DJIA:  33,786

Don’t fight the Fed … but that fight might be over.  They won’t ring a bell when the Fed is through, but it seems pretty clear May should do it.  Sure they won’t be lowering rates anytime soon, but at least the fighting part seems done.  If you think by data dependent the Fed means inflation dependent, there’s good news there as well.  To even the casual observer it seems inflation at least has peaked, but an article in Barron’s took this idea a step further.  If rather than a 12-month trailing measure of inflation, use numbers from the summer when hikes began to take effect.  The Fed-watched PCE rose at a 3.3% annualized rate in the eight months July through February, a lot closer to the Fed’s target than the 12-month 5% number.  Here again, the fight seems well along its way to having ended.

So there seems a case for a new bull market and a strong case the bear market has ended.  After all, last May almost 50% of the stocks that traded that week reached 12-month lows, a real washout unlikely to be revisited.  Then, too, at S&P 4100-4200 you can go back to last May and see the averages have gone nowhere – though there is an uptrend from the October low.  Everyone likes to complain it’s a market led by four stocks.  It’s true the four have accounted for half of the gains in the NASDAQ 100 this year.  However, only 25% of the NAZ is down 20% from their 52-week highs versus 80% a year ago.  It’s not as narrow as you might think.  If it doesn’t feel like a bull market it might be because of the somewhat incessant rotation.  For now you can find four Pharma stocks that look as good or better than those four NAZ stocks.

One place we don’t find the rotation so healthy is the late February/early March peak in economically sensitive stocks like Parker Hannifin (319), though by no means is the chart a disaster – look at the weekly.  The Fed may be through or close and inflation may be peaking, but there’s the concern about the economy in terms of the lagged effects of the Fed’s moves.  We would be a bit more comfortable with a fundamental back up from the charts.  And we would feel a bit better if those regional banks would find a pulse.  It’s not the banks themselves that worry us, it’s the implications for small business, especially commercial real estate.  In that regard, the news from Western Alliance Bank (40) on Wednesday was encouraging.  There is, too, a rather dramatic irony in this economic debate.  Where most layoffs have occurred is in Tech, and the stocks have rallied on the news.

They like to call the first hour of trading amateur hour.  That may be a bit unkind, but we tend to agree it has more than its fair share of reversals.  By contrast, the last hour is said to be when the pros play, whoever they may be.  The last hour is thought to have predictive capability to the point that an indicator was developed to capture this – cleverly called, “the last hour indicator.”  It simply calculates the gain or loss in that last hour of trading.  Positive readings typically mean it’s a good market, the logic of sorts is that traders want to be in before the next day’s likely up opening.  Whatever the logic, like the rest it has its moments, this seemingly one.  It has been positive for more than seven consecutive days.  In the past this has led to higher prices a month later some 80% of the time, according to SentimenTrader.com.

Say what you will about narrow markets, they have their virtues.  Back in the day when it was FANG and FANG only, at least you knew where to put your money.  The best Dow stock this week was probably Travelers (180) – can’t wait to get some of that good stuff.  Tesla (163) seems to cut prices every other day, yet margin contraction was a surprise?  While not a particularly good chart recently the market often gives Musk a pass, but not this time.  Big still seems best, and when it comes to Tech none are bigger than Apple (167) and Microsoft (286).  With its near 40% position in the two, the SPDR Tech ETF (XLK-148) would break out again around 152.  The overall market generated enough momentum off of the October low and again in late March to strongly argue for higher prices into year-end.  We’ve long noticed, however, the market is on its own schedule.

Frank D. Gretz

Click to Download

DJIA:  34,029

If the past is any guide … things are looking up.  In the stock market history tends to repeat because human behavior tends to repeat.  And, too, sometimes it’s just a mystery.  Fund flows at the start of any year tend to boost prices for a time.  Just why that should carry forward throughout the year is hard to say, though it makes some sense that a good and usually predictive first quarter could set the tone for the year.  And, indeed, when the first quarter doesn’t take out the lows of December it has led to higher prices April through December some 93% of the time.  It makes some sense that following a bad year like 2022, a good start would follow through April to December.  In a bad year it makes sense that Tech might suffer most, so when the S&P Tech sector cycles from only 25% positive to 75%, it makes sense that it and the S&P would have a good April to December.  So maybe it’s not so much of a mystery.

