DJIA: 21,201

Sound advice for markets like this as well, at least on an individual basis. When it comes to investors en masse, that’s different. There you want emotion, fear, even a little panic. Selling makes market lows, not buying. Stocks go up with relative ease once you get the sellers out of the way. And that usually takes bad news—news bad enough to turn complacent, ride-it-out holders to scared sellers. Certainly Monday, and then Thursday, had that look. It’s relatively rare to see 50% of stocks in an S&P sector all reach a 12-month new low. When it does happen, it’s typically a sign the sellers are exhausted. Monday saw 50% of the S&P make a 12-month low. Fewer than 2% of the S&P stocks were up on Monday and they accounted for only 3% of the total volume—another sign of exhaustion selling. That said, the only way to be reasonably sure the selling is exhausted is by the way they go up. They should go up almost as though a vacuum had been left on the upside.

So what does this “vacuum,” this absence of sellers, look like? After a “washout,” 18-to-1 down day in the A/Ds on Monday, it looks like a 5-to-1 upside A/D day at the minimum. That’s the simple rule, less simple is 90% volume days to the downside, of which we’ve had a few, followed by 80-90% volume days on the upside, where at 89% Tuesday, obviously seemed positive. We’re a bit dubious, however, that Tuesday’s up-volume number wasn’t somehow distorted. It seems very strange up stocks numbered only 2,900 versus 1,090 declining stocks, not even a 3-to-1 up ratio, and yet volume was so one-sided. In any event, the up-day you should be looking for is at least 5-to-1 in terms of the A/Ds, and 80-90% up in terms of volume. The other catch is that violent declines like this one more often than not require several such days.

We’ve all had drummed into us, the trend is your friend. What they really mean, of course, is an uptrend is your friend. Those downtrends are friends to few. In a market like this, the question naturally arises as to whether the trend remains up, in this case the long-term or overall trend. We have our proprietary, very sophisticated method of determining the overall trend, one involving very complex equipment—a pencil and a ruler. The long-term trend remains up. A slightly more sophisticated trend analysis was offered by Ned Davis several years ago. The study involved the 50-day moving average of the DJIA compared to the 200-day moving average. We haven’t seen an update of the study in a number of years, but for some 113 years, all the net gains in stock prices have come when the 50-day smoothing was above the 200-day smoothing. The DJIA 50-day (28,044) remains well above the DJIA 200-day (27,208). As you can see on the other side, that’s also the case for the S&P and NASDAQ 100.

There are 28% declines and there are three-week declines—there are not many 28%, three-week declines. Precedents are hard to come by, especially when it comes to Monday’s halt in trading. The only other time circuit breakers had been triggered was October 27, 1997. Once trading resumed on October 28, futures dove about 3% and then recovered. Obviously a sample size of one isn’t much help. SentimenTrader.com looked at other times the S&P fell the most in the shortest amount of time, from at least a multi-year high, and even here the current plunge stands out. Others fell this much, but not as quickly. The closest comparison in time and magnitude was 1990, when the S&P fell 18% within 52 days of hitting a new high. Looking at returns going forward, by the time the S&P fell at least 18% within three weeks of a multi-year high, returns were good—the exception 1929

It’s like ’87 meets 9/11. Thursday markets suffered one of their worst declines ever. On the NYSE, 77% of issues traded hit a 52-week low. Everytime that figure has been above 60%, the S&P was higher one-to-two months later, according to SentimenTrader.com. On the NYSE, 95% of volume was in declining issues for the second consecutive day. That’s only happened three other times, each in the midst of a selling climax. Stocks look sold out, but you could have said that last week. Before the ’87 crash, we remember there being a high level of Put buying, making it unclear how so much was lost. The story told is that Put buyers turned to Call buyers half way down. Prices have become so compelling, it’s difficult to keep your fingers out of the cookie jar. When stocks finally are sold out, there will be a sharp rally. Just when you think you missed the low, there will be another move down—a “test of the low.” That’s the safest time to buy, unless you happen to enjoy those knife wounds.

