DJIA:  35,225

Who needs Nvidia (455) … when you’ve got good old Microsoft (347).  On Tuesday MSFT showed NVDA how AI is done, and in the process moved to an all-time high.   The move came after the company announced pricing for its new AI subscription service – making money from AI, what a novel idea.  It’s not so much that this market is resilient, it’s more that it’s inventive.  While everyone worries about good stuff like earnings and rates, along comes AI to take everyone’s mind off of that.   Earnings so far haven’t been as bad as predicted, and the look of those Econ-sensitive stocks is reassuring.  New to the positive side is the recent hit to the dollar, typically good for the NAZ and the Russell.  The real positive, however, remains the technical background.  The stock market and the economy are two different things.  The stock market is sometimes hallucinatory, but it’s usually anticipatory.  What’s important here is what most stocks are doing, and for now most days they go higher.

Suddenly everyone has noticed the market is broadening.  Then, too, you have to ask relative to when?   We see this as pretty much a function of the impressive move in the energy complex –mindful that there are many stocks here – and the stabilization in the banks – again, many stocks here.  Getting back to time frames, to look at the Russell (1966) or the Equal Weight S&P (154), while much better, they’re only back to their February peaks.  Mind you we’re not complaining, for now we’ll take progress over perfection as we have become fond of saying in this market.  More important in many ways is the number of stocks above their 200-day, a good proxy for stocks not just going up, but going up enough to be in uptrends.  There was a rather dramatic jump last week to 63% versus only 50% the prior week.  It also remains below its February peak, but there’s that progress thing again.  Another important aspect of these numbers – 70% historically has said bull market.

Gold it seems has little to do with anything.  It certainly hasn’t proven an inflation hedge, or a hedge of any sort against the war in Ukraine – what did those oligarchs do with all their money?  Where there is some rhyme or reason is the correlation between the dollar and Gold, among other things.  And, indeed, the dollar has turned weak– recently dropping 3% in just five days to its lowest level of the year.  Weakness here typically begets even more weakness.  Pretty much tick for tick with the dollar, Gold shares have improved with most now above their 50-day averages.  This would include the ETFs, GDX (31) and GDXJ (38).  Gold also has seasonality going for it.  Between early July and early October gold is up some 63% of the time, with the average gain outstripping the average loss, according to SentimenTrader.com.

Gold may be in its own world, but that is not to say other commodities haven’t come to life as well.  We’re thinking here of the basics like Copper (COPX-40) and Steel (SLX-67), XME (52) is illustrative as well.  This seems another indication economies are not in such bad shape.  Of course, we contend that shows up foremost in stocks that would seem sensitive here.  You know most of them by now, but the PAVE ETF (32) covers them pretty well.  To look at Lincoln Electric (210), who knew AI entailed that much welding?  To judge by the ETF, PHO (58), one of the best acting commodities is water.  And Bitcoin has excelled of late, helped by the seal of approval from your good friends at Blackrock.   If overcoming adversity tells a story, so far so good for Bitcoin.

Have you noticed the reluctance on the part of most to call this a bull market?  That’s possibly explained by the inverted yield curve, the hawkish Fed and earnings worries.  There’s the fear some other shoe is about to drop.  Meanwhile, it certainly acts like a bull market, though one which has evolved in an unusual way.  Most would tell you the low was last October, and true enough for the averages.  For most stocks, however, the low was last May-June.  At a typical bear market most stocks make their lows together, not so this time.  Consequently, the uptrend has evolved differently.  And then there was the banking mishap in March, which also served to confuse things.  They say bull markets climb a wall of worry.  And they say bull markets don’t give you a good chance to buy.  That sounds a lot like this market, though Thursday did remind you even bull markets have their corrections.

Frank D. Gretz

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DJIA:  34,395

It is said the prophet enters every undertaking with fear and trepidation … and so is always successful.  The market, however, seems not to worry while the rest of us do.  Seems a propitious backdrop.  The CPI threw the market a bone on Wednesday, but more often than not news has been more against it than for it.  Then, too, we would be the first to say markets make the news.  Bless their heart, the Fed is nothing if not persistent in it’s hammering.  Yet, the uptrend has been amazingly persistent, not just in terms of the market averages, but the average stock as well.  We had expressed some concern about Regional Banks and by extension Commercial Real Estate.  For now the stocks have so far overcome even that fear.  Granted stocks are not cheap, when are they ever in any uptrend like this?  When the trend changes that’s when not cheap matters. 

The market often defies simple logic, in this case by ignoring gravity of sorts.  The market seems at peace with the world, or at least resigned to whatever discomfort it sees.  It’s easy to be concerned with rates and earnings, but why if the market itself is not.  If you define a pullback by a decline from a 20-day high, there have been no pullbacks larger than 5% or even 3% since March.  The current streak of some 70 days since the last 3% pullback ranks in the top 7% of all streaks since 1928, according to SentimenTrader.com.  While the mere recognition of this may cause you some concern, history seems to suggest otherwise.  A distinction has to be made between markets that are trading at a multiyear high, versus a one-year high.  In the case of the former, extreme confidence seems to set in, resulting in poor returns.  However, that doesn’t seem to happen when stocks are trading at a one-year high as the S&P then has a history of continuing to rise.

