DJIA:  30,038

Scoop…there’s inflation.  Let them know at the grocery store.  And remember, you heard it here first.  Another scoop, the Fed is tightening.  Meanwhile, someone should tell the market which doesn’t seem to get it.  Then, too, we’ve long noticed the market sees what it wants to see, and trods along on its own discounting schedule.  A couple of times over the last several weeks the market has seemed set up to rally when bad news reared its ugly head.  What we don’t really get is the bad news isn’t exactly new bed news.  Still, things may not be as bad as they look, especially if you’re not just looking at Tech.  It’s Tech that has taken a beating of late, while many stocks have held their June lows.  We understand that holding isn’t rallying, but rallies start somewhere.

While we don’t care much for predictions, an easy one might be more volatility.  Over several time frames the number of 1% swings in the S&P has exceeded anything in the past decade.  Even the Wall Street Journal recently took note of the violent reactions to several earnings reports.  Then, too, they say volatility occurs at tops and bottoms.  Despite the volatility some bemoan the inability of the VIX (32) to Spike. The VIX, or the CBOE Volatility Index, reflects the weighted average prices of options on the S&P.  It is calculated using the S&P 500 puts and calls that mature in roughly the next 30 days.  There are several reasons for the somewhat subdued VIX.  One is that hedge funds and institutional investors have enhanced returns by selling volatility, a potentially risky move for markets.  In any event, even without the anticipated spike, the VIX is elevated to the point where recent lows have occurred.

Does something have to break? The answer of course is no, and the answer of course is something probably will.  Jamie Dimon pretty much suggested as much.  He also suggested the S&P could fall another 20% from here which, if you’re expecting an accident or two, should hardly come as a surprise.  If you make a list of all the things that worry you, in six months’ time the list is often laughable.  Usually it’s where you’re not looking that gets you.  The three day 22% drop in the UK gilts could be a problem that doesn’t go away.  And the dollar itself could always break something, as its strength has had a significant impact on the countries that have to fund in dollars.  And to look at the semiconductor stocks, this chip issue with China seems unlikely to end well.  Then, too, markets don’t bottom on good news.

Adobe trades around 290-300, down from an August high around 450.  The all-time high late last year was around 700.  The stock is more than 25% below its 200-day average, but it’s the 50-day that seems intriguing.  The price difference there is some 15% which is rare, and testament to how battered Tech has become.  We don’t believe in catching falling knives, but this is one of those stocks arguably still in a long-term uptrend.  And its reversal Thursday seems a positive for both it and Tech generally.  Intel (26) also is stretched relative to its 50-day, but there’s not the long-term uptrend there.  Still the best acting area is energy – the oils.  The idea that strength is predicated on production cuts seems a bit of a stretch.  When did everyone start believing the Saudis, oil has outperformed all year.

Pick a number, any number.  The jobs number, the CPI, PPI, whatever it doesn’t matter.  We remember when everyone hung on the weekly money supply number, or remember the semi book-to-bill?  The number doesn’t matter, it’s how the market reacts to the number.  Good numbers sometimes have had bad reactions, bad numbers good reactions.  That’s when you learn something, when the market doesn’t do what it should, so to speak.  Which brings us to the market over the last few weeks.  The market seemed set up to rally but at least so far, has not.  Of course, who are we to say what the market should or should not do.  However, we have often observed when the market has had a chance to go up and does not, or a chance to go down and it does not, it often has proven important.  The market had a chance to go down on Thursday, but did not.

Frank D. Gretz

Click to Download

DJIA:  29,926

Even convicted criminals can be paroled … why not a bull market.  The bull market has done its share of hard time, including a stint in solitary of sorts – recently only one percent of Nasdaq issues were above their 10-day average.  And that’s what these reprieves are all about – getting the sellers out of the way.  In markets like this oversold doesn’t matter, what matters is getting to the point they’re sold out.  Part of that process seemed evident a week ago when energy took a hit, along with Apple (145).  Bear markets get to everything in the end, but when they do that typically is the end, that last push to the give up phase.  We don’t mean to say the bear market is over, we don’t think it is.  Then, too, we like to remind ourselves every new bull market began with a bear market rally.  Sufficient onto the day, but parole ends when these rallies do something wrong.

As usual something wrong, so to speak, involves lagging participation.  It’s not the bad down days, it’s the bad up days that cause problems.  The numbers so far have been exceptional, but that’s to be expected from a low like this.  It’s pretty much what they look like from here, the all-important follow through.  We have our list of favorite charts, but off of even an important low, down the most often turns to up the most, at least temporarily.  The ARKK ETF (40) is loaded with poor charts, but could do well if Tesla (238) behaves.  The ETF’s performance overall actually has some positive implications for the market. When the major averages went to new lows last week, weekly 12-month new lows did not – a positive divergence.  As it happens, ARKK held its July low which, in turn, was above its May low.  This means that despite the weakness in the averages, the market’s weakest stocks have been holding.

