DJIA: 32,001

Hope springs eternal … or do we mean wishful thinking? With the apparent exception of Jay Powell, we all have learned if you have nothing nice to say, and so on. And that pretty much sums up the Fed meeting. Yet the market seems to have had in mind that it wanted to go higher. Clearly it didn’t on Wednesday, and clearly it didn’t take the opportunity to ignore bad news, as good markets sometimes do. Some dust now likely has to settle. So how can these pivot hopes be dashed so many times, and yet the market keeps coming back for more? Possibly the market just sees what it wants to see, or possibly it sees more. Possibly it sees inflation has peaked and the typically late Fed will have to pivot. Or, maybe that really is wishful thinking. To channel Mick Jagger, stay off of my cloud, and the rest of Tech. They say things change, and they have. From the M word being Microsoft (214), to the M word being McDonald’s (273). Both are in big overall uptrends, the difference is MCD is at the top of that trend. A burger and a Coke may hit the spot, but a burger and a Pepsi (178) is even better – the latter is another all-time high. According to Barron’s 27% of packaged food stocks hit 12-month highs last week. Hershey (232) looks like Microsoft in days of old. Technically speaking it’s not difficult to see these stocks continuing their outperformance. After all, it has been all about Tech for so long some change seems overdue. And that often comes about out of corrective periods. Together with the market’s somewhat more conservative leaning, and with help from those that are its namesake, the Dow Industrials are on a tear. Unlike the dot-com/new economy days, the Dow isn’t exactly old economy. Indeed the Cisco (44), Microsoft and Salesforce (146) positions are new relative to those good old days. It does seem fair to say, however, the Dow for the most part is a different economy, different for sure from the NAZ economy. To that point, over the last 30 days through Tuesday, the Dow relative to the NAZ was up more than 10%. Take that you Tech geeks. It was even up more than 5% against the obviously broader-based S&P. It’s too soon to call the revolt durable, but it is something to consider. And in the case of McDonalds and Pepsi, what’s the risk – these are NAZ looking charts anyway. The main thing going for the market has been the seemingly washed out price action. There is, however, some sign of positive momentum in terms of stocks reaching 52-week highs. In September there were a third more stocks trading at new lows versus new highs, a historical extreme. Following similar extremes the S&P’s one year return was 25%, according to SentimenTrader.com. This week the number reversed, with more stocks trading at new highs. As one would expect, returns against this backdrop are about twice that when new lows dominate. The change is a tentative one but still seems important. With the exception of some of the obvious names, even Tech is in the same position. The percentage of stocks at new highs minus lows turned positive after one of the most negative readings since the inception of the Nasdaq In 1985. We still have a ways to go, Powell said. It was another Fed to the market slap down, in this case to the. S&P’s one percent afternoon rally. Nothing new except a little misguided exuberance. And the Fed did add the phrase “cumulative tightening” to the statement, suggesting a need to judge what effect they’re having before continuing their serial tightening. It wasn’t a PIVOT, but maybe a PIV. As we say about the big up days, one day is just that. Worry less about the Fed and more about those A/D numbers. Up in the averages with lagging A/Ds is never good, regardless of the Fed. Meanwhile, oil and the like doesn’t seem to want to quit.

Frank D. Gretz

Click to Download

DJIA:  32,033

Bad news …it doesn’t have to be bad.  After all, the market makes lows on bad news, not good news.  It’s bad news that induces selling, and it’s selling that makes lows.  Take that bad CPI number back on October 13, the S&P is up 10% since then.  Then there was the day of the Russian invasion back in February when the market opened down big only to recover that afternoon and pretty much never look back.  Many reasons were offered for the remarkable turnaround on the CPI number, but there’s only one that really makes sense – stocks had become sold out.  To put the day in context, the market had fallen the prior six consecutive days.  And for a little more color, consider the dollar volume of option Put buying was triple that of Call buying, by far a record.  If you were buying that many Puts, you’ve likely done a lot of selling.  It’s selling that makes a low, and leaves a vacuum of sorts for prices.

Is gold the new bitcoin?  The much hyped Bitcoin Strategy ETF (BITO-13) is down some 60% this year.  It hasn’t exactly proven a store of value, and this with inflation everywhere you look.  The best inflation hedge has been oil, and the stocks more than the commodity.  Gold has had its moments but despite the long held view to the contrary, hasn’t seemed moved by inflation.  Then, too, it’s hard to fit gold into a convenient theme.  During the great depression a 10% position in Homestake Mining would have hedged the rest of your portfolio, and that period was all about deflation.  Gold shares have stabilized and without question are improved.  Of the 40 or so gold shares we follow most are above their 50-day average, and all of the silver miners are above their 50-day.  The dollar meanwhile is below its 50-day, which should prove a tailwind for the precious metals.

Is China uninvestable?  That’s certainly the thought we had when those stocks opened on Monday, but we’ve been doing this long enough to know when even we have that thought, the worst is likely over.  That’s hard to imagine given what’s going on, but for China this isn’t the first time things have looked more than a little bleak.  Chinese stocks endured a similar bout of selling in March, after which they rallied some 60% over the next few months.  The stocks peaked in June, however, and most stocks traded to new lows.  On Monday nearly 60% of Chinese Internet stocks traded at new lows, the fourth highest in 15 years according to SentimenTrader.com.  There have been six other days when more than 55% of the stocks fell to a new low.  Some big losses follow but all showed gains over the next six months.