The S&P peaked the first week of February and more importantly, most stocks peaked around that time as well.  The extent of the decline has been a bit surprising, not in terms of the S&P but in terms of the damage to most stocks.  NYSE stocks above their 200-day peaked at 74%, dropped all the way to 36%, and is only around 43% at present.  When fewer than half of the NYSE stocks are up in uptrends, that is, above their 200-day, we are still in a correction.  It has, however, affected stocks and even markets differently.  Until last week, Tech had been pretty much immune.  And while they haven’t exactly fallen apart, Tech has corrected as likely was their due.  This correction, however, was more rotation than correction as a number of Healthcare shares came to life for the first time since mid-December.

Given how long Healthcare had remained dormant, this change seems an important development for those stocks.  And it seems important development for the market as well.  It’s one thing to just have a group like Tech consolidate for time, but in this case there has been something, and a not a so insignificant something, come along to take its place.  That has kept NYSE Advance-Decline numbers reasonably healthy, something we obviously consider important.  Indeed, the A/Ds were even flat in Wednesday’s confused market, and have been positive 11 of the last 14 days, something we think keeps recovery prospects intact.  Those numbers are not bad, especially considering the still lagging Financials, of which there are many.  And, of course, be wary of any bad up-days.

While the bank crisis might be over for now, try telling that to the bank stocks.  The banking crisis is one thing, the crisis in banking seems another.  There almost seems an excitement that a bank like First Republic (14) will survive, missing the point will it ever thrive.  To look at the charts, it’s rare to see such uniformity and unanimity in any group.  And it suggests the problems besetting the banks are affecting them all.  The charts for now suggest exactly that – survival.   Even that, however, is tentative in that the stocks merely have stopped going down, consolidating in their downtrends.  With barely a pulse, there’s the risk of new breakdowns.

We have been waiting for a pullback to buy Gold, and you know how that works.  We should have done what we usually do, try a little, more if it works, if it doesn’t – kick it.  So that’s our intention and our advice now.  Meanwhile, we have noticed the breakout in Bitcoin stocks like Riot (14), Grayscale (18), Marathon (12) and BITO (18).  Aside from the charts, and recognizing Bitcoin is pretty much synonymous with controversy, we can’t help but be impressed by how well it has acted in light of the collapse of FTX and Silvergate, and the regulatory problems for Coinbase (69).  BITO is an ETF which holds futures contracts while GBTC is a trust which would like to become an ETF, so far without success.  The kicker here, so to speak, is a successful switch would likely narrow the spread between the current price and NAV closer to 25.

Frank D. Gretz

Click to Download

DJIA:  32,859

Forget bifurcated…this market is trifurcated.  When someone says what’s the market doing, even in terms of the Averages you almost have to ask, which one?  There’s the NASDAQ 100, not to be confused with the NASDAQ Composite, which is in its own bull market of sorts. The NAZ 100, also known as the Triple- Qs, is home to Tech to the tune of some 80%.  For now at least, Tech is seen as a safe haven of all things, immune to the news in banking.  The S&P 500, in turn, seems held together by its own heavy weighting in Tech, names like Microsoft (284), Apple (162) and the like. The problem for the S&P is its own more than fair share of Financials, and Industrials that have suffered recently in the wake of the banking mess. Finally, there’s the Russell 2000, where Regional Banks are some 17% of market cap.  Throw in ancillary financials like REITs and Insurance, and you can see why the chart looks as it does.

Bank shares, whether large or small, have been crushed.  The unanimity of the decline doesn’t happen very often, and it usually means bad things for those all around.  When banks fall relative to everything else, as they have recently, everything else tends to follow.  It seems banks do matter to the economy.  When they’re in trouble most of the economy has trouble as well.  The counterpart here is that this will lead to lower rates and hence the overall market’s somewhat indifference.  There is, however, a fine line here.  If troubled banks damage the economy, it will only be because of that rates fall.  We would like to think that last year’s 20% decline and multiple contraction may have discounted declining profits, but only time will tell.

In the long run earnings of course matter, but the long run is just that, and many things come into play in the interim.  An obvious example is last year when earnings were up and the market was down, that because of the Fed’s tightening.  Suppose this year the Fed is close to being done?  Or, suppose the “E” In P/E is not for earnings but is instead for efficiency.  Look what efficiency did for Meta (208).  Or suppose like Baba (103) more companies decide to divide.  It was worth more than 10% to Baba’s stock on Tuesday.  Sure this is all more than a little far-fetched, but earnings are not alone in driving stock prices.  When the market wants to go higher it always seems to find a way.  Maybe prices will drive higher when we all give money to someone to buy something about which we know nothing.  Come to think of it, we’ve already done that.

