DJIA:  34,122

Into every life a little rain must fall.  In the stock market it’s called a correction, in this case a 2% drop in the S&P.  They will tell you it’s because of this, or that, but basically stocks have been stretched, along with investor enthusiasm.  Investor’s intelligence recently showed a move from 0% to 30% in the Bull-Bear spread, a move that typically results in a couple week setback, but little more.  Together with a recent one-year high in the S&P’s favorable implications, the A/D index of S&P components reached a new high as well.  Contrary to what many believe, the average stock tends to drag along the stock averages, both up and down.  Meanwhile, we are now in the seasonally interesting period around the July 4 holiday, with both good and bad implications.  Fortunately, the bad ended with the close June 28, and saw A/D’s days negative 6 of 8 days prior to that.  The favorable period this year extends to the close on July 7.  Historically the market is up some 70% of the time with an average gain around 2.4%, according to SentimenTrader.com.

Last time we mentioned the 21-day weighted moving average in reference to GE (108).  Most of Tech and other extended names, like Tesla (258), Netflix (428), Nvidia (408), XLK (171), and so on, have held their 21-day.  If they can hold even this “trading” moving average amidst the weakness in these stretched and volatile stocks, it seems surprisingly positive.  Tech has borne the brunt of the recent weakness, while Econ-sensitive stocks have come through pretty much unscathed, and look promising, PAVE (31) or components like PH (387), ETN (199), FAST (59), PWR (195) and the like.

Frank D. Gretz

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DJIA:  33,946

Follow the trend … but that’s following the herd.  The trend is pretty clear.  The problem is it’s so clear most are on to it.  They say the crowd is wrong at extremes but right in between.  This may be one of those extremes, if only temporarily.  When it comes to gauging settlement, we typically prefer to look at investor action rather than investor talk.  Put-Call Ratios relate to the former, and they’re back to levels of last March.  When it comes to indicators that use investor surveys, Investors Intelligence has been around forever, and measures the opinion of market letter writers – a drop dead smart group.  Here the spread between bulls and bears has moved from 0% to 30%, a change which typically results in a couple weeks of stall or pullback.  Subsequently, however, the outcome is surprisingly positive, with the market almost always higher a year later.

Meanwhile, while pretty clearly up, the S&P has achieved a milestone of sorts.  It has moved from a one-year low to a one-year high.  This has happened some 25 times since 1948, according to SentimenTrader.com, with only one loss in the six and 12-month period.  Of course, up doesn’t mean straight up, but there were only two drawdowns of 10%.  You might argue this time is different given what most consider a narrow market.  Indeed, fewer than 5% of the S&P stocks are at one-year highs.  Historically this did not significantly change the outcome.  So we can add this to other aspects of the background that have similarly suggested favorable outcomes.  The first quarter, for example, held the December lows, leading to a higher prices April – December some 90% of the time.  And we have seen back-to-back up quarters which, according to Tom Lee of Fundstrat, never happens in bear markets.

Despite what many consider the market’s limited participation, the A/D index for the S&P has reached an all-time high.  Note this is for the S&P components, not all NYSE stocks, which is what we typically reference.  It’s not unusual to see a discrepancy in these numbers, it’s again about progress not perfection.  The NYSE numbers show no important divergence, at least with the DJ, against which we typically measure.  The S&P A/D Index itself has a credible record, leading to an annualized return in the S&P of almost 19% since 1928, according to SentimenTrader.com.  Interestingly, too, of the 23 occurrences there were only three drawdowns of 10% at any point in the next six months.   Contrary to what might seem logical, the average stock tends to drag along the stock averages, both up and down.

Watching the after-hours trades Tuesday night, we couldn’t help but be struck by the juxtaposition of Tesla (265) going by up some 17 points as Cramer stood on the floor of a Ford assembly plant.  To be fair, while no Tesla, both Ford (14) and GM (37) have more than respectable charts, and Tesla has come in a bit since then.  These almost sacred stocks like Tesla, the “Magnificent Seven” or whatever, have been pretty much impervious to market weakness, at least so far.  We hesitate to say corrections here might be healthy, since we never understood why losing money is healthy.  But we know what they mean, and a respite of sorts would do some good.  And a little weakness in the sacred would put a little fear in things, fear creates selling and selling creates a low.  While we consider this a minor selloff, it could take another week or so to be resolved.