Slum-Burger – how many on Wall Street learned to speak French.  It seems a telling commentary on oil’s strength they finally got around to Schlumberger.  There was a time when if you wanted to play oil, SLB (43) was the go to stock.  Now it’s stocks like Devon (72) and EOG (128).  Oil has led right out of the gate, perhaps not surprising in that the last to get hit are the first to come back.  Oil started the year leading which historically has led to happy endings.  OPEC has helped recently, but this again seems a case of the market making the news.  Had the stocks not wanted to go up, OPEC can be pretty easy to ignore.  Few believe oil is going away anytime soon, but somewhat surprising are recent numbers showing fossil fuel at 81% of total fuel consumption, down a whopping 1% in ten years.  And to further pique your fundamental interest, we are told Exxon’s pre-cash flow last quarter was the same as that of Microsoft (247).  The ongoing technical appeal, of course, the stocks remain under-owned.

We have displayed a number of positive charts, names like Aspen Technology (254), Cheniere Energy (173), Digi International (38), Humana (499), Eli Lilly (333), Snowflake (189), Sarepta Therapeutics (115), Shockwave Medical (280) and Vertex Pharmaceuticals (299), though there are others.  Remember, too, stocks like Humana and United Health Group (519) with their long term uptrends should be stocks for all seasons.  If this rally proves another false dawn, those uptrends should provide a backstop of sorts.  Meanwhile, with back to back days of more than 5-to-1 stocks advancing, most stocks are finding relief.  It will take time to see how much might have really changed in terms of leadership.  There is a change in gold, though an insipid one.  And as we pointed out last time, one that seems dependent on the likely peak in the dollar.  We looked at defense stocks as a bit of a nuclear hedge, but charts there are unremarkable, except perhaps for Northrop (485).  Though not a particularly good chart, we are intrigued by Palantir Technologies (8) in light of their contribution to Ukraine‘s success.  It’s one of those companies that if you know what they do, they have to kill you.

Hope springs eternal.  And once again the hope is the Fed can’t go as far as they say they will.  The market became sold out, yields came in and we have a rally.  For many the worry now is earnings.  If you don’t think earnings will be bad, you should be falling all over yourself to buy.  The market by most standards would be considered cheap.  If like most you believe earnings will be bad, isn’t that why the S&P had that little 28% pull back?  Disappointing earnings won’t be a surprise, the question is whether those earnings will disappoint investors.  How much bad is priced in?  The rally is off to a more than decent start, but it’s follow through that’s important.  The backdrop here is similar to June.  The low back then was June 16, the real uptrend began July 20.  Some volatility for now would be more the norm than the exception.

Frank D. Gretz

Click to Download

DJIA:  29,225

It looks like a low, it feels like a low, missing…is a low.  As we like to remind ourselves, and anyone who cares to listen, lows are made by sellers.  We’re not looking for a market that’s oversold, we’re looking for a market that’s sold out.  Sounds a little like double talk, but consider the numbers.  When it comes to Tech, it’s the worst selling in some 30 years.  For the NASDAQ 100, as of Monday night only 1% of stocks were above their 10-day moving average, only 4% were above their 50-day, and only 12% were above the 200-day.  Of course these numbers could go still lower, but the point is these are numbers seen at lows.  By definition, sold out means stocks should lift, and it’s the lift part that’s missing.  Since the inception of the NDX in 1985, there have been 20 other days with readings this low.  Not surprisingly, after the others there was plenty of volatility, but prices eventually moved higher.

These measures of market momentum are one part of the picture, the other being market psychology or how investors react to that momentum.  Here the look is pretty positive as well.  As you might expect, with the weakness comes the fear of more weakness, and that shows up in the Put-Call Ratios.  This is a measure we like because it gets at what people are actually doing, not just what they’re saying.  For the big Tech stocks, the 50-day Put-Call Ratio is above .85, the highest since the data was available back in 2013, according to SentimenTrader.com.  By the time traders buy this many Puts you have to assume they’ve done quite a lot of selling, which again gets back to the idea that it’s the selling that’s important.  As for what traders are saying, only 8% of postings about the NAZ have had a bullish leaning over the past 20 days.  That’s the second lowest in a decade.