The problem for now is not earnings, it’s the technical background.  We’ve been in this correction since early February, exacerbated by the banking mess.  You might say all things considered the market has held together reasonably well, and to a degree that’s true.  Still, holding up isn’t going up, and many stocks haven’t been holding.  Our measure here is not so much the Averages but what most stocks are doing.  During this correction NYSE stocks above their 200-day average have gone from 74% in early February to last week’s low of 36%.  If this is a decent proxy for stocks in uptrends, it means almost 2/3 of stocks are in downtrends.  And that means it’s hard to make money.  There’s no magic number here, it simply has to turn back up again.

The recent action has been more encouraging.  While we make light of it, we always take note when the market has its chance to do something but does not, in this case, go down.  And the Advance-Decline numbers recently have held together pretty well.  We especially like days like Tuesday when the Dow and the S&P showed modest losses, but the A/Ds were positive.  This should be a prelude to improvement in stocks above their 200-day and, therefore, a better market.  While Tech clearly leads, the Econ sensitive stocks seem to be regrouping.  To look at a stock like Cintas (468), which should have its finger on the pulse of the economy, you might ask what recession.  While history says the banks drag down the rest, maybe this time Tech drags up the rest.

Frank D. Gretz

Click to Download

DJIA:  32105

Funny, we were all good traders back in January… but not so much now.  It’s hard to overstate the importance of the market’s overall trend.  Academic studies long have held as much as three quarters of a stock’s movement is a function of market trend.  With the growing importance of ETFs we suspect it’s even more – buy one thing, move 10.  Back in January 74% of stocks were above their 200-day, that is, in uptrends.  Now it’s only 47%.  Your odds of having the market at your back are less than 50-50.  When we hear it’s a stock picker’s market we cringe.  Stock picking is hard.  Give us January when most stocks went up, when “stock picking” was easy.  We are still in this correction that began in early February, though considering the news it could be worse.  At least 3840 on the S&P has held, and that seems important.

Going through the bank charts – what’s March Madness for – it comes as little surprise how poor they are.  The surprise, and there are almost 400 of them, is how uniform those charts have become.  And by the way, that includes the money center banks who would seem had something to gain here.  The stocks for now have stabilized and that’s important for the market’s sake.  We don’t see them storming back but that’s fine, stable will do.  What is of concern is the ancillary fallout.  In terms of markets. Regional Banks are a big part of the Russell so that wouldn’t seem to bode well for that Index.  And Regional Banks are behind some 80% of lending to commercial real estate, another place you might want to avoid.  Seems it’s a tangled web they weave.

The banking mess and its attendant implications for growth, has put a dent in most of those stocks we have termed economically sensitive.  While Grainger (665) and Cintas (433) didn’t seem to notice, on the whole some dust needs to settle here.  A quick rebound would be the ideal, but that seems unlikely without some new leg up in the overall market.  Certainly it seems important the recent lows hold, both for the sake of the stocks and for implications for the economy.  GE (92), by the way, is another name that didn’t seem to notice.  Meanwhile, there continues to be a shift to Big Tech on the perception they are somehow immune, and perhaps they are.  This includes most of the Semis, Microsoft (278), Apple (159), Meta (204), and now Amazon (99) looks better.  Tesla (192) also appears to have turned up again.

If we had to choose a word for the Fed meeting – yawn comes to mind.  After the most aggressive tightening in years, does a quarter point really matter?  We can see a half a point might have mattered, though a rally on that news would’ve been really bullish.  And had they paused, would it have signaled a lack of confidence in the financial system?  Back in 1984 when Continental Illinois failed, tough guy Volcker did pause.  That was May and by July- August the market rallied sharply.  Events like the Fed meeting always seem not so much about the event but the market’s reaction to the event.  We know these meetings usually come with their share of volatility, but Wednesday we found a little over the top.  Reaction, dare we say seems more about manipulation.

A theoretical trade might be, long the NAZ and short the Russell.  By the NAZ we mean the NASDAQ 100 where the large-cap growth stocks live, and are for now the market’s best acting stocks.  The Russell, in turn, is 17% home to Regional Banks.  It’s not just Regional Banks that are the problem.  Over the last few weeks a ratio of small-cap to large-cap stocks has cycled from a 200-day high to a 200-day low, a change that seems more than just about the recent weakness in Regionals.  In theory this is a warning sign for the economy.  For stocks, it tended to precede some additional small-cap weakness, while the S&P tended to hold together reasonably well.  We don’t really believe in these so-called “pair trades,” being right once is hard enough. The concept, however, does seem valid.  The Regionals will take time to dig themselves out while large-cap growth, of all things, seems a safe haven.