Frank D. Gretz

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DJIA: 28,957

One can only hope it’s back to business, literally. Business doesn’t seem so bad if the stock market is the guide it’s supposed to be. While last year we had to wake up to the threat of new tariffs most days, it would be pleasant if this year we don’t have to wake up to new attacks somewhere. No doubt plenty of trouble may still come from the Middle East, but the Tuesday-Wednesday events seem to mark Phase I of a peace deal. Now the stock market can go along its merry way seemingly toward some euphoric binge. Already in a bubble for more than a year, the NASDAQ managed to further surge 76% from October 7, 1999, until its March 10 peak in 2000. As it happens, back then the Federal Reserve flooded the market to prevent any disruption from the “Y2K” bug. The moves it has made in the last few months following the September seizure of the repo market are proportionately just as big, according to Bloomberg’s John Authers.

Speaking of 2000, some measures of sentiment are back to those happy days. Options are one thing, leveraged options quite another. Speculative activity in leveraged instruments has risen dramatically in the last month, with one of the biggest spikes since 2000. Meanwhile, those ETFs protecting against a fall are losing assets. During dynamic uptrends, traders tend to pile into leveraged funds faster than they have the inverse funds, according to SentimenTrader.com. Over the past month, the long funds have gained more than 15%, while the short funds have lost more than 10%. Every time since 2010 spreads were this wide, returns weren’t all that bad—after all, the trend was up. Short term, however, the next 1-to-3 months, the S&P’s median was below a random return. We could look at call buying alone and get pretty much the same picture. These sentiment measures are simply telling us what we already know—things have gotten frothy. Sentiment gives you an insight into risk, but it’s not a timing tool. When those A/D numbers change, then worry, and maybe a lot.

Momentum numbers like the advance/declines still have the market’s back. Another measure we favor is stocks above their 200-day moving average, that is, stocks in medium-term uptrends. For the S&P, this measure nudged above 80% a few days ago, its highest level in a year. So much for the “unwind” in momentum characteristic of bull market tops. As is often the case, when it comes to all stocks on the NYSE, they’re lagging a bit at a recent peak of only 68%. We take this to mean the large-cap stocks of the S&P simply are outperforming NYSE stocks taken as a whole—not unusual. As long as those A/D numbers hold together, we don’t see this as an important divergence, and hopefully one soon corrected. When coming from an oversold level as it did last year, a move above 60% of NYSE stocks above their 200- day has been followed by above-average returns in the S&P. Spikes to 70% marked new bull markets in 1995, 2003, 2009, 2013 and 2016.

One technician’s top is another’s consolidation. We’ve worried for some time just what those FANG stocks were up to, especially Facebook (218) and Amazon (1901). Just two weeks ago Amazon looked particularly risky, but managed to dramatically move higher on 12/16. This kind of surge of itself often means higher prices, moving the stock, as it did, above some four months of trading. The stock, like Netflix (336), has gone nowhere since the end of 2018, so the consolidation/top issue remains unresolved. It is, however, much easier to give the stocks the benefit of the doubt. Meanwhile, both Facebook and Google (1420) have made it pretty clear their respite since 2018 was just a consolidation. On the whole, we can see all four on their way back to the good old days, even if not quite the FANG of old. If the volatility here seems a bit too much, we would note that over 40% of the Communications Services ETF (XLC-55) is Facebook and Alphabet.

The war hedges—Gold, Oil, Defense stocks—came undone on Wednesday. Gold and the Defense stocks have particularly good charts and may have to settle-in, so to speak, but should be fine. Energy is trying, and trying in more ways than one. As for the hedge aspect, clearly fears eased Wednesday, but when isn’t the devil dancing in the Middle East? To assassinate the second most powerful person in Iran seems to have taken things to a new level. For now, the market agrees with Trump—all is well. Wednesday was the first time in the history of the S&P futures that they fell to a multi-week low and rallied to a 52-week high in the same session—Tuesday night and Wednesday. Lesser reversals generally led to higher prices. The positive seasonality will begin to fade, some prices are becoming stretched and sentiment is over the top. The Advance/Decline Index, however, just hit a new high—not how markets get into trouble.