The real news in the last week hasn’t been AI, it’s been OI-H (326) – that is, Oil.  Many of these stocks have been improving for some time, but last Friday they didn’t just break out they blew out.  A distinction needs to be made here between Oil and Oil Service/Drillers.  It’s the Schlumbergers (57) more than the Exxons (105) that had the big moves. Here again, more evidence of broadening participation.  Meanwhile, what’s wrong with those econ-sensitive stocks?  How can they be bumping up against their highs when there’s a looming recession?  It would seem the answer might be what recession?  Parker Hannifin (399) and Fastenal (57) are but two of the many.  FAST makes nuts and bolts – very techy, techy.  PAVE (32) is an ETF that covers several of these names.

Meanwhile, they’re really killing Tech.  It must have been about four or five weeks since stocks like Nvidia (460) and Adobe (517) made new highs – what a drubbing!  We mention these two names because to look at the charts you wouldn’t know one from the other.  The weekly charts show a spike-like move higher a few weeks ago, followed by a four-week consolidation.  You might want to write this down – stocks don’t go straight up.  Rather, this is about as good as it gets – a spike up and a high-level consolidation.  Another way to think of stocks like this is the good stocks, like good markets don’t give you a good chance to buy.  Hence their shallow corrections. Conceptually speaking, when it comes to stocks like these the first time you think they’re done, you’re wrong.  The second time you think they’re done, you’re wrong again.  By the third time you don’t even think it, let alone say it out loud.

Back in the last bull market we used to say most days most stocks go up, and it seems so now.  We understand the narrow market argument, we just don’t think it’s the negative many try to make it.  To some extent the market can always be considered narrow – there’s the leadership stocks, and the rest.  Granted things are a bit extreme this time but there’s an important mitigating factor.  The rest of the market is at least going up – look at the A/D numbers.  It would be a different story if were Tech and only Tech, and the rest were going down.  That’s simply not the case.  The breakout in Oil Service stocks is an important change, which obviously suggests participation is broadening.  In terms of performance the market has been narrow, in terms of participation it has not.

Frank D. Gretz

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DJIA:  33,922

What gets downgraded most days, goes up most days … and is not Ford (15) or GM (39)?  It’s that other car, battery, AI, autonomous driving, etc. company.  Talk about the fickle finger of Funnymental analysis, with its holy grail of value, Tesla (277) is overvalued and Nvidia (421) is not?  As we have suggested many times, stocks and markets sell at fair value twice – once on the way higher, and once on the way lower.  The trick is to figure out whether they’re on their way to becoming more overvalued or more undervalued.  The figuring out is called following the trend.  We trade so we use the weighted 21-day we’ve referred to recently.  For those of you who don’t mind waiting for instant coffee, the 50-day is probably best.  While for the moment we’re praising Tesla, we’re fully aware the stock did sell for 400 back in late 2021.  That’s why discipline is often more valuable than thinking.     

Does the market make the news, or does the news make the market.  Technicians, of course, hold it’s the former.  In good markets, there is no bad news.  When the news is bad, in good markets it’s construed as good, or just simply ignored.  This market has been a good example as it continues to ignore the Fed’s berating, at least until Thursday.  The real point is that it’s not the news per se, it’s how the market reacts to the news.  When it comes to individual stocks, we don’t really care about earnings, but we do care how stocks react to those earnings.  An interesting example recently was FedEx (248) back on June 20, when the company apparently disappointed.  The stock did react temporarily, only to quickly move back to its high and break out.  Because of its Rorschach test like long-term pattern, the stock has never been one of our favorites.  That said, the pattern we just described, the fakeout move to the downside and subsequent breakout, is pretty much money in the bank.

Sell in May and go away?  That worked fine provided you were back June 1 when the S&P broke out.  Seasonal tendencies are but one of the things to consider in analyzing markets, certainly not the most important.  Most important, of course, is basic supply and demand – the trend.  Like many aspects of market analysis often there’s a message when markets don’t follow the probabilities, sell in May being a perfect example.  We’re also intrigued by the seasonal probabilities of natural gas, which from now until almost the end of July show only a 15% chance of advancing.  The average loss during this period is more than twice the gain.  Nonetheless, the ETF here, UNG (7) is basing and would break out above 8.  It also seems encouraging that a couple of related stocks like Southwestern Energy (6) and Comstock Resources (11) are acting better.         

So, where’s the worry?   Sticking with the technical stuff, we’re a bit surprised by the lag in stocks above their 200-day, a measure of trend as well as direction.  The numbers here will vary depending on the database – all NYSE stocks versus S&P components showing 53% to about 63%.  The real issue here, however, is these numbers are well below the 74% of last February.  Given the improvement in the S&P Equal Weight and the Russell 2000, the divergence seems surprising.  Of course, it likely lies in the poor behavior in banking shares back in March.  Throw in Energy, and you have a lot of issues below their February levels.  We hesitate to make excuses for the numbers, but we will at least as long as the A/D Index continues to show improvement.  In other words, for now we’ll take progress over perfection.

The key to a healthy market is participation.  During the recent 2% setback A/Ds were negative for five consecutive days.  Weakness happens, weakness doesn’t kill uptrends.  What kills uptrends, at least eventually, is weak rallies.  Since that little setback, A/Ds turned positive for six consecutive days through Tuesday.  It didn’t necessarily have to be that way; those numbers could’ve turned flat or at least mixed – it could’ve been a weak rally.  We will see a weak rally eventually and it will be a warning, but sufficient unto the day is the evil thereof.  We can see the numbers actually getting better along with stocks above their 200-day with a little more improvement from the banks and energy.  Thursday’s weakness was nasty but again, weakness happens, it’s the recovery that will be important.  Meanwhile, the Bitcoin stocks have had a good week as have some names in Quantum Computing.

Frank D. Gretz

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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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