The Energy sector is what you might call lurking.  They’re probably not quite ready for prime time, but they’re getting there.  A stock like Vista Energy (24) did break out the other day, but failed to follow through and is, in any case, not exactly an Energy bellwether.  Stocks like Baker Hughes (30) and Halliburton (31) are promising, but still not there.  Meanwhile, NatGas seems particularly interesting, but here the seasonal pattern is unfavorable until almost the end of July.  During this time NatGas is up only some 15% of the time.  Still, seasonals are one thing but not the only thing.  We would pay attention to a breakout in something like UNG (7).  After a little respite, we fully expect Tech to continue as leadership, though we certainly wouldn’t forget those economically sensitive names we went through last time.  We would also note the better action in drug wholesalers like McKesson (417), AmerisourceBergen (188), and Cardinal Health (93).

Frank D. Gretz

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Trend isn’t just your friend … it’s your nearest, dearest, bestest buddy.  Look at what trend has done for Tesla (256).  When it recently got on one, it stayed on one 13 days through Wednesday, without so much as one down day.  Consider, too, Tesla isn’t exactly known for a lack of volatility.  Sure the market’s new dynamics has played a role, but not even Nvidia (427) can match Tesla here.  There is, however, another and more mundane stock that is perhaps our favorite example of a consistent uptrend.  Those of us who trade, and a measure favored by IBD, know the weighted 21-day moving average.  The weighting here simply means day 21 counts for 21 times as much as day one.  It is as they say, a very fast-moving average, one which very closely hugs the price action.  Since the start of the year, GE has gone from 65 to 105 without falling below its 21-day weighted moving average.

Meanwhile, the backdrop seems to be filling in the bull market blanks.  Forever it seems it has been “don’t fight the Fed.”  Now if not over, the fight seems close to over, and the Fed won to look at recent CPI and PPI numbers.  Of course, only the Fed would remain data dependent while the data they depend on is old news.  You would think they’ve never heard of the lagged effects of monetary policy but hey, nobody’s perfect.  So that just leaves the looming recession standing in the way here.  And while well-advertised, it doesn’t mean it won’t happen.  We just think there will be no significant downturn, and we say that after consulting with the charts of Grainger (744), Cintas (492), Ingersoll Rand (65), Lincoln Electric (196), Eaton (197), and Parker Hannifin (374) – the latter was used by Greenspan as an economic indicator.  These economically sensitive stocks are at or are near all-time highs.  We doubt this would be the case if we were facing a severe downturn.

The bear market was itself unconventional, perhaps helping to explain why many are uncomfortable with this new uptrend/bull market.  When it comes to the bear market, even its low seems misunderstood.  Most call October the low, true enough if you’re talking about the market averages.  When it comes to the market in terms of the average stock, the low was last June.  Last June was a washout low, October was what they call a secondary low, a low with less selling pressure.  In turn, that has left the recovery a bit disjointed, and complicated by ongoing rotation.  And then, of course, there was the setback of the banking crisis.  The NAZ/Tech breakout in mid-May and the S&P breakout a few weeks later were the game changers.  You might argue this is when the real uptrend/bull market began. Even now, however, we still have not completely come out of what has been three or four months of base building.  Stocks above the 200-day, for example, are still only just about 50%, well below the 70% level of February.

The VIX (14), or Volatility Index is always a bit controversial, often misunderstood, and taken by many to be pretty much useless.  The latter, in this case, often have a point.  When it comes to market weakness, volatility as measured by the VIX rises out of fear, fear creates selling, and selling eventually creates a market low.  However, there is no magic number to the rise needed for such a low, rather it’s a peak and subsequent decline in the VIX that signals the panic/selling is out of the way.  A low VIX, in turn, seems often to stay low without consequence.  Indeed, the VIX currently is at a two-year low as the S&P makes higher highs.  Contrary to popular thinking, multiyear lows in the VIX tend to occur in bull markets, not in bear markets.  Except for August 2000, every two- year low in the VIX occurred in a bull market, suggesting that at the very least the VIX is not a worry.