Market peaks are gradual, with stocks and groups peaking a few at a time.  Hence, the peak in the A/Ds ahead of the market averages.  Market lows typically are violent events, coming with volume, volatility and, of course, a washout.  This market has aspects of both.  Certainly the recent string of six days where declines outpaced advancing issues by better than 5-to-1, qualifies in the violent part.  Yet you can argue the selling was not all that intense.  The Dow, S&P and the Advance-Decline Index all reached new lows this week, undercutting those of June.  However, looking at 12-month new lows for individual stocks, the numbers were considerably fewer, suggesting the selling was less.  This is what is meant by a secondary low, and can be a positive setting for higher prices.  Naturally, that depends on how things play out from here, but it’s not insignificant.

When it comes to intangible signs of a low, the bell seemed to ring last week when the commodity stocks were slammed.  These had been holding together reasonably well, so the idea here is that of getting to everything.  Bear markets get to everything in the end, but when they do it typically is the end.  We might throw in Apple (142) here as well.  We did notice Wednesday that gold shares acted better, speaking of false dawns.  This may be a stretch, but gold could be sensing a turn in the dollar’s relentless strength.  There’s certainly no sign of an important turn here, but there certainly is every sign the trend is stretched.  We spoke above of the NAZ and its moving averages, much the same can be said of the dollar in an opposite way.  The Dollar ETF (UUP-30) is 5.8% above its 50-day versus 4.2% when there was a month long peak back in mid-July.  A strong dollar is bane to most commodities.

Overall the market still has some headwinds, as they like to say.  The biggest, it’s fighting the Fed.  That means either the Fed gets its inflation number, which will not come easily or quickly, or the Fed flinches, which means things get real bad, including an accident or two.  And there’s the matter that for the averages this bear market only started in January.  For a market which is in the process of unwinding five or more concurrent bubbles, nine months just does not seem time enough, despite the extent of the weakness.  What we’re talking about in terms of a low is something like June, a temporary washout.  Something even less than that 15% reprieve would look pretty good right now, and it’s doable.  Even bear markets become temporarily washed out, even bear markets have their counter trend rallies.

Frank D. Gretz

Click to Download

DJIA:  30,961

So who are you going to believe … the numbers or your eyes?  The numbers were almost compelling.  Three consecutive days with 87% of stocks advancing last week.  That’s rare, having last happened after the low in March 2020.  Then there’s the percent of stocks above their 10-day average.  That number cycled from fewer than 10% to more than 90% in a week.  Another pretty much sure thing in terms of higher prices.  So was Tuesday just our imagination?  Did our eyes deceive us – wish our P&L had.  It’s one thing had the numbers been weak going into the CPI, a couple of “bad up days” or something.  We like to think it’s not the news that makes the market, it’s the market that makes the news.  Good markets can almost ignore bad news, this market certainly did not.

It has been a tough year including a tough year for the technical indicators.  Going into Tuesday we had seen a multi-day buying spree – buyers were clearly in control.  Tuesday’s reaction to the CPI, however, was over the top.  Selling pressure within the S&P was so severe that fewer than 1% of stocks in the index advanced.  That ranks among the worst days in history.  Still, all may not be lost.  Markets have become more volatile and as we say about good up days, they’re just one day.  And there is some history to negative reactions to economic reports, including the CPI.  Stocks tend to stay weak for a few days, which seems expectable.  Over the next month or so they tend to rebound, so the history goes.

So this year has been riddled with technical false starts.  Few times in history have the A/Ds been so positive leading into a day with such overwhelming selling pressure.  There’s always a risk in reading too much into one day, knee-jerk sort of reactions.  Then too, the numbers say the report may have shifted investors’ mindset.  They now suddenly believe what the Fed has been screaming.  And technically speaking, it’s discouraging when markets have their chance to rally, their chance to ignore bad news, and fail to do so.  That’s what you get in bear markets.  The good numbers did work in June, and though disappointing in the short term, the buying spurts have had a good record over a year’s time.  You just have to put up with the hassle in between.

Cramer likes to say there’s always a bull market somewhere, an observation with which we tend to agree.  In this market, however, that’s a stretch.  The closest thing we see is oil, and that at best is still in the correction from its June peak.  Oil led out of the gate in January and for oil that typically implies a good close to the year as well.  And oil still is only something like 4% of the S&P, not exactly over owned.  The fact is, however, even the best of them like DVN (69) or the XLE ETF (80), are consolidating beneath those June highs.  Recently turned best chart in energy is Cheniere (172), where the symbol LNG says it all.  Green energy works as well, see for example, ENPH (312) or the Global Clean Energy ETF (ICLN-22) or the Invesco Solar ETF (TAN-85).

