DJIA:  34,639

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

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

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

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

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

Frank D. Gretz

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DJIA:  35,870

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

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

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

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

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

Frank D. Gretz

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DJIA:  35,921

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

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

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

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

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

Frank D. Gretz

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DJIA:  36,124

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

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

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

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

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

Frank D. Gretz

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

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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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