They didn’t see inflation coming, what makes anyone think they’ll see it going. The Fed does seem determined however, probably out of fear of being wrong twice – it’s called human nature.  Fortunately, the market sees things differently.  Even the Fed induced market bashing Wednesday saw 1700 stocks advance, not bad for any day.  And Thursday’s better than 3-to-1 up day wasn’t exactly the “weak rally” about which we forever worry.  The numbers, of course, speak to a broadening market.  Note the breakout in the Russell despite its 17% weighting in Regional Banks.  One group that would further help here is Energy, which had a good day Thursday – especially Nat Gas.   But most stocks are at least lifting, and why not.  After all, they stopped going down a year ago and since have just been base building.  We don’t like to sound more bullish on the way up, but in this case things have become more bullish.

Frank D. Gretz

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DJIA:  33,833

Turn your back… and it’s a new bull market!?  So they say, they being those who believe a 20% rally in the S&P makes it so. Fine with us, though it doesn’t quite feel like a new bull market.  To feel it, you probably have to be in what someone aptly called the Magnificent Seven, and probably little else. Even if you were in uptrends like McDonald’s (286) or Microsoft (325), they never seem to go together. It’s like Superman, why is it you never see Superman and Clark Kent together? And who amongst us is without sin, that is, a few clunkers.  So the S&P has been tough to match, much like the 80s when few owned enough Microsoft to keep up. Apple (181) these days is a 7% position in the S&P, so to speak, while most funds can’t hold a 7% position in anything.  Whatever you choose to call this market, Friday’s rally says they want to go higher.

Last Friday’s was a surprisingly good rally, and in ways that were more subtle than most realize. The Dow, for example, rose 700 points, both impressive and not very subtle. Consider, though, the Dow has lagged the NAZ and S&P, making its rally a bit more impressive. Similarly, Friday’s 5-to-1 A/D numbers are not unheard of, but they typically come along after a washout sort of selloff.  There was more concern than fear about the debt ceiling, and certainly no real weakness. The QCHA is a number from the old Quotron system, which measures how much stocks are up, not just whether they’re up like the A/Ds. Friday was the best day since January, meaning stocks were not just 5-to-1 up, they were up a lot.  A number of years ago we used that number in a piece and got a call from Barron’s asking where they could find it.  We both had a good laugh when we said – Barron’s. 

Not only were the Friday moves in some individual stocks dramatic, they also seemed technically important.  A 17-point move in Caterpillar (234), for example, is an outsized move for that stock.  More importantly, it also moved the stock above its 50-day moving average for the first time since mid-March.  Similarly, without wanting to be demeaning of our four-legged friends, Dupont (70) has been among them.  Here, too, its five- point rally on Friday lifted the stock above its 50-day.  Then there are the Regional Banks, a group we had begun to think of as investment shorts, especially in light of the Treasury’s required financing.  The Regional Bank Index (KRE-44) on Friday also moved above its 50-day.  Meanwhile, there were a myriad of Econ-sensitive stocks, already with decent patterns, that performed well – names like Cintas (483), Eaton (188), Fastenal (54), and Parker Hannifin (356).  And who knew AI was so dependent on welding – to look at Lincoln Electric (191), you might think so.

What has been a narrow market has not gone unnoticed.  And things noticed usually don’t matter, or at least they’re not the market’s undoing.  Now things seem to have gone a step further, where some are arguing narrow markets don’t matter.  While we have heard, but not read the arguments here, we’re sure they have their data.  Then, too, there’s your data, there’s my data, and there’s the undisputed data.  Unfortunately, there’s no undisputed data here, the real issue may lie in time frames.  Back in 2018 the Dow moved to successive new highs in three days, while the A/Ds were negative each of those days.  The market subsequently abruptly fell 20% into the end of December.  In 1987 the A/D Index peaked in March, and subsequently showed a pattern of negative divergences against the Averages.  While the latter continued to move higher, it didn’t matter until October – then came the Crash.  Divergences matter, sometimes not until they matter.

