DJIA:  30,630

You can summon the witches of the deep… but will they respond.  Shakespeare wondered, and we have begun to do so as well.  For a time now the market has seemed set up to rally, but no response.  The weakness this year has been about the contraction in P/Es, which some time ago we suggested would be temporary.  The contraction has been about the decline in prices, while earnings seemed sure to follow.  Wall Street analysts’ lowered price targets and earnings downgrades for stocks in the S&P jumped to over 500 in the past week, according to SentimenTrader.com.  Of course downgrades have been going on for months, but not to this degree.  Perhaps there’s a more acute fear of this earnings season.  There’s a limited sample size here, but similar period of analyst panic have coincided with market lows.  Yet another reason to expect the market to rally, but will it respond?

They say the market runs on greed and fear.  Actually the market runs on trends, greed and fear are important in recognizing when trends may change, and sometimes to what degree they might do so.  The end to downtrends has nothing to do with buying, it’s all about getting the sellers out of the way.  And when do sellers really sell, they sell when they’re scared, even panicked.  There is a relatively obscure measure for this called the Citi Panic Euphoria Index, and can be found in Barron’s.  While the calculation is not known, the composition includes the usual suspects, options trading, short selling, fund flows and the like.  In the early part of this year this measure reached a new high, even taking out the high of 20 years ago during the dot-com bubble.  The higher the model the more investors are euphoric, and lower returns can be expected.  Low values, particularly below zero, suggest panic and higher returns can be expected.  The recent reading was -0.07, a level which historically has resulted in higher prices over the next 3 to 12 months.

Evidence of fear and panic is important.  That translates into selling, and we’ve seen evidence of that in the many 90% down volume days.  We’ve yet to see evidence that the selling is completed – a 90% up volume day.  Most of us think that’s important, and historically it has been.  However, we have begun to wonder just a bit.  There could be too many of us on the same side of that boat, and mechanically it’s simply difficult with the commodity stocks under the pressure they’re under.  Meanwhile, most stocks have stopped going down and areas like drugs and biotechs have performed quite well.  On the NYSE, Advance-Decline numbers have been lackluster, no doubt due to the commodity stock weakness.  Meanwhile, on the NASDAQ the A/D numbers have outperformed – commodities are lacking there while biotechs are plentiful.  This switch in the Advance-Decline numbers is relatively rare.  Whatever the reason, the poor NYSE A/D numbers are always a concern.

While even the good days haven’t been that good, a couple of areas have been.  Standing out there has been Pharma, a term typically preceded by BIG.  However, it cuts a pretty broad swath these days, as evidenced by the Small Cap Healthcare ETF (PSCH-142).  And the Healthcare Provider ETF (IHF-258) also has moved above its 50-day.  Humana (473) more than the obvious United Healthcare (502) stands out there.  Many food stocks also have improved, thank you General Mills (75), though that can be taken as just defensive and not such a good sign.  Still, we’ll take any improving charts, especially in a market which seems unable to get out of its own way.  We often mention the 50-day moving average which seems particularly important since so few ETFs are above that measure.  However, it’s certainly no guarantee of success.  Microsoft (254) recently nudged above the 50-day and took a particularly hard hit on Tuesday to fall back again.  The same was true of Thermo Fisher (526).  Both are among those stocks in long-term trends, making the action disappointing.

This market has been about correcting the excesses of the bull market.  When it comes to excesses/bubbles there have been several, but our favorite remains giving money to someone to do whatever – the SPACS.  The real poster child for excess, however, might be Cathie Wood and her ARK ETF (ARKK-43), which is about growth/innovation at any price.  And it may be the poster child for the market now.  ARKK put in a low in mid-May, tested that low in mid-June and in recent days even has managed to move back above its own 50-day.  A look at the chart, however, says at all – it has stopped going down, but it’s not going up.  We believe in two types of “stops,” price and time.  Even when the price doesn’t go against you, given enough time it probably will.  This market may need another washout phase of sorts and a break in ARKK should be predictive.  Or did the CPI selloff serve that purpose?