Despite what Tuesday’s market would have you believe, the peak for US headline inflation remains intact – the highest level to date was still June.  Meanwhile, the low in the S&P set that month also remains intact.  Yet, everyone seems in a panic.  Just imagine if inflation has peaked, stocks should rally.  Research by Larson of Sanford Bernstein shows since the end of World War II, the S&P has averaged a decline of 5% in the 12 months before inflation peaked, and a 17% gain in the 12 months after the peak.  The problem here, of course, these are averages.  Meanwhile, this time around inflation is one thing, the Fed another.  Powell’s speech at Jackson Hole made clear the Fed’s resolve to fight inflation.  The recent strength had been based on the hope for some policy moderation.

Frank D. Gretz

Click to Download

DJIA:  31,774

The stock market … where simple logic goes to die.  Going into Tuesday the market was down six consecutive days.  That made it tied for the second longest losing streak of the year.  Simple logic would suggest – time for some sort of rally.  While that didn’t happen, there’s a more important implication to these losing streaks.  More often than not, rather than an end to the weakness, they’re a start to the weakness.  There was another six day negative stretch in early April, which marked the end of the March rally.  And, of course, there was a ten day stretch of negative A/Ds in the middle of January which got the bear market rolling.  What makes the recent stretch particularly worrisome is its intensity – three of six days declining issues outnumbered those advancing by 5-to-1.  That’s real deal kind of selling.

The recovery from the June low died at the S&P’s 200-day average.  You would almost think there’s something to this technical analysis stuff.  It’s easy to make a big deal of this rejection because of a couple of similar periods, those being 2001 and 2008.  Going back, it also proved ominous in 1973 and 1930.  Then, too, there were nine times it didn’t much matter, and seven when the market pressed on to double digit gains.  Barron’s made an interesting point this week, quoting Sundial’s Dean Christians.  The S&P’s 200-day now has been declining for 90 consecutive days.  This has happened 23 other times since the beginning of 1930, and the S&P has dropped an average of 5.8% over the next six months following the 90-day mark.  The S&P is below both its 50-day and 200-day.  More importantly, the 50-day is below the 200-day.  For the S&P all the gains come when the 50-day is above the 200-day – something that was last case in early March.

Do as I say, do as I do, or better still, do the opposite.  According to IBD the AXS Short Innovation ETF (SARK-56), which does the opposite of Cathie Wood and her flagship ETF, is the number one performing non-energy ETF this year.  As of Friday SARK had returned some 54% – there’s no shortage of lousy stocks in the ARK Innovation (ARKK-43) portfolio.  The average decline is 53%, and all but one of the 34 positions is down this year.  Tesla (289) is the fund’s top position at 10%, and off only 20%, which in this market is not unreasonable.  A biotech, Invitae (3), is the biggest loser down some 80%.  Then, too, if you’re going to bet on “innovation,” especially in biotech, you’re always going to be rolling the dice.  We’re not here to kick the fund while it’s down, but we are here to kick one of its apparent themes, “stay at home.”  The fund’s second largest position is Zoom Video (80), down 55% this year.  Then there are names like Roku (69), Exact Sciences (39), Teladoc (32) and Shopify (32).  Things change.  Compare these stay at homes to something like Ulta Beauty (445).

These downward market spikes produce conditions everyone likes to call, “oversold.”  If you look at a 10 day average of the A/Ds, but it could be any market measure, it will oscillate above and below the zero line.  Measures like this in fact are often called oscillators.  These work some 80% of the time, but you end up losing 80% of your money.  They may work in a trading range, a buy the dip kind of market, but they bury you when the market trends.  You buy the dip way too soon, like January, or you sell way too soon, like before January.  The indicators that work, so to speak, are what are called trend following, basically the moving averages.  Depending on the time period, they are subject whipsaws, but you will always be in an uptrend and out of a downtrend.  Meanwhile, good markets get overbought and stay overbought, markets like this tend to stay oversold.

Relief at last!  Wednesday’s 3-to-1 up day wasn’t the best, but it wasn’t what we call a “bad up day.”  Those are days up in the averages with flattish A/D numbers.  Thursday wasn’t Wednesday and in fact it was a borderline bad up day – the Dow up 200 with only 500 net advancing issues.  Good recoveries follow through and remember, most of the best one day rallies come in bear markets.  Still, we’ll give peace a chance.  Meanwhile, it’s difficult to really call anything leadership here.  We have been hopeful about oil and remain so, though they didn’t exactly cover themselves in glory this week.  The related solar/clean energy stocks act well as does uranium.  Biotechs seem to be rolling over, but names like Sarepta (119) and G1 (16) look interesting.