While we haven’t exactly embraced the Cathie Wood/ARK concept, there are a couple of the ETFs that cover some stocks we like. The ARK Autonomous Technology ETF (ARKQ-53) has a 15% position in Tesla (235), along with Nvidia (385) as one of its top 10 holdings.  When it comes to stocks like NVDA, our rule of thumb is the first time you think it’s over, you’re wrong, and so too the second time.  Typically, there’s no third time. Momentum like this doesn’t go away easily or quickly.  Not to dismiss the market’s seeming broadening, Tech is leadership, but as Wednesday made clear, there will be setbacks.  Meanwhile, stocks above the 200-day have improved to 51%, but here it’s progress not perfection.  And don’t forget those A/Ds, it’s not just the Averages that will keep this going, you have to have the average stock as well.

Frank D. Gretz

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DJIA:  33,061

Party like it’s 1999! That is to say, party like you own Tech, and little else. Back then you could put dot-com behind your name and it made it worth another 20%. The same is true now if you’re anything AI-ish. The latter is the new, New Economy.  Meanwhile, the Old Economy stocks are pretty much everything else. Hence, it’s an S&P Index hovering around its highs with fewer than 40% of stocks in uptrends, that is, above their 200-day.  This is anything but a healthy backdrop, technically speaking. While this will last until it doesn’t – you can’t underestimate momentum. The Semis had their best day ever last Thursday, gaining some 11%. When they have gained 5% or more in a day, they’re higher a month later more than 70% of the time, according to SentimenTrader.com. Back in 2000, it took a peak in the dot-coms to get the rest of the market going again, by then the rest had become sold out. On the plus side, with better than 3-to-1 A/Ds, Thursday was a surprisingly good day.

Speaking of Tech, it wasn’t a pretty picture after hours for those reporting on Wednesday. We don’t like to see downside gaps, but we find their significance less when they don’t change an overall uptrend. You might want to look to Snowflake (167) as a guide here.

Frank Gretz

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DJIA:  32,764

A Yogi Berra market… not over until it’s over.  Without question this is the most divergent market we’ve seen in some time.  That everyone seems to get it doesn’t make it less so.  And seeing it also doesn’t make its negative implication less so.  Narrow markets are a reflection of the liquidity and its decline.  There isn’t enough to push up as many stocks as there once was.  This shows up in the A/D Index, the Equal Weight S&P, and perhaps most clearly in stocks above the 200-day, a decent proxy for stocks in uptrends.  Currently around 40%, it’s down from 74% in February but it’s relative.  The S&P now is higher than it was in February, meaning the performance gap between big cap stocks and the average stock has significantly widened.  This kind of divergence doesn’t end well.  Still, there’s no magic timing or levels here, it can go on until it doesn’t.

History has its examples of markets like this outlasting the naysayers, 1972 and 1999–2000 being prime examples.  Both had their themes, 1972 the Nifty 50, and 2000 of course the Dot-com’s.  What is often forgotten about both, and especially the Dot-com period, was how poorly everything else performed.  During this market phase it wasn’t just that only the Dot-coms were going up, the rest of the market was not only not going up, it was going down.  This past Monday we thought we were back there again – Pepsi (184), down five points and Tech up, the Dow down more than 150 points. and the NAZ up 50 points.  Back in 2000 everyone saw the divergence to the point they named it “old economy” versus “new economy,” which is beginning to look familiar.  Still, the divergence went on, the NAZ continued higher though the Dow did not. 

In these diverging markets, at least one of the major Averages moves higher – the Dow in 1972, the NAZ in 2000.   The leaders, the few, drive the Averages, in this case the NAZ.  The insidious part of this is that it offers hope for the rest, the poor, the downtrodden, the huddled masses – the Equal Weight S&P.  The history isn’t promising here, likely because the liquidity just isn’t there to pull up the rest.   It’s not just that the leaders lead, in this case Tech, it’s pretty much them and little else.  AI no doubt will change the world just as Cisco (49) did back in 1999–2000, when it sold for 80 and change, roughly double where it has sold since then.   On the plus side, just like the Nifty 50 and the Dot-com’s in their day, there’s money to be made in this market, provided of course you’re pretty much focused on Tech.