Frank D. Gretz

Click to Download

DJIA:  32246

Who loses money in the world’s safest investment … banks of course.  So how does this work again – rates go up, bond prices go down?  Having tired of lending money to Third World countries, trying to rig LIBOR, writing “liar loans,” the banks have found yet another way to screw up.  Still, there was a perverse predictability to SVB, no one was looking there, and that’s what usually comes back to bite you.  Scary/disappointing as it all might be, it’s an ill wind, and all that.  SVB and the rest just may have done the Fed’s job for it.  At the very least, it should help ease the Fed’s foot off the rate hike pedal.  The idea that the futures were up prior to the CPI release Tuesday morning tells you inflation is less of a worry.  Now it’s about a loss of confidence, and that takes time to resolve.

After Tuesday’s calm came Wednesday’s turmoil, thanks to those almost forgotten problems at Credit Suisse (2).  Tempting to say let those problems remain forgotten, but that didn’t turn out so well in the case of Bear Stearns or Lehman.  The latter were seen as being small enough to allow to fail, though in retrospect they were not.  It seems clear that bank profits will be hurt, which means lower share prices.  What’s not clear is that dirty word contagion – to what extent this morphs into further failures and a greater economic impact.  The latter came to the forefront Wednesday with the selling in everything sensitive to economic growth, especially Energy.  As we suggested, this banking problem is doing the Fed’s job for it, but will the Fed see it that way as well. We had thought a pause might be taken as a sign of Fed panic – they must know something.  We now think it would be taken as a sign of Fed reason.

In the midst of layoffs in the auto industry, Walter Reuther once quipped, who do they think buys these things?  Meta (205) plans to cut another 10,000 jobs and leave 5000 openings unfilled.  Investors may not have bought into the metaverse, but they have  bought into the stock.  It was up some 13 points on the news Tuesday, and another 4 points in Wednesday’s weak market.  Seems growth is out and efficiency is in.  Be lean, be mean, layoff more workers and really get that stock going.  Then, too, if this is good it’s a telling commentary on how bloated and poorly run the Company had been all this time.  In any event, we’re not here to praise or to bury Meta, we’re here to praise what has become a very good chart, and one leaving the rest of FANG behind.  And this was prior to the last few days when growth became the new defense.  It’s not just growth at any size, of course, it’s big growth –Microsoft (276), Salesforce (187), Nvidia (255) and Apple (156).

The overall technical background isn’t as bad as you might think.  The S&P had fallen below its 200-day, but you might notice it often dances around that number.  The 50-day remains above the 200 and is less prone to the dance.  Another trend following indicator we use remains up, provided there’s no weekly close below 3845.  Like most trend following indicators, it’s only right 45% of the time.  Like most trend following indicators, you make four times as much as you lose – you avoid the big losses.  The last buy signal was at the end of October.  There’s no question we have seen selling that can only be described as intense – a spate of 5 days where 3 saw 90% of the S&P components lower.  More important than the recent weakness, however, still seems the momentum surge off of the October low.  Even intense selling did not negate the positive implications of this kind of surge, at least historically.

When things change, Keynes once observed, you should change as well.  Things change but rarely as quickly as they did this week.  While we should be leaving time for the dust to settle, a couple of things seem clear. The economically sensitive stocks fell out of favor this week, on the perception the economy will suffer from the banking debacle.  While perceptions aren’t always reality, in the stock market they often can be more important. At the same time, areas perceived to be immune to such problems were the winners – growth stocks turned to defensive stocks.  And clearly, bigger was better.  The economy won’t fall apart, so stocks like Grainger (681) and Parker Hannifin (314) will recover, as the dust settles.  Gold caught a bid finally, and that “safe haven” Bitcoin did as well.

Frank D. Gretz

Click to Download

DJIA:  33003

One thing leads to another… or does it?  Inflation leads to Fed tightening, Fed tightening leads to an economic slowdown, and slowdowns lead to declining earnings – or do they?  Our take is that when it comes to the stock market, what we all know isn’t worth knowing – it’s already discounted.  Tom Lee of Fundstrat has done some work here and what he found is interesting.  The key is what the market did in the previous year, down in the case of 2022.  When earnings were up the following year, the market’s median gain was some 18%.  When earnings were down in the following year, the market’s median gain was 15%.  So earnings didn’t prove an issue even when poor – seems they were discounted by the previous year’s weakness.

