding in Tech.  At the quarter’s end, Tech ranked last among the 11 industry sectors.  At some 26%, Tech is the S&P’s biggest weight, making it very unusual for the S&P to rise when Tech trails, let alone runs last.  So, for the market’s sake, stabilization here seems important.  And, of course, not all Tech is equal.  Semi’s trade like they’re re-open stocks, what we’ve called retro Tech, the Cisco’s (52), Intel’s (67) and Oracle’s (75) are having their renaissance.  Oracle lost a legal battle with Google (2251), and both rallied, which pretty much says it all.

Tesla (684) delivered, and then some.  In the first quarter, so the headline read, the company produced just over 180,000 vehicles and delivered nearly 185,000 vehicles.  That’s a pretty good trick.  If they continue to double charge some customers, they could really have a good year.  Rest assured, we’re not here to knock Tesla.  After more than a good run, the stock simply seems to be taking a needed rest.  As it happens, the rest is taking place right on the October uptrend line – funny how that happens.  After some five weeks, the stock seems to be trying to come out of its respite, something close to 750 should do the trick.  That’s the look of the weekly chart – each bar one week.  The daily chart shows a declining 50 day around 730, which could be a bit of resistance.  The daily also shows little volume expansion, and that should change to confirm any breakout

The key to making money in the stock market is to not lose a lot.  You can lose often and, indeed, it’s part of the business.  You just can’t absorb big losses.  Cutting your losses, of course, is something we all talk to talk about, but stocks have their way of doing a Paul Simon, slip sliding away.  You can use a rigid 8–10% rule, but that needs to be adjusted for volatility.  For one of the Bitcoin stocks 8% could be an hour or two.  Moving averages are our preferred stop method, but often they’re not close enough in uptrending stocks to prevent more damage than you might like.  A more esoteric stop is what we call a time stop.  You buy a stock because you think it’s going up.  If it doesn’t go up, at some point you have to say you’re wrong, and sell.  The stock itself may do nothing wrong, but given enough time it probably will.  As much as we like Disney (187), we’ve given it just about enough time.  Here at the 50 day, it is also running out of room.

As suggested above, it’s hard to fight markets that still can generate Advance-Declines of 4-to-1.  The other insight here is that it takes money to generate those days of 2500 net advancing issues.  There’s still money out there – the bull market remains intact.  Still there is some conflict in the technical backdrop. The measures related to momentum and breadth are those seen in the early phases of a bull market.  Measures of sentiment, particularly measures of speculation, are those seen near the end of a multi-year bull market.  As we have suggested many times, momentum trumps sentiment, and so far it has done so.  Then, too, there has been quite a bit of under the surface rotation, and that seems the biggest challenge in the weeks ahead.  Tech won’t go away, but it can underperform. To generalize about the stocks we like, we think of them as the under-owned.

Frank D. Gretz

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