Frank D. Gretz

Click to Download

DJIA:  33,294

Four-to-one and six-to-one down … sounds like a shot across the bow.  Those were Advance-Decline numbers last Wednesday and Friday, followed by another five-to-one down day on Monday.   We know we said the bad down days aren’t the problem, but these kind of numbers get our attention.  A week earlier we had seen a couple of five-to-one up days.  It’s rare to see things change so quickly.  Through Monday the Dow had lost over 1000 points in four days, while the Advance-Decline Index lost 5000 net advancing issues.  That’s a lot to make up and it’s important that it be made up.  A weak rally, a few bad up days, and we will be left with a divergence – higher highs in the averages and lower highs in the A/D index.  Sufficient unto the day, but divergences rarely end well.  It’s no time for bad up days.

It’s not exactly raging, but the debate goes on – new bull market or bear market rally?  If you believe it the latter, you’re not too happy having missed the 17% rally in the S&P, and more in the Naz.  But to answer the question – who cares.  Back in June there was ample evidence stocks were washed out.  And the rally has turned out to be quite credible, call it what you like.  The S&P 500 is yet to reach a new high but an Advance-Decline Index of the 500 component stocks has made a new high.  This configuration has been followed by a new high in the S&P Index itself every time – more of the average stock leading the stock averages.  Yet, this time doesn’t have to be different for things to go wrong.  What could go wrong is simply a change in the pattern, not just for the S&P and its stocks, but for the market as a whole.  Bad up days mean a narrowing market, and narrowing markets lead to corrections.  Would you call down 10% a test of the low or a correction in a bull market, and does it matter.

Energy shares have had a good year, though not exactly one that could be called linear.  As measured by the SPDR ETF (XLE-84), the shares are up some 45% this year, including a little 26% setback from their June peak.  Having tested the 200-day a few times, earlier this month most recently, the move above 80 seems to have reestablished the overall uptrend.  At still only about 4% of the S&P by market cap, the stocks aren’t exactly over owned, despite their 9% share of S&P earnings.  It also seems worth noting the stocks are outperforming crude, which, based on the US Oil Fund (77) is in a trading range below its 50-day.  In our experience, when it comes to commodity versus stock disparities, the commodities more often than not follow the equities.  A similar pattern to that of XLE may be unfolding in the SPDR Metals and Mining ETF (XME-53) as it consolidates just above the 200-day.  A move above 53 would suggest a resumption of the overall uptrend there.

Peloton (11) could be the poster child for stay at home, and for its subsequent unwind.  The stock rallied 20% Wednesday on news of its hook up with Amazon (137).  We get the benefits but if you don’t want a Peloton, does it really matter who’s selling it?  We don’t mean to pick on Peloton, or for that matter, Zoom Video (86) which missed earlier in the week.  And we won’t even pick on ARKK (46) which is loaded with this stuff.  ARKK, however, has become interesting analytically.  The ETF itself was the poster child for the excesses of stay at home.  When it put in its low on May 11, well ahead of the S&P low June 16, that seemed encouraging – the excesses had been wrung out.  The near 50% bounce off the low also seemed impressive, though that retraced only a few percent of the stock’s decline.  More importantly, the ETF now is back below its 50-day, not a good sign for it and perhaps the market as well.

Finally it’s showtime!  Of course by the time you read this, it will be showtime dissecting time.  We find it hard to believe anything said will differ greatly from what the rest of the crew have been saying for a while now.  And historically these get-togethers have not been market movers, though most have not had the hype of this one.  The real point, however, is it doesn’t matter what Powell had to say, what matters always is how the market reacts to what he said.  The news doesn’t make the market, the market makes the news.  The market is entitled to the recent spate of weakness we’ve seen, it’s just that we didn’t like the character of the weakness.  Thursday’s 3-to-1 up day was a shift again, and more of what we would like to see.

Frank D. Gretz

Click to Download

DJIA:  34,000

Forget the bad down days … worry about the bad up days.  Wednesday was certainly the former.  The Dow muddled around all day before closing slightly lower.  Advance-Decline numbers, however, were 4-to-1down, our idea of a bad day.  The market can live with that, it’s those days when the averages rise and the A/Ds are flat that cause problems.  This measure of the average stock has probably been this market’s best feature.  The A/D Index for the 500 stocks in the S&P just reached an all-time high, impressive in its own right, but more impressive is it has done so while the S&P Index itself remains some 10% below its own high.  This divergence, new high in the A/Ds versus the Index, has led to higher prices one year later every time, according to SentimenTrader.com.  Similarly, stocks above their 50-day average have moved above 90%, a level which also has led to higher prices every time.  Over the years betting “this time is different” has cost a lot of people a lot of money.  Then, too, you never know.  Heraclitus, the famed technical analyst of 550 BC once observed, you never step in the same river twice.  