Frank D. Gretz

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DJIA:  28,377

The trade war, impeachment, Brexit, all have had their moments, but none have proven the market’s undoing.  And so it goes.  The “knowns” rarely prove the problem, it’s those nasty unknowns.  The obvious catch is how to know the unknowns.  In some cases, the overall market sniffs out trouble and it shows up in breadth divergences and the like.  There is, however, a specific indicator designed to detect Black Swans called the SKEW.  What the SKEW measures, and what it is telling us now, is that traders are paying up for out-of-the-money Put options.  They’re buying insurance on what who knows, and they’re paying up for it.  Like the “Titanic Syndrome” and other esoteric measures, the SKEW has had its moments, but fortunately not that many.  Ironically, the Volatility Index, or VIX, a short-term measure of fear, is only around 12-13, well below the average of around 19 since 1990.

A Black Swan is a significant and market moving event.  Most important, it’s unforeseen.  That makes any prediction little more than a guess, other than it’s not where you’re looking.  And, indeed, that would describe most of the market’s problems, they’re never where you’re looking.  The impeachment, rather than a Black Swan, has proven a non-event.  Then, too, a conviction in the Senate might well qualify.  We’re thinking, however, a little further from home, specifically China.  It’s not our trouble with China, it’s trouble in China.  China’s financial system is struggling under the weight of an enormous borrowing spree.  Companies piled up plenty of debt as they expanded, as the world’s investors rushed to lend even more money.  Now defaults are rising, a sign the world’s No. 2 economy is feeling the stress from its worst slowdown in nearly three decades.  Fortunately for the rest of the world, that’s yet to show up in the China charts, so no worries for now.  That said, we’ll keep bird watching.

It has been a great year despite the lack of true believers, or maybe because of it.  Investors have fled funds this year despite the market’s performance.  That is among the reasons for optimism about next year—good years typically follow years with outflows.  Then there are the Wall Street strategists who are looking for only a 4% gain next year, their smallest projected gain in 20 years.  Historically they’ve proven a modestly good contrary indicator, much like fund outflows.  Following double-digit up years, the odds of being up the next are 85%, it’s as simple as that.  Earlier this week 7% of NYSE and NAZ stocks reached 12-month New Highs.  Last year at this time, 40% were at 12-month New Lows.  The Advance/Decline Index is at an all-time high—peaks here typically lead peaks in the market averages by 4-to-6 months.  It’s reasonable to worry that we may be borrowing something from next year, and at the start it could be true.  The end and start of years can be tricky, but there’s no reason to think next year won’t be another good one.

Many so-called long-term investors didn’t start that way.  They were poor short-term investors who didn’t sell.  The obvious key to long-term investing is to find stocks in long-term uptrends.  Even when it comes to short-term investing or trading, life is that much easier when you have the wind of that long-term uptrend at your back.  Still everyone likes to buy low, who doesn’t like a bargain?  They do come around, and in the context of long-term uptrends.  We’re thinking here of Home Depot (220) and McDonald’s (197).  Both have had a 30-point, or 10%-15% corrections, with barely a dent to their long-term uptrends.  Both also have patterns that have stabilized, MCD is even about to cross back above its 50-day moving average.  Even good companies have their problems, or their stocks simply fall out of favor.  More than a specific business, long-term uptrends more often than not are a reflection on management.

Seeing the light?  For most of the year we’ve seen how pessimistic individual investors have been, and how persistently so.  Given the myriad of reasons—trade war, impeachment, economic malaise—they were expecting the market to drop.  Historically, the market rarely does so when so many are expecting it.  It has taken a while, a historic high, but those investors finally may be beginning to believe.  The latest AAII survey shows bulls to bears above 67% for the first time in nine months.  While this may seem worrisome, it’s hardly so.  When it comes to individual investor or public sentiment, they are wrong at the extremes, but right in between.  We are, at worst, at the start of in between.  Meanwhile, if momentum trumps sentiment, the number of daily advancing issues has been 2000 or more each of the last 7 days, and 10 of the last 12.  It takes a lot of money to push up that many stocks.  When it’s finally all in, the numbers will change.