We can make the case for a new bull market, though not exactly your father’s bull market.  To buy into this case you have to realize the bear market ended last June, not last October.  Sure the low in the averages was last October, but most stocks made their lows in May-June.  So the October low is what technical analysts call a secondary low, a lower low in the averages but one with less selling pressure – clearly the case when looking at 12-month new lows.  Since then we’ve been in some form of base building, punctuated by the selloff in October and the buying spurt in January.  While we can’t always remember what we had for lunch, we recall pretty well the pattern of most bear markets.  Last year pretty much duplicated 1962, while this year is off to a good start, much like 1963.

January‘s momentum surge was impressive, with a variety of positive implications for future returns.  It did, however, serve to get things a bit overcooked – the near 50% surge in Cathie Wood’s ARK Innovation ETF (ARKK-39) being a prime example of speculative fervor.  After all, the fundamentals of these stocks didn’t change that much in a month. Rather, after a bad year short covering and the end of tax loss selling seen the likely impetus, as well as down the most turning to up the most in rallies.  Most of those names, whatever their financial credentials might be, are tied to their stay-at-home world.  You may want to write this down – things change.  Meanwhile, most of Oil was up big last year, in large part because it was under-owned.  To that point, how much Parker Hannifin (355) or Grainger (684) do you own?

Grainger is a chart we particularly like, and that for two reasons.  Back on February 2 the stock had a price gap – a low that was higher than the previous day’s high.  It takes a lot of buying to cause a price gap, making it our favorite chart pattern.  Gaps of course usually leave patterns somewhat extended, so some consolidation was to be expected.  In Grainger‘s case it has been a very high-level consolidation, with the stock giving up very little.  Yet to happen is the breakout from this pattern.  And that would take place with a move above roughly 680, preferably with a pickup in volume.  Another gap just a few days ago was in Nvidia (233). While a strong pattern, keep in mind a sideways consolidation is preferable to any real pullback, awaiting the eventual follow-through.

The idea of a trading range it’s not so much of a prediction as it is an observation.  The S&P is around 4000, a level where it traded in May, September, and December.  A difference now is the S&P has traded in an uptrend since October, and broke its overall downtrend in December.  The pattern in 1963 was similar, a trading range but with enough of an upper bias to end the year 18 percent higher.  While just about everything is stalled for now, the question as always is what comes out of this as leadership.  We still like the economically sensitive names we’ve mentioned recently, Aerospace and Defense ETFs, XAR (120) and ITA (171), and the Global Infrastructure ETF (PAVE-30) – though components like United Rentals (471) and H&E Equipment Services (55) actually look a bit better.  We would still avoid most of FANG, though META (175) looks betta.

Frank D. Gretz

Click to download

                                                                                                                                    DJIA:  33,697

Value… it’s in the eye of the beholder.  And the eye of the beholder, that’s likely a function of the market’s trend.  What they call fair value is a function of many things, but in the end does it really matter?  Stocks sell at fair value twice – once on their way up and once on their way down.  The rest of the time they are overvalued or undervalued, and the trick is to figure out whether they’re on their way to becoming more overvalued or more undervalued.  In other words, figure out the trend which determines as much as three quarters of the movement in individual stocks.  Then there’s group or style rotation.  Most of Energy was up 50% last year, with virtually nothing to do with the market’s multiple.    The best performing individual names indeed are about earnings, but earnings which surprise.  What multiple do you put on earnings that you’re not expecting?  Seems easier to go with trend versus valuations.  Money is made in the stock market when for the S&P the 50-day moving average is above the 200-day moving average.

If you believe history of sorts repeats, there’s plenty of reason for optimism.  As we pointed out last time, there’s a pre-election seasonal pattern that’s quite positive, even for the usually not so wonderful month of February.  And from February through July it’s quite positive.  Tom Lee of FundStrat published a note regarding the first 25 days of the year.  When up 5% or more the market was higher at year-end 16 of 17 times.  And finally, the Nasdaq Composite has outperformed the Dow Jones Average to an unusually large degree, the greatest since 2000.  Over the next six months there was never a negative return for the S&P, according to SentimenTrader.com.  Obviously this time could be different, though we cringe to say that.  Those words have cost many of us more money than we’d like to remember.