So bad down days aren’t the problem, they are to be expected.  The market averages don’t go up every day and when they go down it’s more than likely more stocks will decline than advance.  A little less than 4-to-1 down would have been nice on Wednesday, but it’s more about the next up day and how the numbers recover.  Rallies quit when they start to lose participation.  Monday was a bit of an interesting day in that the Dow reversed to rally some 150 points while the A/Ds were barely positive.  The overnight China news sent oil and other commodities stocks lower, and financials seemed weak as well.  Simply put, there are a lot of commodity stocks and a lot of financial stocks to the point we were a little surprised the A/Ds were positive at all.  That said, you don’t want to start making excuses for the numbers.  And that said, typically it takes a pattern of bad up days to cause problems.

Last time, courtesy of the Leuthold Group, we pointed out that the S&P outperforms when Tech outperforms.  While that may seem obvious, less obvious is Tech performs best when it performs slowly.  The Nasdaq Composite and other Tech indexes have rallied more than 20% off their 52-week lows.  The rally took 40 days, relatively long by historical standards.  These rallies that took longer, however, had more staying power, according to SentimenTrader.com.  When we think of good rallies this seems somewhat counterintuitive – good rallies don’t give you a good chance to get in, and all that.  Especially when it comes to Tech, however, the quick rallies, even if 20%, often can be about short covering.  The more drawn out rallies are where, dare we say it, the fundamentals have a chance to evolve.  If you’re keeping score, this seems another plus on the rally’s side.

There once was a time we used to talk as much about volume as we do now about A/Ds.  That was when volume was NYSE volume, and that was pretty much it.  The importance of volume cannot be overstated.  The problem for us became, whose volume?  These days volume seemingly comes from everywhere.  For sake of consistency, and because it is in many ways THE market, we’ve been tracking SPY (428) volume, that’s volume in the SPX ETF.  The market and stocks should go up on rising volume and fall on declining volume, it’s that simple.  We recently resurrected an indicator combining volume with A/Ds.  By now you know we consider A/Ds more important than the averages, so we have an A/D index using only days when volume is higher than the previous day’s volume.  The indicator bottomed on 7/14, but it’s the direction that’s important.  Since then it has been in a consistent uptrend.

As the A/Ds would suggest, there’s more to this market than just Tech.  Indeed, at what might be thought of as the other end of the spectrum, Staples have performed quite well.  And utilities these days are not your father’s Oldsmobile.  In any event, on the back of green names like Nextera (90) and Constellation Energy (82), XLU (78) is probably outperforming XLK (151).  The area we really think deserves attention is energy, and probably commodities generally.  Energy led the market into early June before declining sharply into mid-July.  Since then most of the stocks, and ETFs like XLE (79) have moved back above their 50-day averages, which now should act as support on any pullback.  With the commodity itself having been under pressure lately, the hype seems to have corrected as well.

Frank D. Gretz

Click to Download

DJIA:  33,336

New bull market or bear market rally… does it really matter.  This remains a technically sound rally.  Sure Wednesday saw the market rip higher, but with the Dow up only 29 points on Monday advancing issues outnumbered decliners by better than two to one.  That’s not how markets get into trouble.  Bear market rallies end but so too do bull markets.  Those numbers will flip – up averages and flat A/Ds – before important weakness.  The bear market rally thesis also seems to be flipping, in keeping with our long-held belief that opinions follow price.  And prices themselves are on the edge of being convincing.  As of last Friday the S&P had retraced 43% of its decline and was 13% off its low.  With maybe one exception, that doesn’t happen in bear markets.  Similarly, stocks above their 50-day average have cycled from 5% to 75%, a move that typically produces sustained rallies.  Call this what you like, it’s better than not bad.

When it comes to stocks above the 50-day average, the Holy Grail is 90%.  That has happened 30 times in 70 years, and since 1942 the market was higher one year later every time, according to SentimenTrader.com.  It’s the idea that strength begets strength, and strength begets opinion change.  There almost seems a little FOMO in the air.  It’s one thing to see stocks in general go up, it’s another to see stocks you wanted to buy go up without you.  Opinions certainly have changed in the world of option traders.  Not that long ago they were loaded for bear but lately have seen the light.  If this is a new bull market that’s not a problem, you have to expect traders to be bullish in uptrends.  If a bear market rally, that’s another matter.  But if the latter, we would have expected momentum to be changing around now as well.