Frank D. Gretz

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DJIA:  28,132

Hedge funds don’t seem confused.  After being under-exposed for much of the year, in the past week there has been an abrupt change—equity funds are now carrying their highest exposure since the beginning of the year.  There must be something about “group-think,” because the record here isn’t altogether better than the general public.  It’s not a perfect indicator, but high levels of hedge fund exposure have tended to lead to below average future returns in the S&P, and vice versa.  In the meantime, the new-found religion here could be help to a name like Google (1350), and should help names like Microsoft (153) and Apple (271), which don’t really need much help.  Meanwhile, the confusing part of this time of year is the tendency for the downtrodden to rise again.  And pretty much synonymous with downtrodden is Energy, which is acting better.

Rotation is nothing new to this market, and the past week was no exception.  We’ve touted Health Care as a leadership group, which didn’t have its best week, though there were a couple of doubles in small Biotechs.  While the group covers an array of very different companies, taken as a whole more than 90% of Health Care stocks are above their 50-day moving average, the most of any sector.  A number like this says “overbought,” but as we’ve pointed out, overbought isn’t a bad thing.  As it happens, modestly overbought can be a bad thing in that it indicates only modest momentum.  Health Care has the kind of momentum consistent with trends that persist.  We are also impressed with this group considering what seems a difficult political backdrop.  On the good side of the rotation go-around, the recently dormant Semis, based on the Vaneck Vectors ETF (SMH-140), seem in the process of reasserting themselves.

At a basic level, technical analysis can be divided into two parts, momentum and sentiment, or investor psychology.  As has been the case for much of the year, momentum trumps sentiment.  Overbought doesn’t mean over, the trend is your friend, we’ll spare you the rest.  Meanwhile, sentiment has remained rather subdued and rightly so—trade war, impeachment, dubious economic numbers, and how about that Uber (29) and the other IPOs?  That said, momentum by some measures has itself been a bit dubious.  Despite the market’s stellar performance in 2019, for more than a year and a half, fewer than 60% of NYSE stocks have managed to move above their 200-day moving average.  This could be taken negatively and it has been a concern for us.  It’s not just the fewer than 60% above the 200-day versus new highs in the S&P, even 60% is below the 70% in 2016-2018.  That’s the picture of momentum unwinding—unwinding momentum is the picture of bull market tops.

We’ve learned not to make excuses for the indicators.  In the case of stocks above their 200-day, an excuse is hard to come by.  After all, the Advance/Decline Index is at a new all-time.  It’s a similar case as well if we adjust for price by using the QCHA, a measure of the percentage price change in stocks up versus down.  A possible explanation could be the rotation that we often mention.  Stocks don’t go down, but there are these rolling corrections in groups like the Semis.  The good side of that is it has kept most stocks from becoming too extended, and in that sense it has kept the market healthy.  You may miss the days when it was FANG and only FANG, but the balance now likely will prove more durable.  In an overall sense, moving to 60% of stocks above their 200-day is good.  Getting to 70% is the Holy Grail for durable uptrends.

The market has had a good year, up something like 26% in the S&P.  Then, too, were it a 15-month year, it would be up only about 9%—last year’s fourth quarter was that bad.  There are no perfect indicators, but the Advance/Decline Index also had a good year, and that after a prescient warning last year.  That most days most stocks go up is pretty much all you needed to know.  That’s unlikely to change in the New Year, which history suggests could be another good one.  Wall Street strategists are looking for only a 4% gain in 2020, their most pessimistic call in 20 years.  They have proven a modestly good contrary indicator.  Also, about $200 billion has come out of funds this year, small as a percent, but surprising in light of the market’s performance.  The record of good years after outflows is also good, especially when outflows occur in an up year.  The so close and yet so far trade deal seems one that has come down to groceries.  Still, it’s clearly something the market wants, if only to get it out of the way.

