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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