After that diatribe on Tech, we should point out a couple of other areas acting better.  The Saudi‘s have said don’t short oil, which would be interesting if you thought you could believe anything the Saudi’s say.  We do believe price action, however, and USO (64) seems about to cross above its 50-day, which should drag equities higher as well.  The other area to come alive recently is Biotech, though not the Amgen‘s (217) and other household names.  If you look at the iShares ETF (IBB-127), it’s market cap-weighted whereas the Equal Weight SPDR (XBI-84) shows a much different and better picture.  Unlike the overall market, here small seems better, perhaps anticipating more consolidation.  You might also look to the Ark ETF (ARKG-31) which has a number of positive charts.

The Kabuki dance that is the debt ceiling negotiations has put a damper on the market, and rightly so.  The odds of an unfavorable outcome are low, but so too are the odds of an unfavorable outcome in Russian roulette.  In both cases, the consequences of a losing outcome are severe.  The good news is that good news should be met with a make-up rally, and then we can get back to normal worries like the Fed’s next move, employment numbers, and the mess in banking.  Although we’ve been doing this for a while now, we really don’t recall a stock more loved than Nvidia (380), and apparently rightly so.  Not to rain on a parade that should continue, we’re always reminded that stocks are pieces of paper, not companies.  Overloved stocks become over owned stocks, and eventually who’s left to buy?  But there’s that word again, eventually.  The A/Ds, you might have noticed, were almost 2-to-1 down and the Equal Weight S&P unchanged amidst Thursday’s euphoria.    

Frank D. Gretz

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DJIA:  33,535

Buy the S&P or sell the S&P… Yes!  And you thought we couldn’t take hedging to a new level.  There is, of course, the S&P Index and it is pretty much the benchmark for the world.  The other S&P to which we are referring is the so-called Equal Weight S&P, where all stocks are created equal by market cap.  In this case equal isn’t such a good thing since it’s the larger cap stocks that are in favor.  These dominate the Averages by virtue of their market weight construction.  If you’re thinking Tech for the most part you ‘re right, but don’t forget a few names like McDonald’s (294).  The distinction between these two measures of the S&P these days is a bit dramatic.  The Index has traded in a range since mid-April, just below the early February high.  The Equal Weight Index by contrast is below its April peak which, in turn, is below the January peak.  It’s a narrow market favoring the big.

Good markets always have their leadership, and that leadership by definition outperforms and like now sometimes significantly so.  It’s not something to lose sleep over, some stocks will always be better than others and the better tend to dominate.  So when 5 or 10 stocks account for most of the gain in the S&P, it happens.  When it’s a problem is when the rest of the Index isn’t following – when the rest of the Index is moving down.   Measures like the Advance-Decline Index and stocks above the 200-day average show this as well.  Stocks above their 200-day are hovering around 40% while the averages dance around their highs, a rather dramatic discrepancy.  We wish we could say there’s some magic number here, but there is not.  We can say the many eventually drag down the few, but the key word here might well be eventually.

They like to call this market a trading range, but which market?  The NASDAQ certainly isn’t a trading range, even the Composite let alone the NDX.  The Russell 2000 has been in a trading range since its mid-March low, but that range is well down from its earlier February high.  The S&P has been range bound of late, but well up from the March low, which in turn was up from the December low.  If you look at the series higher lows from last October, it’s an uptrend.  The problem is the average stock is different.  NASDAQ A/Ds made a new low not long ago.  If the NAZ is literally 100 stocks, let’s further refine it to 10 via the Micro Sectors FANG Plus Index, FNGU (133).   It’s clear what’s working, and you have to be careful with the rest.  When the Averages are doing well, it’s easy to hope the others will come along, but you know what they say about hope as an investment strategy.