Frank D. Gretz

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DJIA:  27,782

A year ago last October, it took only three days of higher highs in the Dow and negative advance/declines to unleash the havoc that was last year’s fourth quarter.  The backdrop here, however, seems much different.  The Advance/Decline Index now is coming off a new high just two weeks ago, and we don’t have the divergences in the FANG stocks, which then were the leaders.  You will recall, too, monetary policy then was pretty much the opposite of now.  Still, the reality is that against the backdrop of higher highs in the market averages, the A/D numbers have been negative 6 of the last 8 days through Thursday.  Any negative consequences here would seem short term in nature, given the overall backdrop.  And, a couple of good days—2-to-1 up days—would resolve the problem.  This somewhat sudden change in the A/D numbers seems a function of the weakness in rate-sensitive shares like the Utilities and REITs, and the shift to Cyclicals versus Staples.  That said, we’ve learned not to make excuses for the numbers.

It’s out of habit and a history of some success that we measure divergences in the A/D Index against the Dow Industrials.  Over time, Dow or S&P, it doesn’t much matter.  It is, however, a little more interesting these days given Boeing’s (367) weight in the Dow and its volatility.  With the Dow down 100 points the other day, Boeing news left the Dow unchanged in a heartbeat.  Much the same happened Wednesday when Disney (147) news took it from down a point to up ten points.  While the Dow gained some 90 points on the day, the A/Ds were down all day, by about 300 issues at the close.  The distortion was such that DIS accounted for almost 75% of the Dow’s gain, while only 14 of the 30 Dow stocks were positive.  Divergences are never good, but we would rather see them come about because of some specific stock or two, versus the entire market average, in this case the Dow.  And we weren’t complaining when Boeing was having its problems, helping the A/Ds outperform most days.

The NASDAQ, as it happens, has some problems unique to itself.  To get the laughter out of the way, the problems would be what are affectionately called the Hindenburg Omen and the Titanic Syndrome.  These occurred in mid-July, preceding a pullback then.  At the time, they happened both on the NYSE and NASDAQ, so for this time it’s only the NASDAQ.  As you might imagine, there are guidelines more than rules for these indicators and beauty, or in this case ugly, can be in the eye of the beholder.  The basic tenet, as we see it, is a market at or near its high, showing a large number of both 12-month New Highs and 12-month New Lows.  The concept is that of a market showing strength in the Averages, while underlying that strength is a far less supportive picture in terms of the average stock.  Instead of A/Ds, this is another way of looking at divergences.  Because of noteworthy failures, these warnings rarely are taken seriously, but there have been some noteworthy successes.

Utilities in part are the reason for lagging A/D numbers.  They peaked at the end of September and there are a lot of them.  The stocks, of course, had had a big run and seemed vulnerable both in terms of valuations and technically.  At the end of September, 60% of the Utilities made a new high, typically as good as it gets.  At the other end of the spectrum has been Technology, as measured by the SPDR ETF (XLK-87).  Outside of some lagging Software shares, Tech has performed well.  When it comes to XLK, there’s little mystery—Apple (263) and Microsoft (148) are its two largest positions.  Looking at those charts, it’s a wonder the ETF hasn’t done better.  Then, too, we all have our problems.  When it comes to the XLK, it’s Cisco (45).  Despite a “golden cross,” the Russell 2000 remains in its overall trading range.  What is a bit surprising there, the Russell is somewhat a proxy for Regional Banks, and they still act well.

Sometimes a cigar is just a cigar, and sometimes lagging A/Ds is just rotation.  The S&P is making new highs, but what’s getting it there keeps changing.  Remarkably, there have not been back-to-back down days in the S&P since early October, but making money hasn’t been easy.  If the U.S. and China can’t agree on farm purchases, what can they agree on?  Maybe it’s trade war fatigue, but the market seems focused on other things, most likely what Industrial stocks say is a better business backdrop.  It’s certainly not focused on the public impeachment, leaving that as a possible negative surprise.  That Walmart gave up its breakout and a 4-point gain Thursday makes the market look that much more tired.  For the big deal we’re making out of the lagging A/Ds, you have to remember the Index made a new high just two weeks ago.  The worst day during this period saw 1500 stocks advance, not exactly big-time selling.  Market corrections come in two varieties, price and/or time.  All this could be just the latter.