If it’s true this time is not different, the numbers seem to back that up.  Stocks above their 200-day moved above 70%, historically indicative of bull markets.  The level of 12-month New Highs seem to say the same.  That said, this is unlikely your 2009 bull market, or others of that ilk.  The washout this time was last June, so while the numbers so far have been good, they lack some of the drama of past bull markets.  Even last week saw a little glitch in the rosy scenario, as some reversals took NYSE stocks above their 200-day from 74% to 64%, a not so insignificant drop in just one week.  In turn, this made Monday’s rally all the more important, not for its 300+ Dow points but for its 3-to-1 A/D numbers.  Following what you might call a sloppy week, it’s important not to rebound with what we call a weak rally – up in the averages with poor A/Ds.

Recent data seems to confirm getting inflation under control will be, as the Beatles once suggested, a long and winding road.  Recent data also seems to confirm the economy is in his own world, one which seems more than fine with things.  Bull markets come around when stocks become sold out.  And as has been the case recently, new uptrends see stocks down the most turn to up the most.  That said, there also seems a new leadership has evolved in old industrial names like Parker Hannifin (355), Eaton (174), Dover (155), and names sensitive to economic growth like Cintas (441) and Grainger (670).  Obviously, there’s some contradiction here, as continued Fed tightening does not bode well for the growth story.  So what is the market missing, or is it what are we missing?  Rather than overthink it, for now, we will just go with the charts.

Our comments above notwithstanding, a common complaint is about leadership.  This can be pretty much summed up in saying Cathie Wood is having a good year finally, or at least so far.  While short covering seems a part of this rally, what bull market ever started without short covering?  We find it a bit upsetting that stocks like Deere (403) and Caterpillar (247) have not done better, but Boeing (212) and GE (84) at least have held their own.  Commodity-related stocks also have been disappointing, though oil equipment/drilling stocks look poised, so to speak, more than the exploration names. Cyber and defense stocks, to look at their respective ETFs, CIBR (42) and ITA (116), are much improved — wonder what that’s about?  Last year’s winners like Staples and Pharma are going through and out of favor phase, but this too should pass.

Frank D. Gretz

Click tp Download

DJIA:  33,699

Stock charts tell a story… and for now that story is a good one.  Clearly not all charts tell a story, and when they do it’s not always a good one.  We’ve come across a couple where the story not only seems a good one, it also seems an important one – with important implications for the economy and by extension the stock market.  Take for example WW Grainger (661), where one of their segments is called “endless assortment.”  In other words, they sell “stuff,” and they sell it to everyone.  Then there’s Parker Hannifin (352), whose engineered solutions go to a range of businesses.  The company was used by Alan Greenspan as an economic indicator.  Both of these stocks are in long-term uptrends, and came through the bear market reasonably well.  The real point is their recent significant breakouts.  The stocks of these companies, who seem to have their finger on the pulse of the economy, are telling a very positive story.

Investor psychology has shifted from pessimism to skepticism.  It’s apparent the market is acting better, but this better action isn’t really trusted.  The distrust, of course, relates to earnings which seem likely to disappoint.  And therein lies the point of the matter.  How disappointing can earnings be when even we technical analysts know earnings will be disappointing?  One of our long held tenets is that when it comes to the stock market, what we all know isn’t worth knowing.  What we all know already is priced in.  And if you insist earnings are your big worry, how is it last year‘s earnings were good and the market went down?  Why can’t earnings this year be bad and the market go up?  Amidst the media’s onslaught of warnings, it’s easy to forget that these forecasts likely will prove old news.  Market averages make their lows some eight months ahead of the news.

The anecdotal positives aside, the numbers also have turned positive.  The percent of NYSE stocks above their 200- day reached 74% last week.  Historically readings above 60% have been followed by above-average forward returns in the S&P, and spikes toward 70% marked new bull markets in 1995, 2003, 2009, 2013 and so on.  Last week also saw more than 10% of NYSE issues traded reach a 12-month New High.  And more than 8% did so on the NASDAQ.  It’s difficult to argue numbers like this fit with an ongoing bear market.  Because this was in its way a different kind of bear market, with a washout in the middle rather than at the end, a bull market likely will be different as well.  Rather than eleven months like January, we expect more of a trudge higher.  We have likened last year to 1962, and would liken this year to 1963 – up some 18%.