Three things to keep in mind here – oil, oil and oil.  Then, too, late last week much of healthcare came to life, and there is much of healthcare.  There are the big pharmaceuticals like Eli Lilly (356), the insurance guys like Humana (545), and the wholesalers like Cardinal Health (75).  Finally, there’s aerospace/defense.  When you think about McDonalds (265) and Pepsico (179) punching near all-time highs, you can’t exactly say strength is all that selective – different, but not selective.  Similarly, Deere (395) and Caterpillar (212) were among the leaders Thursday.  While no one was looking they had turned into more than respectable charts.  Meanwhile, the go-to-stocks we all new and used to love, FANG, the Semis and Tech generally, are underperforming, to be kind.  That the market has been able to ignore the action in these stocks seems an important intangible.

So how long can this keep going on?  We are always tempted to say, until you stop asking.  Sounds pretty rude, but they will stop asking when they’re back close to being fully invested.  These end of the year rallies, especially when good ones, can feed on themselves a bit in the form of job security.  If you think you’re not going to buy until the Fed pivots, you look pretty safe.  Suppose, however, the market changes the definition of pivot.  Let’s say rather than easing the pivot just becomes no more tightening.  A drop in inflation to 2% becomes just a peak in inflation.  When markets want go higher they have a way of creating their own reality.  A less esoteric answer to how far this can go is that it will go higher until it does something wrong.  Wrong typically is about those Advance-Decline numbers.  Strength in the Dow without strong participation is how markets get into trouble.

Frank D. Gretz

Click to Download

DJIA:  30,333

If rainy days and Mondays get you down … how about those Fridays?  As the week began, eight of the last nine Fridays saw lower closes.   We consulted Freud for any insight into weekend phobias, but found only his usual quip about cigars. The consistent Friday weakness is one thing, more striking is the extent of the weakness.   From August 18 through this past Friday the Dow had lost a total of almost 4400 points.  Of that some 3500 points or almost 80% came on Fridays.  So much for TGIF.  If, indeed, this is about fear of the weekend and the news it might hold, it didn’t seem well-founded – Mondays proved not all that bad.  Over the years we have noticed the market sometimes gets into some hard to explain patterns.  We remember when Fridays and Mondays were positively correlated, or when most of the gains came on Mondays and Tuesdays.  We don’t expect weak Fridays to persist, especially now that we’ve made the observation.  Rather than fear Fridays, we would look to an up Friday as another overall positive sign for the market.

The calendar overall seems to favor the upside.  October is not known as a wonderful month – we have just passed the October 87 crash anniversary.  That said, many lows are made in October as early weakness is followed by rebounds.  Since 1952 there have been five times the market has been 20% lower YTD in mid-October.  Three of these times the market never went lower.  In 1962, a year similar in pattern including a June low, the market fell a few percent in a few days and that was it.  The outlier was 2008 which didn’t bottom until March 2009.  However, we do recall the semis put in the low in November, obviously well ahead of the low in the S&P.  Perhaps most important, in each of these cases the market was higher one year later, according to SentimenTrader.com.  While this study comes at it from a different perspective, many of the recent momentum surges suggest a similar one-year outcome.

In mid-June the market put in an interim low which carried some 15%, and most bear markets are interrupted by similar countertrend rallies.  In the dot-com bubble bear market in 2000 and the financial crisis of 2008, you had five rallies in the S&P of 18% to 21% on the way to the bottom.  In the great depression there were five rallies of more than 25% between the crash in September 1929 and the bottom in June 1932, all on the way to losing 86%.  Even bear markets become temporarily sold out, even bear markets have their interim rallies.  A couple of times in recent weeks the market had seemed set up for such a rally.  Back on October 3 and October 4 we saw back-to-back days of 5-to-1 up, but no follow through.  Six consecutive days of declines followed and the backdrop again seemed washed out, this time with another important positive – sentiment.

Last week’s CPI number was disappointing.  You can argue there is a distortion in the way housing is calculated, but the market found the number disappointing and that’s what matters.  While everyone tried to explain how the market was able to reverse and close 800 points higher, the only real explanation was on the news and down opening, the market had become sold out.  Granted there was no follow through Friday, but there was on Monday.  As much as the positive price action, however, the CPI may have pushed sentiment over the edge.  The dollar volume of Put buying to open was triple that of Call buying, by far the most ever.  The sentiment surveys can be helpful, but we prefer transactional data.  Investors may say they’re bearish while they are in fact fully invested.  If you’re buying puts, chances are you’ve done a lot of selling, and it’s selling that makes lows.

It’s important to keep in mind a market low doesn’t mean an instant big new uptrend.  There can be a process of backing and filling, testing as they say.  The June low is a good example in that regard, the low was June 16 and the real start of the uptrend more like July 20.  When markets make a low, most often the stocks down the most turn to up the most – there’s that reflex or coil reaction.  For the most part these are not where you want to be after that initial move.  Leadership, the best charts seem to lie in healthcare, though they didn’t do much for you this week.  Energy is the real standout.  It’s not just that the stocks are up, stocks like Chevron (169) and Schlumberger (46) have nudged above their recent trading ranges.  Meanwhile, the defense stocks had dramatic moves this week, hopefully on the numbers from Lockheed (444) and not worry of another conflict.

Frank D. Gretz

Click to Download

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