Frank D. Gretz

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DJIA:  26,583

Where you’re in  …  versus whether you’re in.  The former has become a bit more confusing, though the bull market seems to roll on.  Last Friday it almost looked as though those cloud/software stocks could blowoff on the upside, only to reverse on Monday—Atlassian (144) up 11 to break out Friday, down 7 Monday.  The patterns here remain intact, but failed breakouts are a sign of buyer exhaustion.  Then, too, two weeks ago within the S&P were the largest number of failed breakouts since January 2018, a real warning back then.  This time, however, not all breakouts have failed—look at the likes of Starbucks (95), Procter & Gamble (117) and, one of our favorites, Twitter (42).  If the micro seems a bit confused, the macro is not.  The Advance/Decline Index is only a few issues from a new high.  Even Wednesday’s debacle saw close to 1,400 advancing shares, not exactly what we think of as a Dow -300 day.

While we sometimes trade like we’re double parked, over the years we’ve become increasingly enamored of long-term charts.  The easiest way to make 50% trading is to trade a stock that’s going to double, that is, trading a stock in a big old uptrend.  This idea holds true of investing as well as trading.  Find a stock that’s been trending higher for five years or so, and there are plenty, it only makes sense they will prove the best investments.  In most cases, it seems clear it’s not what the company does, rather the way they do it—take Procter & Gamble versus Microsoft (138).  If these long-term uptrends seem the easiest way to make money, there is another benefit as well.  Should your entry point prove poor, or should you catch a market downdraft, the stocks bail you out—long term the trend is up.  Aside from PG and MSFT, Church & Dwight (74), McCormick (157), Coke (52), McDonald’s (211), Roper (361), Oracle (56) and many others fit our description of long-term uptrends.

A little different take on long-term charts involves base patterns, or protracted periods of consolidation.  The recent rise in Starbucks has been nothing short of stunning.  The move up is not new, having begun late last year.  It began out of a period of consolidation, a base pattern, which began in late-2015.  This is pretty much textbook stuff—the bigger the base, the bigger the potential move.  The stock pattern here is extended, which is not to say the move is over, but rather, this doesn’t seem a good entry point.  There is, however, a very similar pattern, less extended, and that’s Disney (142).  Disney’s recent strength began this April, following a period of consolidation which, like Starbucks, began in late-2015.  Again, if the duration of the base is a guide, DIS seems to have further upside potential.

Long-time Fed watcher Rod Stewart once observed, “The first cut is the deepest.”  The market seemed to agree—that’s it for easing.  The two “dissenters” also would help markets lean that way.  When the Fed last lowered rates back in 2008, a careful perusal of the minutes—actually we heard it on Bloomberg—revealed a concern about tight financial conditions and concerns about foreign economies.  Now the domestic seems good, the global not so much.  Even here, it’s not so simple.  Domestic is good in terms of the consumer, but not so in terms of business investment.  The latter is about trade, and Powell acknowledged as much.  In our less than humble opinion, rightly so.  No one sees a recession coming, and they are rarely recognized even when in one.  An ounce of prevention and all that.  Meanwhile, remember when the market was all atwitter over the inverted yield curve?  Well, it’s no longer so.  Markets can be hard to please.

If not what it wanted, the market got from the Fed what it expected.  Sure it could have gotten more and sure the Fed could have promised to lower every month.  Give us a break.  If they had given more, then the market could have played the “what do they know game.”  It’s the market that makes the news.  Momentum trumps sentiment, but a look at stocks above their 10-day moving average shows momentum waning.  Days like Wednesday happen when there’s too much complacency, too many on the same side of the boat.  In any event, if it’s more cuts you’re looking for, you may not have to wait long.  This latest tariff proposal, which won’t take effect until September 1, would mean a tariff on everything coming out of China.  The usual suspects like the Semis took a hit Thursday, but this time Retail took a bigger hit.  Depending on your color preference, there’s always Gold and Silver.