Frank D. Gretz

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DJIA:  30,779

Oh Lord, we beseech you… send now a 90% up volume day.  The Psalm gets right to the point – “send now prosperity,” we’re going with the idea that’s where a 90% up volume day will lead.  This up one day, even when up big, down the next isn’t getting it done.  The numbers say most stocks have bottomed, but not going down isn’t the same as going up.  With only one percent of stocks above their 10-day average recently, the backdrop would seem auspicious.  Stocks above their 50-day average are around 2% versus 1.2% at the lows of March 2020 and December 2018.  NYSE stocks above their 200-day reached 13%, a level from which prices were higher 12 months later almost every time.  We are not anticipating an end to the overall bear market, more a summer vacation.  Meanwhile, we need a couple of those show me the money days.

Prices are compressed, but there seems no consistent buying.  Beneath the surface, however, there are some positive signs.  Looking at stocks above their 50-day average, from the low of 2%, one of the lowest in 70 years, the number has move to above 20%.  In recent years going from 2% to 20% has meant the end of important declines.  Going back to 1950, of the 13 occurrences only one didn’t lead to higher returns a year later, according to SentimenTrader.com.  So stocks not only have stopped going down, to some degree they’ve started to turn up.  It often happens that many stocks bottom before the averages, just as they peak before the averages.  So this part is encouraging.  A perhaps more esoteric positive is the better performance of growth versus value, with the ratio of growth to value at a recent 30-day high.  When growth out performs value it suggests a higher level of investor confidence.  Again encouraging, but no substitute for that 90% up volume day.

Nike (103) shares fell in Tuesday’s particular weak session, this after it reported what most judged to be strong earnings.  Even taking into account a stronger dollar, global sales rose 3%.  The problem was China, where sales fell 20% and the Company gave a downbeat forecast.  Sales in the region made up 19% of revenue last year.  One might think Covid-related lockdowns there are not forever, and the market might have given the stock a pass, but it’s a bear market and Tuesday was a bad day.  Somewhat ironically, Chinese stocks have acted much better.  Stocks there bottomed in March, tested the lows in May and most are at their best levels since February.  A top executive at JD.com indicated Tech regulation is getting more “rational,” and charts like KWEB (32) show it.  It will be interesting to see how quickly Nike might recover from the setback, particularly given what remains an excellent long term chart.

One of the best acting areas is big Pharma.  Lilly (324) probably leads, but Bristol-Myers (77) which has frustrated everyone for, let us count the years, has come out of a multiyear base.  They all pretty much now have good patterns, ironically better than the XLV ETF (128) which includes most of them.  The XPH ETF (42) is a bit better here.  Humana (468), the healthcare insurer, broke out this week, while United Health (514) has lagged but is above its 50-day.  Both are in big long term uptrends.  McKesson (326) is another potentially interesting chart, though it’s yet to break out of its three month base pattern which would occur around 340.  It’s part of IBD’s wholesale drug and supply group, which ranks 14 among 197 groups.  The stock rates above 90 on IBD‘s EPS and relative strength ratings, and the Company has recorded a three year EPS growth rate of 22%.

They say volatility occurs at tops and bottoms.  Over the past five weeks the S&P has swung by 5% more than four times.  That makes this the second most volatile period since 1928, according to SentimenTrader.com.  Indeed, volatility is a hallmark of market lows, but it’s no 90% up volume day.  We are looking for a summer rally and obviously that’s frustrating.  We find ourselves trading our opinion, and that’s never good.  Best to trade what you see and not what you want to see or think you see.  The market for now is barely worth the effort, but just as you think that things often change.  Meanwhile, keep thou beseeching, and just say yes to drugs.

Frank D. Gretz

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DJIA:  29,927

Sometimes you get the bear… and you know the rest.  The rest was last Thursday and Friday, and Monday as well – the kind of pattern typically indicative of a bear market.  A few weeks ago 12-month New Lows showed a market that look to be washed out, and the pre-Memorial Day buying seemed to confirm that – but, apparently not.  It was one of the fastest ever reversals of a 7% recovery, also indicative of a bear market.  While the bear market seems alive and well, it doesn’t necessarily mean we accelerate to the downside just now, at least if past patterns like this are any guide.  Measures that address oversold levels aren’t of much help in markets like this.  However, the idea that only 1%, that’s one %, of S&P stocks are above their 10-day average tells you prices are stretched.  While bear markets will do what they do, they also don’t necessarily go straight down.