So why can’t the few drag up the many?  In theory we suppose they could, it just never seems to work that way.  The explanation here we suspect is sideline buying power – there isn’t enough to continue to push up all stocks, just enough to push up strong stocks and eventually not even enough for them.  Sideline buying power or liquidity is only restored in an eventual market correction.  Meanwhile, enjoy it while you can.  These diverging markets can last for a while, including through 1972 and 1999.  There was money to be made as long as you were in the Nifty 50 or the Dot-com’s.  The leaders will be the last to give it up as will the big-cap beverages they include.  There’s an old Wall Street story about a wonderful party, everyone was having a good time and no one wanted to leave, yet they knew it would end – but the clock had no hands.

The Advance-Decline Index is another proxy for the average stock versus the stock averages. It peaked in early February, had a lower peak in mid-April, and a pattern of lower peaks since then.  In other words, it’s very similar to the unweighted S&P, and other measures showing the bifurcation.  Recently, however, the A/D numbers have been mixed.  We have long pointed out it’s not bad down days but bad up days that cause problems.  Recently we saw a day with the Dow basically unchanged and 700 net declining issues – not a good day.  Then there was a modestly up day with 1300 net advancing issues.  Given how selective the market has been we are almost surprised the numbers haven’t been worse.  That said you don’t want to see them become worse.  Those up days with poor A/Ds are a warning. 

Frank D. Gretz

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DJIA:  33,309

Go big… or go home.  Well, you don’t have to go home, but if you don’t go big you probably want to go to the sidelines.  The ratio of small-cap stocks to large-cap stocks has tumbled to a multiyear low.  This proved a warning sign in 2007, but other years not so much.  Of course, it does speak to where you want to be in this market, if not specific stocks or groups.  It’s as simple as Microsoft (310) and McDonald’s (295), one sells burgers and one sells software but that’s not what matters – they’re big.  It has been a while since we thought of the FANGs as a group, but we have recently.  They have a few things in common as well.  And like Apple (174) and Microsoft, the FANGs have almost taken on the mantle of defensive.  This narrowing in the market rarely ends well, but clearly it has yet to end.

Whatever happened to that China reopening, the one that hopefully was supposed to lift all ships.  A look at Oil pretty much tells you that didn’t happen.  And China itself again seems to be in trouble.  China had a tough time last year, and Tech especially amidst a storm of political controversy.  Shares cratered into October, but in doing so created some noteworthy technical extremes.  The subsequent rally into January was impressive, but since then selling has resumed.  At the time nearly every Tech share was above its 50-day average, but since has fallen to fewer than 7%, according to SentimenTrader.com.  Looking at stocks above the 200-day, more than 95% had recovered to that level, but a couple of weeks later fewer than 30% were holding there.  While Chinese stocks clearly have suffered, they probably haven’t reached an extreme that would suggest the high probability of a durable rebound.

When they’re worried about their bank deposits for goodness sake, this should be a more than decent backdrop for Gold.  While there’s only so many bars you can bury in your backyard, there are ample opportunities here including many old fashion mutual funds.  Or, if you’re feeling pretentious, you can always stuff a couple Krugerrands in those penny loafers.  Perhaps the most compelling argument for Gold is what seems an important peak in the dollar, and what seems an imminent further break.  We are always uncomfortable when stocks or markets have an opportunity to go up but fail to do so.  The stocks have done nothing wrong in terms of their patterns, but we didn’t buy them to have them do nothing wrong.  And we sometimes find that if you give charts doing nothing wrong enough time, they will do something wrong.  Realistically, time sometimes takes time and in this case they may need that break in the dollar.  For GDX (34) a move above 36 should extend the uptrend.

Semiconductor stocks were not created equal, and certainly not equal to Nvidia (286), or even AMD (97).  Indeed, to look at the SMH ETF (123) over the last six weeks they haven’t been so wonderful, even dropping modestly below their 50-day average.  This hasn’t been in every case just a drift as the gap lower in Qualcomm (104) a week ago makes clear.  As a key supplier to Apple, it left some surprised at that company’s report.  Skyworks (97) is another whose disappointment resulted in a gap, and there are others.  The point being like the Averages the strength in the Semis is the result of a few, while others have shown surprising weakness.  One of those few is AMD which itself did show some weakness last week.  The break and subsequent sharp recovery, breaking the late march downtrend, in this case has left it with a dynamic looking pattern.