Frank D. Gretz

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DJIA:  25,916

The trade news Monday morning was plenty good enough for a rally, and the market did just that—for all of two hours.  The good news we’re seeing now is why markets are up the last nine weeks in a row.  We’re pretty much at the other end of the December spectrum, when the bad news didn’t go away but, rather, also got priced-in.  The idea of “priced-in” simply refers to the response, or lack of response to either good or bad news.  That “markets make the news” is one of the great insights of Technical Analysis.  Another might be the distinction between the “average stock” and the stock averages.  And here it’s nothing but good news—the Advance/Decline Index is at new highs.  Should this, by chance, be the peak day, there’s little risk.  Important peaks just don’t look like this.  Important peaks come with a pattern of weak rallies, that is, divergences.  Much seems priced-in, but even if done for now, the rally likely isn’t done.

Like Monday, what is or isn’t priced-in is only known in retrospect.  At that, Monday is just one day.  And there is that lack of divergences—the A/D Index is actually outperforming.  And the momentum—more than 90% of the S&P is above its 50-day moving average, among only 13 other times since 1990.  The market was subsequently higher all but once in the next 3- and 12-month periods.  Momentum like this does take time to unwind.  Still, markets don’t go straight up and in terms of time, despite the momentum and lack of divergences, this one has gone as far as they usually go.  The market has been up for 9 weeks in a row, its best run since 1945.  Since 1900, it has done so 12 times, according to SentimenTrader.com, after which a two-week or more pause is typical.  Perhaps more noteworthy, this September to February decline rally pattern can be overlaid against 19 other occurrences.  In those cases peaks occurred in the 70-to-100 day timeframe, that is, around now.

Caterpillar (137) was hit the other day by a double downgrade—once for tomorrow, once just for today, as Jim Morrison would say.  To our thinking, the analyst is missing the big picture, which is, this is what you might call a “China Trade” stock.  The poster child there, of course, is Boeing (440), outperforming just about everything, even those software numbers.  Caterpillar is no Boeing, but the pattern is just fine, and likely to move more with the market, and even more with the “concept” than the fundamentals.  Meanwhile, when it comes to Boeing, it’s tempting to take profits, but this is where “cut your losses, let your profits run” seems the sage advice.  Not only that, this is “market leadership,” and that’s important in terms of longevity of a trend.  Finally the chart, daily or weekly, is in a very orderly uptrend.  Should it, heaven forbid, break out of the trend to the downside, the rule says to sell.  Should it break out of the trend to the upside, the rule says sell some and call us in the morning.

When we go through the ETFs for a perspective on group action, it’s surprising how positive they are and even more surprising, how similar they are.  Even at some basic level like Consumer Discretionary versus Consumer Staples, from the lows in December you can’t tell them apart.  We suppose this shouldn’t come as a surprise given the advance-decline numbers, and it’s certainly the sign of a healthy market.  Then, too, you can’t help but miss those unhealthy days when only the FANG stocks went up, but at least they did so day in and day out.  The Software stocks like Workday (198) have been pretty wonderful, but adjusted for beta, not much more so than Procter & Gamble (99).  In what is supposed to be a rising rate environment you might not expect Utilities to do well, but they’re back to their December highs, after their own 10% decline.  All of the S&P Utilities are above their 50- and 200-day moving averages, though Utilities are an exception to the momentum rules.  Historically the next month has been up only 30% of the time.

The three down days this week won’t kill the rally, especially when all three saw more than 1500 advancing issues.  Even in terms of price, the S&P has spent 38 days above even its 10-day moving average, the longest streak since April 2010.  That says momentum, one side of the technical coin.  The other is sentiment, or investor reaction.  The Investors’ Intelligence Survey of newsletters turned bearish in January after years of being bullish, doing their contrary thing.  It comes as no surprise they’ve seen the error of their ways, and now are back to the bullish side, but not extremely so.  Keep in mind, momentum always trumps sentiment so here, too, there is no big worry.  The worst day in a while seems Monday when the market actually rose, but with flat A-Ds and a news backdrop that could have produced more.  Then, too, “priced-in” is not altogether objective.  We’ve come a long way from late-December, but we’re a long way from late-September.