At issue is whether this is another case where it’s so bad it’s good?  More than 98% of volume was in declining stocks on Monday.  Only 16 other days since 1962 saw such overwhelming selling, after which the S&P rose 14 times, according to SentimenTrader.com.  The three day up volume dropped below 7% for only the second time in 60 years.  To get to numbers like this takes some pretty bad news and not just inflation, which may have taken its toll last week.  Monday it was crypto’s turn, the last of the market’s many bubbles to finally give it up.  Whether crypto is fraud or real we don’t much care.  We do know the weakness has its impact, at least psychologically.  Then, too, whatever it takes to get the selling out of the way is a good thing.

The market usually isn’t slow to catch on, so to speak.  Indeed, it typically discounts well ahead.  Until recently, however, the market seemed to miss the likely problem for the home builders and ancillary businesses.  It was almost as though the market was listening to homebuyers, and their clamor to buy.  For sure the stocks are well off their highs but after several months, only this week have the shares moved to New Lows.  Of course, this follows a 22-year low in mortgage applications, given rates that hardly seems a surprise.  The builders, of course, have poor charts, but so too do shares of companies like Sherwin Williams (219).  Meanwhile, when it comes to shares of Home Depot (273) and Lowes (172) we’re not quite sure if they’re suffering along with the builders, or whether they are suffering from the stay-at-home hangover, but they’re suffering.

When was the last time you thought about buying Oracle (69)?  Looking at the chart, it’s understandable.  The stock was one of Thursday’s best performers, up nearly 10% on a beat.  It seems worth noting the stock held up that day, despite an otherwise volatile market.  We are not here so much to praise Oracle – it’s still a poor chart.  It brings to mind, however, another large cap with little attention which does have an improved chart – IBM (136).  As you cringe, we realize there have been more than a few false dawns here.  But consider the price action especially relative to that of the market, and Tech.  Speaking of Tech they were great when they were on our side, but not so much now.  Stocks like Apple (130), Microsoft (245), Nvidia (156), seven altogether, have accounted for more than 40% of the points lost in the S&P since January.  Maybe it’s time for an IBM type of Tech.

So the Fed meets and there’s something for everyone – something for everyone not to like.  The attention grabbers wanted a full point, some more thoughtful believe inflation through natural forces will be peaking, and too much tightening runs its own risk.  The Fed has a “dual mandate,” but seems to have decided its sole task is to limit inflation.  They admitted inflation is a problem, and seem prepared to raise rates to eliminate it even if it means higher unemployment.  Yet Powell is good at managing expectations.  The last eight FOMC decision days saw good gains on six and flat action the other two.  Then, too, this is within the context of a 20% decline in the S&P.  Rising rates are not good.

Frank D. Gretz

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DJIA:  32,272

A bear market rally… isn’t that how every bull market starts?  We agree any strength in coming weeks is likely a bear market rally, but we are struck by the seeming universality of the call.  As such it seems one based on the crummy fundamentals – record inflation, rising rates, a war, the pandemic, the China rivalry and so on.  What’s to like?  Then, too, that’s why the S&P has had a 20% decline and the average stock even more.  The news is never good at a low, and that’s how stocks become washed out/sold out.  And it’s selling that makes a low.  We’re just not sure stocks are bear market sold out.  Stocks above their 200-day only got down to 24% versus a more typical 18%.  And the bear market is unwinding five or more bubbles, something that seems unlikely complete in just a five month decline in the S&P.  Then, too, they do seem washed out enough for more rally, maybe even enough to question, it’s a bear market rally.

Remember global investing?  How’s that going?  Yet here we are with an office full of globes, looking more vintage all the time.  Or how is diversification working for you?  It has been a tough year, even for those diversified.  As an example, Ruffer LLP looks at returns from a range of 11 different global indexes of stocks and bonds, including the S&P, the Russell, the 30 Year Treasury, the MSCI World Index, and so on.  The first quarter of this year was the first in more than three decades none of them gained.  Duncan MacInnis of Ruffer has called this the illusion of diversification – the balanced portfolios were not balanced.  The diversification turned out to have higher cross asset correlations than thought.  They were all subject to the same problem, the problem being inflation and the pressure it put on rates.  That has had a negative effect on everything except inflationary beneficiaries like oil and commodities generally.