Semiconductors remind us of that guy with a can of tuna.  The can keeps being bid higher and higher until finally he opens it to find – it’s just a can of tuna.  It’s explained to him it wasn’t for opening, it was for trading.  Semis never seem just right – there’s always too many or not enough.  Years ago we remember shorting Micron (62) because even we had figured out the so-called shortage then wasn’t real.  Even we had figured out everyone had double ordered.   Finally with the stock around 90 we gave up because the stock just wouldn’t go down.  We shorted it again around 30 when it was growing about 40% per year and selling for about four times earnings.  Yet that was a much easier trade.  It’s hardly an insight to say semiconductors are important in many ways.  It’s just that they sometimes trade like tuna.

In a database we use there are over 500 stocks in the category of Biotechnology.  After going through them recently we have two thoughts.  First, we really need to get out more.  The second, there are roughly 400 must buys.  Granted many of these you could buy by the handful – they are two dollar stocks.  And for most it’s just about sold out bounces.  But it seems more than just that, and in a way reminiscent of Energy at the start of the year.  To that point, how much Biotech do you own?  We are still positive on Energy particularly those that have moved above their 50-day averages.  We feel the same about Biotech, which really had become underloved and likely underowned.

A thought the other day was why not just buy Microsoft (287).  If we’re not going to overthink this bull market/bear market rally thing, why overthink what stocks to buy.  It may be hard to find a semi in a long-term uptrend, it’s not hard to find other Techs in long-term uptrends, and Microsoft is one of them.  And the fact is, market uptrends don’t get far without Tech.  Data from The Leuthold Group shows over the last hundred years, but who’s counting, the S&P 500 only outperforms when the Tech sector does so as well.  Of Tech’s leadership cycles, only the period between December 1964 to November 1967 saw the S&P make only modest gains.  The rest saw gains of up to 36%.  Meanwhile, the Fed seems to be going out of his way to lean against the rally.  Perhaps they’re human after all – they were late to tighten, they don’t want to be wrong again by being early to ease.  May be time to fight the Fed.

Frank D. Gretz

Click to Download

DJIA:  32,530

The low was more than a month ago … but it had been hard to tell.  The averages are up some 10%, and the S&P is above its 50-day for the first time since April.  Moreover, more than 50% of S&P stocks are above their 50-day.  At the low that number was 2% – clearly the charts are improved.  However, what seemed to be leadership, pharma and the biotechs have stalled rather than lead.  When the leaders aren’t leading, it’s not much of a rally.  Being over the 50-day is like clearing an obstacle but no guarantee of success.  You’re over that prison wall, but still not in the clear.  For now there are many stocks still dancing around their 50-day averages.  Moving above that level may be no guarantee of success, but it does put the odds in your favor.

To the point “they have stopped going down,” the oil stocks provide an interesting example.  If you look at the Energy ETF (XLE-75), it peaked some 12 points above its 50-day, and for now seems to have bottomed 12 points below the 50-day.  We realize this is hardly in-depth analysis, and if were not above our pay grade percentages would be more appropriate.  Still, if only aesthetically you have to appreciate the symmetry.  Commodity types have suggested oil’s demise is more in the financial world, the futures market, then it is in the world of cash.  Most of us assumed it was about getting out ahead of the recession.  Cash suggests that may not be right.  Natural gas meanwhile is back to its highs.

When you get most people on the same side of the boat, it’s prime time for a little mean reversion.  And that’s pretty much what we have seen in investor sentiment, especially the all in Put buying by small options traders.  And now US consumers generally share that gloom.  The latest survey of households by the Conference Board showed that only 25% of consumers expect stock prices to rise over the next 12 months.  This reading is in the bottom 5% of all months since 1987.  Meanwhile, 46% of consumers expect stocks to drop, ranking it in the top 3% of all months, according to SentimenTrader.com.  The difference between Bulls and Bears is -21%, one of the worst readings in the survey’s history.  Even during some of the worst bear markets, the current level of pessimism has almost always preceded at least a multi-month relief rally

They say the only thing that goes up in a crisis is correlation.  It turns out that Bitcoin and other cryptos made that point. Their correlations to the stock market over the first months of the year have been striking. Despite the ambitious claims of crypto as a diversifying asset, Bloomberg’s John Authers points out it has been increasingly procyclical.  We have wondered in the stock market’s dark days of June, if there might not be a little causality to go with the correlation.  Consensus is the Cryptoverse is too small to have much impact, Bitcoin being only the market cap of a large US company and it would be ranked 10th in the S&P, between Nvidia (180) and Procter & Gamble (148).  According to Citi, most main stream financial firms are waiting for regulatory clarity and are only at early stages of exploring crypto investing, leaving it somewhat isolated from other financial markets.  If crypto’s troubles haven’t spilled over into other markets, it’s clear it’s not immune to those other markets and the factors driving them.