There was nothing in April’s numbers to suggest the Fed should feel it has to keep raising, nothing to suggest they should start cutting.  The futures may be pricing in the latter, but be careful what you wish for here.  The only easy path to easing is if something goes wrong, and something going wrong wouldn’t be good for stocks.  The going wrong, of course, looks to be the Banks and other Financials generally.  Rather than going away, the banking issue seems to feed on itself, or is that why it’s called contagion.  We find it amusing that it’s still about blaming the short sellers rather than the reason for the short selling – the bankers.  Stocks above the 200-day have been hovering around 40% recently, but it’s relative.  With the big-cap Averages hovering around their highs, it’s a big negative. Certainly this number can drift lower as the big-cap dominated Averages continue higher, but you might want to recall the “nifty 50” or the “dot-com” days.  Narrowing or diverging markets eventually end poorly.

Frank D. Gretz

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DJIA:  33,127

Follow the soldiers … not the generals.  In the stock market the average stock is often likened to the soldiers, the big-cap stocks that dominate the averages the generals.  Where the analogy breaks down is that in the stock market, it’s the soldiers that lead.  It may not always appear that way, but when all is well with Microsoft (305) and the like, it doesn’t mean all is well.  In reality, of late there has been distribution under the guise of strength in the averages.  The Advance-Decline Index is a reasonable proxy for the soldiers, the average stock, and that Index peaked in early February.  An easier and similar look is the percent of stocks above their 200-day average, the equivalent of looking at stocks in medium-term uptrends.  This measure peaked at 74% in February, while the April peak was only 49%.  As the S&P and NASDAQ touched highs on Monday, the number was down to 43%.

This is the anatomy of a market peak.  When markets diverge like this, the averages versus the average stock, it doesn’t end well.  Market lows are characterized by big volume and volatility.  Stocks become washed out and make lows pretty much all together.  Market peaks are almost the opposite.  Stocks tend to peak a few at a time or a group and a time – market peaks are a process.  As buying power is depleted, it’s typically the smaller or secondary stocks that give it up first.  It’s the bigger stocks that hold up.  Since these dominate the averages, the averages hold up as well.  This creates the divergences between the averages and measures like the A/D Index and stocks above their 200-day.  It’s tempting to think or hope the averages will drag up the rest, but it doesn’t work that way.  These divergences are about depleted sideline cash, and that’s typically only restored in a correction.

If market peaks are a process that eventually gets around to everything, this includes the big-caps that dominate the averages.  The key word here, of course, is eventually.  You do have to be careful of falling into the trap of thinking these are immune, thinking the few will drag up the many.  History is not on that side.  Meanwhile, there is a bull market in stocks that can only be called defensive – Staples and Healthcare.  It’s easy to think of this as temporary, as just another sign of a weak market and investors seeking shelter from the storm.  While there has to be some of that, it’s not quite that simple.  If you look at many of the long-term charts here, charts of Hershey (275), Lilly (429), Merck (117), Mondelez (77), Pepsi (193) and McDonald’s (295), you’re not exactly hiding out here.  In a really weak market these won’t be immune, but these are stocks you should be comfortable owning in any market.

Seems prudent to be more cautious here, perhaps considerably more cautious.  It’s not every day you see Regional Banks down 10-15% while the same day Brent falls 5%.  If caution seems sage advice, it’s also vague advice.  Regional Banks may be cheap and they may survive, that’s not a reason buy them.  At the risk of dancing on the dark side of funnymentals, their road to profitability seems more than a little difficult.  Ironically they’re likely to be hiring staff – to deal with those new regulations.  It also seems a good time to let go of those “hope stocks,” stocks like Zoom Video (62) where you’re still hoping it will get back to 600.  This seems the case when it comes to all of the stay-at-home stocks.  Bubbles may come and go, but when they go they stay gone.

Some time ago something went wrong in the office, and someone said blame the temp.  Amusingly, it was the temp who said it and who though innocent, didn’t run away from responsibility.  It’s somewhat amusing then that the weakness in bank shares to some extent is being blamed on short sellers.  In his little diatribe the other day Powell reassured us the banks are “sound and resilient,” though any need to reassure somewhat defeats the purpose.  It’s interesting that amongst the Fed there never seems a dissenter – apparently they don’t get out much.  The recent backdrop of course is hospitable to Gold, but we would argue the uptrends here have been well-established.  And we would further argue news often comes along to explain what the charts already were seeing.  Meanwhile, the dollar seems about to break, which would only reinforce Gold’s longevity.