Bloomberg’s John Authers argues this pattern of rising rates and rising commodities can’t keep going on.  Were commodity prices to continue higher it would become that much more difficult to contain inflation.  And higher prices would stifle demand, as would higher rates.  All too true though, again, it’s about the timing.  Argue as you might what a peak in oil prices might look like, so-called fair value is likely a poor guide.  Sentiment or psychology likely will play a bigger role.  In the summer of 2008, in the midst of that bear market, it wasn’t until you started to hear of $150-200 that oil peaked.  We don’t think we’re quite there yet.  And back then there was plenty of speculation.  You can’t exactly call oil stocks undiscovered, but unlike back then they’re not exactly parabolic either.  And there’s a bit of an exogenous factor this time around, oil this time around is still only about 4% of the S&P by market cap.

The market for now is both good and bad.  The good is stocks have stopped going down.  By that we don’t mean the averages, we mean literally most stocks.  A few weeks ago nearly half of NYSE and NAZ stocks reached 12-month New Lows.  This past week the number was a fraction of that. Surprisingly, there were actually more NYSE new highs versus New Lows last week, unusual in a bear market.  The Advance-Decline Index, another proxy for the average stock, reached a low May 12 and held against lower lows in the Dow and the S&P.  These positive divergences, even those relatively minor, often can be significant.  It’s opposite the pattern back in December and January when the averages moved to new highs against weakness in the A/D’s.  The bad news is that holding up isn’t going up.  Other than the few good days before Memorial Day, and they were good days, the market has been unable to put much together on the upside.

So missing is the MO – not Altria, upside momentum.  Tuesday’s rally was unimpressive, except for its reversal aspect.  And no follow-through.  To borrow from the movie line, it’s time to show me the upside.  Meanwhile, you would be applauding rather than crying at the pump if you owned a little Valero (143) or one of the other refiners.  Then, too, any food stock would leave you crying all around, despite higher prices.  Go figure.  In early January we published a list of stocks in long-term uptrends.  The idea of the list being these are stocks you want to own when they give you a chance.  In the subsequent five months of bear market they’ve given you a chance, and then some. We prefer to buy stocks when they’re above their 50-day moving average and there are a few from the list that fall into that category – Adobe (426) and Estee Lauder (259) have had big declines and are above the 50-day.  Accenture (295) and Intuit (401) also have had significant declines, and are just below their respective 50-day averages.

Frank D. Gretz

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DJIA:  32,637

Down 20% so it’s a bear market… now they tell us.  Why didn’t they tell us when it was only down 5%?  Just the other week more than half of the stocks on the NYSE and NAZ were at 12 month lows – no kidding it’s a bear market!  Now that it’s more or less official, now we’re supposed to sell everything?  Or now that it’s more or less official, does that mean it’s more or less over?  Trying to define this or any bear market is almost tilting at windmills.  We will stick with our definition which is – how’s your portfolio doing?  It was looking fine if you only owned Hershey (210) – whoops, until last week.  And so it goes in bear markets, they get to everything.  It’s all well and good until they get to your stocks, especially those you’re “never going to sell.”  That, of course, changes to “they’re down too much to sell.”  Finally comes bad news in that stock you’ll never sell, now you have an excuse to stop the pain, and you sell.  That’s how bear markets end.  Is that what we just saw?

Other than we all need something to write about, we don’t understand these downside price targets in the averages.  Are we really supposed to believe even 30, let alone 500 stocks know at what level they’re supposed to stop going down?  Some specific level is supposed to be “fair value” as the funnymentalists like to say.  Stocks trade at fair value twice, once on their way up and once on their way down.  What’s important is to figure out whether they’re about to become more overvalued or more undervalued, in other words, the trend.  To go by value, stocks are getting cheaper, but that’s an illusion.  They’re getting cheaper because of the P in P/E, not the E.  They will become less cheap later because of the E.  We don’t have targets on the averages but we do have a target idea on indicators like the percent of stocks above their 200-day average.  Our target there is somewhere around 15%, making our Dow target wherever it happens to be at that time.