Good rallies don’t give you a good chance to get in, they get overbought and stay overbought, and all the other technical clichés.  This hasn’t been that kind of rally, at least so far.  On top of that, the best momentum typically comes early, not six weeks after a low.  Yet the Naz just had its best day in years and that on the “good news” of a 75 basis point Fed hike.  Or should we give credit where credit is due.  Phooey on FANG, it was Microsoft (276) to the rescue.  And looking at the stock’s action going into those numbers, the news was quite a surprise.  Of course one day is just that, which makes Thursday’s follow-through impressive, that and the positive A/Ds.  Meanwhile, though not the oils or biotechs in terms of numbers, the solar stocks have taken on a whole new and dynamic character.

Frank D. Gretz

Click to Download

DJIA:  32,036

We beseeched the Lord, we summoned the witches … and we finally got a 90% up volume day.  Let’s hope it’s not much ado about nothing.  To rain just a little bit on our own parade, some lows have involved a few of these 90% up days, interspersed with a couple of 90% down days.  Market bottoms can be a process.  Make no mistake, however, Tuesday’s 90% up day is a positive.  Two of the last three days actually have seen better than 87% up volume, and since 1962 that has resulted in double digit gains virtually every time.  Speaking of 1962, this year has its similarities.  Stocks were down almost 20% in the first half of that year, culminating in a similar pattern of 2% intraday declines.  Prices in 1962 went on to rally 15% in that year’s second half.  Even if this year does prove similar, you have to realize volatility is a given.

To go with Tuesday’s 90% day, the market indices were able to push through their respective 50-day averages where, as it often happens, they had stalled.  For the S&P it was its first time back above the 50-days since April.  A move through the 50-day by no means guarantees follow through, and several stocks including Microsoft (265) have danced around their own 50-day for a while now.  For the averages the move is another incremental sign of improvement.  Now it’s important to stay there – the 200-day is around 4350 which, speaking of no guarantees, the March rally briefly surpassed.  As we suggested above, expect plenty of dancing around, hopefully all of it above the 50-day.  Price objectives have never been one of our favorite endeavors.  We would rather go with the idea rallies end when they do something wrong, the obvious here would be lagging Advance/Decline figures against strength in the averages.

Tuesday’s 90% up day was made possible by those former leaders, the commodity stocks.  As measured by the Energy ETF (XLE-72) the peak here was early June, and relative to its 50-day it had become even more stretched to the downside than it had been to the upside.  Again, no guarantee, but something.  As measured by the Metals and Mining ETF (XME-45), commodities in general peaked in late April, found a temporary low in mid-May, and seem to have at least done so again.  What makes this important is that these commodity stocks are many.  It’s difficult to get a 90% up day while they’re going down.  There should be more to this commodity stock rally, if only because of what hopefully will be a rising tide.  Meanwhile, we don’t see commodities back to their leadership position which for now seems a role being played by Pharma and Biotechs.

This week’s positive price action comes against the backdrop of some extreme negativity on the part of traders and investors.  We pointed to the Citi Panic Euphoria Index and its reading of “panic,” and the panic of sorts in analysts’ downgrades.  And small option traders, among the worst market timers, are pretty much all in on a big leg down.  Anyone will tell you these measures of investor sentiment are not for market timing.  Still, if you’re buying put options chances are you have already sold a lot of stock, and it’s the selling that makes market lows.  To that point, the latest edition of Bank of America’s monthly survey of global fund managers finds they are now more underweight in stocks than at any time since March 2009, the month the stock market hit bottom after the financial crisis.

This Monday the market wiped out a 1% gain in the S&P, obviously annoying if not disconcerting.  Two weeks ago the S&P erased a 2% loss, meaningless like most intraday reversals.  It’s easy to be thrown off by the recent volatility, and it has been volatile.  The S&P has closed 1% or more above or below intraday levels the second most times in 40 years, according to SentimenTrader.com.  Sometimes it’s a wicked game the market plays, so when the real deal comes along it’s hard to trust.  This seems the case now.  When it comes to volatility certainly Amazon (125) and Tesla (815) come to mind, yet while positive they have been anything but volatile.  They act more like safe havens.  Meanwhile, many of those long-term uptrend stocks we often allude to have moved above their own 50-day averages, taking them out of the category of falling knives.  Long-term trends here are compelling, examples plentiful – Estee Lauder (263), Intuit (435), Dominos (406), Accenture (288), Zoetis (181), and Edward’s Life (104).  Get our list and check for the 50-day.

Frank D. Gretz

Click to Download