Frank D. Gretz

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DJIA: 33,826

Sometimes it’s not whether you’re in … it’s where you’re in. A former colleague liked to say he always knew he was a good trader, all he needed was a bull market. Studies have shown as much as 80% of the movement in individual stocks can be a function of the market’s overall trend. It does indeed help to have that market wind at your back. If you look at this market, however, there is no wind, fair, ill or otherwise. Here around 4100 in the S&P is pretty much where we were a year ago. There’s always stock picking, but that’s hard. Similar but less difficult is identifying the group or sectors in favor. Being in the right place often is as important as simply being in, and that’s particularly so in a market like this. If there is always a bull market somewhere, you also have to keep up when it changes.

As the year began Tech was all the rage. It was so much so that many complained there were only five or ten stocks driving the market. By some measures this did seem the case, yet in February 74% of NYSE stocks were above their 200-day average, that is, in uptrends. The market wasn’t as narrow as it looked. By mid-March the number was in the upper 40s, a significant drop and the stocks driving even that number had begun to change. Even with the recent action in Microsoft (305) and Meta (239), the relevant ETFs show Tech has stalled. And since mid-March areas like Consumer Staples and Healthcare have come on to lead. In regard to the former you’re likely thinking Procter & Gamble (156) which gapped higher last week. However, Retail is also a significant part of the XLP (77), as stocks like Walmart (151) and Costco (501) also have outperformed. In XLV (132), it’s Pharma like Eli Lilly (390) and Merck (115) driving performance, with United Healthcare (490) being its usual erratic self. The Medical Device ETF (IHI-56) is a group of companies whose products we find ourselves using more and more.

Who knew First Republic (6) was so important. In retrospect, seems those big banks knew when out of the goodness of their heart they doled out that $30B lifeline. Then, too, it’s a matter of pay now or pay later – the cost of that FDIC insurance certainly would rise in a failure. When you lose 40% of your deposits, your options have dwindled. A rescue would be nice but if the first one didn’t work, would you trust the next one? The risk of course is contagion, but that takes a couple of forms. There’s the mechanics of the industry, which is above our paygrade, but we can say the charts all look the same. It is hard to believe FRC is the only Regional with a problem. The other contagion risk is what was evident in Tuesday’s selloff, the bank problem takes the market lower. The bears have worried all year about disappointing earnings dragging down prices. It’s more than a little ironic earnings like those of Microsoft seem to be holding the market together.

There are many reasons to like Gold except for the obvious, it’s Gold. When it comes to false starts, were it a runner or a swimmer, it would have long been disqualified. At this point the uptrend is well established and the stocks are in a needed consolidation. Conceptually, when money is being pulled out of banks, could there be a better backdrop? Of course, the same might be said of Bitcoin. A bit of an outlier among areas acting well are the Gaming stocks, BJK (46) being one of the ETFs there. Las Vegas Sands (62) is among the best individual charts, which despite its name has little or no presence in Vegas. Without wanting to read too much into this, seems someone might be benefiting from China’s reopening – it’s certainly not the Chinese stocks.
We dislike the idea of mechanical buy and sell signals as the market rarely lends itself to rigid determinations. That said, mechanical guides are useful versus just letting your wishful thinking, hope and fear run amok. So we have a sell signal, so to speak, as of yesterday’s close. By way of perspective the last such signal was back on 2/14, S&P 4136, with a subsequent buy on March 30, S&P 4151. While not much of a money maker, it did get you on the right side of what little trend there was. And unlike many “signals,” it didn’t whip you around every other day. So there’s this mechanical trend change as well as deterioration in indicators relating to New Highs/New Lows. And stocks above their 200-day now are back to 42%. There’s no magic number here, but clearly the number of stocks in uptrends has deteriorated, and to the point it’s time for a little more caution.

Frank Gretz

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