DJIA:  35,213

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

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

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

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

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

Frank D. Gretz

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DJIA:  35,499

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

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

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

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

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

Frank D. Gretz

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

Frank D. Gretz

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

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DJIA:  34,987

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

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

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

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

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

Frank D. Gretz

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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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