February can be a difficult month, especially when January is a good one.  The numbers go something like up only 46% of the time, with losses far outweighing gains.  SentimenTrader.com points out, however, those and other numbers change rather significantly in pre-election years, with February up some 68% of the time.  Even more impressive is what follows in these years.  The period from February to July has a success rate of close to 85%.  The top performers in this pre-election period are Materials, Consumer Discretionary and Tech.  We favor the Materials ETF (XLB-82) and there is a Consumer Discretionary ETF (XLY-150).  The good news/bad news there is that Amazon (98) is 23% of the holdings.  As for Tech generally, our feeling is stay away from last cycle’s names, including the FANGs.

Winston Churchill once remarked Americans always do the right thing, once they’ve tried everything else.  We were reminded of that watching Tuesday’s market following Powell‘s remarks.  The market had a great day, after doing all that it could to have a bad one.  We always find it impressive when the market has its chances to go down, but does not.  Still, after January’s run it seems reasonable to expect some flattening out.  While Tuesday’s reversal in price was impressive, the reversal in the A/Ds was at best adequate.  And Monday was the first bad day of the year – 3-to-1 down against a loss of only 35 Dow points.  Bad down days, however, are not the worry.  It’s the bad up days that get markets in trouble – up in the averages against lagging A/Ds.  The elephant in the room for now is leadership – always difficult this time of year and during changing market cycles.  A rising tide lifts all ships, but some of these were sunken ships – Carvana (12) from 5 to 20?  These “January Effect” bounces are nice, but keep in mind they’re not called February Effect.  We expect Commodity leadership to return, but they have lagged so far.

Frank D. Gretz

Click to Download

DJIA:  34,053

Do you trust your thinking … or do you trust your eyes?  Logic suggests there’s unfinished business on the downside.  After all, as the Fed just made clear, it seems hell-bent in its serial tightening, unlikely to stop until the market drops.  Then there’s the matter of earnings which, to the surprise of no one, likely will be less than stellar.  Yet despite what might seem a logical expectation of lower prices, the market action has been quite impressive to the upside.  As of last Friday 67% of NYSE stocks were above their 200-day average – 70% says bull market.  Weekly 12-month new highs were 269 on the NYSE versus 31 new lows, on the NAZ 382 versus 128.  We just don’t see these numbers fitting in with the ongoing bear market thesis.  Without meaning to be too convoluted semantically, a big new leg down here would almost seem a new bear market, rather than a continuation of the old one.  Meanwhile, the possibility of a new bull market is certainly there, though it may not look as most might expect.

A few weeks ago we compared last year to 1962.  We don’t believe any two years completely match, but last year and 1962 are pretty close.  Moreover, it’s the pattern of buying and selling that seems of particular interest.  Both years saw declines pretty much from the start, and both saw those declines end in June, down 20%+ in both cases.  We don’t have numbers from 1962, but last year the number of weekly new lows totaled almost half the issues traded that week, or what you have to think were washout numbers.  In other words, that was the low for most stocks with later numbers not coming close.  In both years there was what seems a period of base building, a selloff in October both years, and a rally in December.  What followed in 1963 was an orderly but not dramatic sort of uptrend, leading to a year-end gain of about 18%.  No washout drama after the June low, and no upside drama in ‘63.

If you’re bearish, you’re thinking the Fed/earnings eventually will get to the market, stocks will leg down and then wash out.  It seems to us we’ve been there, done that – that being last June.  Without the downside drama, however, there likely will be less drama on the upside.  Why are the banks not rallying, how can a leader like CAT sell off, there always will be something to make you wonder.  Then, too, price leads and news follows – markets bottom some eight months before good news.  We have no dog in this hunt.  We are more trading than investing oriented.  We do understand that most are just the opposite, and we are simply trying to lay out here what we see in terms of bull versus bear, a longer term perspective.  From a short-term perspective, indicators like the A/Ds and new highs turned negative mid-October, positive again mid-December.  They remain positive.

When they say hope springs eternal, they might well be referring to spending on infrastructure.  To look at some of the relevant stocks, rather than the rhetoric, the reality just could be at hand.  We are thinking here of names like Granite Construction (43) and Sterling Infrastructure (36) where the names pretty much say it all.  There’s an ETF here, Global X US Development, PAVE (30).  This includes one of the market’s stronger stocks of late, United Rentals, URI (456).  The largest position is Nucor (177), where if you haven’t looked lately will surprise in a positive way.  The same can be said of Steel Dynamics (126), like Nucor almost tech-like.  There is also a Steel ETF, SLX (68), and, in this general area, you might also look to XME (58).