Frank D. Gretz

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DJIA: 24,370

From September 20, when the S&P peaked at a record, the FANG stocks on average had fallen 27% through Christmas Eve. Since then, there has been what you might call a resurgence, led by a 52% gain in Netflix (353) from December 24th through Tuesday. This is the most in the S&P and has helped the NAZ to be the first to rise above its 50-day moving average, though that of itself has little forecasting value. Meanwhile, Facebook (148) and Amazon (1693) also have outpaced the gains in the S&P, and Google (1090) has come close. Netflix remains under-loved by the analysts as it reports Thursday evening. Rather than wait to comment, let us just say, does it matter? In the end the movie is a happy one, weakness being another chance to buy. It is, after all, one of those big overall uptrends. As for FANG per se, it strikes us as a positive for the market that confidence in these volatile stocks is back.

Always knew we liked the Banks—just kidding. What we do like are stocks that are sold out. After their 10%+ drubbing in December alone, you might have thought Financials fit that bill. Perhaps the best definition of sold out, however, is an ability to ignore bad news. Citigroup (62) got the earnings ball rolling earlier this week with news that was more dubious than good, but the stock rallied. The telling commentary, however, was JPMorgan (103), where the news was such the stock actually traded down for an hour before its sharp rally. We’re still not particular fans here, but sold out is sold out, there should be more rally. Perhaps the best thing is the implication for the market. If one of last year’s biggest disappointments finally can respond to dubious news, it goes a long way to suggesting the market itself is sold out. Overall market numbers say this is so—the two 95% up-volume days—but it’s also nice to see it in a tangible way.

They all laughed at Christopher Columbus and even more at Hindenburg and his Omen. Then wouldn’t you just know it, last September the thing worked. Divergences of any sort are never good, the Hindenburg being an unusual one. The typical divergence involves one measure up and another not up or not up as much. Think of the Dow Theory, the Industrials up, but the Transports not confirming. Rather than the market averages or the advance-declines, the Hindenburg looks at New Highs and New Lows, and comes about when there are too many of both—a market internally out of sync. The signals only work when they appear in a cluster and, in our experience, even then rarely live up to their name. Since it did work recently, however, it seems worth a mention that the opposite of the Hindenburg now is taking place. With the market still in a downtrend, there are a very small number of New Highs and New Lows, and a cluster of such days. In the past this had led to positive one-to-two month returns, according to SentimenTrader.com.

These sort of washout market lows often see a “test” of the lows, which is a move back to, or even below, the washout low. We’re still within the time parameter of a test and the market is up enough to correct, call it a test or whatever you like. We have our doubts about a test because getting to the December 24th low was itself such a process. And there’s been ample excuse for a test, including even Apple’s hiring freeze announced Thursday, to which even Apple (156) didn’t react. BlackRock’s assets during the fourth-quarter meltdown sank $468 billion and all together, investors pulled a net $48 billion from developed world equity markets in the quarter. That pretty much tells you why we’ve seen the market numbers we have. Impressive is what has happened in the three weeks since the low period. In ETFs, Bloomberg noted that leveraged funds betting on the S&P 500 rally have been seeing an outflow, while inverse funds that bet on a decline have been seeing an inflow. This kind of skepticism seems another reason we may avoid a test.

The “funnymentalists” will tell you the fourth quarter created value. We will tell you stocks sell at “fair value” twice— once on the way up, and once on the way down. For the rest, they’re over or under valued, the trick being will they become more of the one or the other. Stock markets are about supply and demand. What the fourth quarter did was create a vacuum. Stocks are where they are now because the sellers became accommodated. Stretched to the upside, as we are now, is not so difficult when those sellers are out of the way. News on the trade war front is getting better, but when doesn’t the news follow price? Sure the market can correct, but, then too, good markets don’t give you a good chance to get in. Markets can yo-yo between overbought and oversold for months, but there are markets that get overbought and stay overbought, and vice versa. These markets are their own indicators—they tell a story.

Frank D. Gretz

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For additional  information contact: lmp@wellingtonshields.com