The bull/bear debate aside, a new year often presents challenges in terms of leadership.  In other words, it’s often confused.  Last year’s leaders have lagged, and laggards like Tech have led.  The ratio of Consumer Discretionary Stocks to Consumer Staples has risen by more than 20% over the last four weeks.  This is quite a change and can be construed positively as it suggests investor confidence has risen.  In the past this has led to gains in the S&P, though we tend to think of this more benignly – down the most becomes up the most temporarily.  We have been a bit negative on Tech but by no means all Tech.  There’s plenty of good if somewhat obscure names acting quite well, and the Semis are acting well.  It’s the winners from last cycle, the FANGs despite META (189), and the stay-at-homes that seem unlikely to repeat.  Think of the “Dot-coms” and the “Nifty Fifty” before them.

Frank D. Gretz

Click to Download

DJIA:  33,044

Rock ‘n’ roll is here to stay… and Tech will never die.  Don’t tell that to Digital Equipment, Sun Microsystems, Burroughs, Control Data or Sperry Rand.  Tech may never die, but the names do change.  There are very few durable technology franchises.  Years ago Bernstein did a study which showed over a 40-year period, there was 1 chance in 7 that a “recognized” high growth tech stock could sustain that status for five years, and a 1 in 14 chance for 10 years.  Tech may be forever, but the players shift.  As it happens, this is a very positive seven months for Tech, at least as measured by the NAZ 100, the NDX or Q‘s.  Since its inception the NAZ has rallied all nine years between January 1 and July 31 in pre-election years, showing an average gain of 24%, according to SentimenTrader.com.  We suspect, however, RCA will not be among those Techs, though RCA really did change the world.

It’s not how you start the race, rather it’s how you finish.  After a fairly dismal December, it’s nice to see January start well, particularly as January has some forecasting value.  Last week’s pair of days with close to 4-to-1 A/Ds is what you like to see, and Friday’s upside reversal was impressive.  Perhaps most important in the overall pattern has been the increase in stocks above their 200-day to a recent peak of 57%.  As we noted, readings around 60% are indicative of good markets, 70% are associated with bull markets.  For now it seems a credible turn, but as Wednesday made clear, it won’t be easy.  When you think of market turning points it’s tempting to think straight up.  That’s rarely the case, and even less likely here.  This wasn’t a climax, washout low – that was back in May-June.  Any low here will be work.

Market strategists and stock analysts both basically analyze earnings.  The analysts nickel and dime you with their estimates – pretty much raising and lowering them to follow the price of any stock.  They are almost more “trend followers” than technical analysts.  Strategists are more big picture.  The analysts have trouble figuring out what one company will earn, strategists think they can figure out what 500 companies will earn, and then know what those earnings are worth.  Granted that in the long run companies that grow earnings do well, but that can be a long run.  Academic studies have found the stocks that outperform each year are those that beat analyst’s estimates, and vice versa.  So the best and worst performers are pretty much stocks where analysts are wrong.

Strategists assign multiples to overall earnings to determine valuations, and therefore the likely trend in the overall market.  The problem here is not in the use of earnings, but in the dependency on earnings.  Assuming that earnings are knowable, they’re only but one of the factors affecting stock prices.  Studies show as much as 70% of a stock’s price is determined by the overall market trend.  Throw in the importance of group rotation – think of Energy last year – and there’s not a whole lot left for the importance of earnings.  One of our favorite examples here is McDonald’s (264) back in the 70s and early 80s.  MCD in 1973 peaked around 75, fell to 22 in 1974, and recovered to 66 in 1976.  It then did nothing for the next five years, though earnings continued to grow at a compounded rate of 25%.  All the time, the company never missed a quarter.  Despite that by its 1980 low MCD was selling at 10x trailing 12 months compared with selling at 75x in 1973.

It’s Groundhog Day – again.  It’s surprising and disappointing the market keeps reacting to the same news.  Rates are going higher – who knew?  At some point bad news gets discounted.  Then, too, after a good run the market may have been due for a little reality check.  In any event, a couple of bad days don’t negate a surge in the ADs, stocks above their 200-day and the pickup in 12-month new highs.  This wasn’t a washout low.  If a viable low it would be the kind you have to work for.  We still favor Commodity-related stocks like Freeport (44) and Caterpillar (246) – China re-opening.  The pre-election year seasonal pattern for the NAZ is hard to ignore, but the winners of last cycle, the FANG+, seem unlikely to win again.  We’ve highlighted a few that we favor.

Frank D. Gretz

Click to Download