All of this is not to say we can’t see a decent interim rally, maybe even something similar to that 10% rally in March.  You don’t have the washout sort of numbers in the VIX (28), but sentiment is otherwise pretty negative, in this case a good thing.  That’s what happens when you get to that get to everything phase.  If you look at the charts of the various ETFs on the other side, Energy is pretty much the only one still standing.  And now divergences are beginning to show up on the positive side.  There were those washout numbers in New Lows a couple of weeks ago and only half that number last week, despite lower lows in the S&P and DJIA Thursday and Friday.  And despite lower lows in those averages the Russell 2000 held it low of a couple weeks ago and so too did the Advance-Decline Index.  It’s all still tentative, but the potential is there.  Encouraging was 3-to-1 move up after those not so wonderful Fed minutes, and the better than 5-to-1 follow through on Thursday.

Energy and pretty much Energy alone is where the best charts are to be found.  The global slowdown could dampen the outlook here, a China re-opening the opposite.  We also worry about our unanswered “get well” card to Putin.  His demise likely would result in a knee-jerk selloff in Energy stocks, but a knee-jerk rally in markets overall.  We think stocks like Chevron (107), Devon (74) and pretty much the gamut look higher.  As you might have guessed, refiners like Valero (128) and Phillips (99) also are among the best charts.  Given the overall market weakness and the “get to everything” recent nature of the decline, good charts are not so easy to come by.  A few big Pharma names do stand out, Lilly (313) and Merck (92) specifically, and Johnson & Johnson (179) and Pfizer (54) have improved.  When it comes to Tech, now we’re starting to learn why the stocks are down so much.  But they are down, and should do their typical Tech rebound as the overall market gets a lift.

Buy good sound stocks, hold them until they go up.  If they don’t go up, don’t buy them.  Such was the investment strategy of Will Rogers.  Ours is only slightly different.  Buy anything you like as long as it’s in an uptrend.  When it breaks that uptrend, sell it.  While they may seem different the strategies are basically the same – don’t hold losers.  Everyone makes money in the stock market, the reason they don’t make more is they give too much back.  On the premise you’re buying stocks in uptrends, how do you know when the trend is broken?  One very complicated and sophisticated method involves an expensive and hard to use device – a ruler.  If you find rulers too intimidating, recalling your time with the nuns, moving averages work just as well.  For most, a 50-day should do the job, or if you’re truly a long-term investor, then the 200-day.  For those of us who find instant coffee not fast enough, there are the exponential 10 and 21-day moving averages.

Frank D. Gretz

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DJIA:  31,253

Bad news in a bear market …who saw that coming?  Markets aren’t already down this much because things are peachy keen.  Good markets, or a sold out market, should be able to absorb a degree of bad news.  In this case apparently not, though the possibility of a tradable low is still there.  Over the weekend we had become encouraged, if not outright optimistic, by weekly data showing almost 50% of NYSE stocks and 50% of NAZ stocks had traded at 12-month lows last week.  That’s our idea of sold out or close to it.  Throw in as much as 60% of the S&P 20% or more off their highs and there’s all the more reason to think we’re close if not there.  Missing remains the compression in stocks above 200-day moving average, which makes us think no new bull market.  As does the idea bull markets with five or more bubbles don’t end in five months.  There is, however, enough for a March-like tradable rally.

We joke it’s a bear market when they sell our stocks, but in bear markets they sell everyone’s stocks.  Last week had that look, as did Wednesday this week.  When you can’t hide in Hershey (205), you pretty much can’t hide.  The idea of a 25% hit to Target (153) is one thing, but hits to Microsoft (253) and Apple (137) may have done greater damage to the investor psyche.  It’s that helpless, all is lost feeling that gets you to a give up or capitulation phase, and after all that’s what lows are about – the selling, not the buying.  Backing up this feeling of capitulation have been a few 90% down volume days, days when 90% of the total volume is in declining issues.  And last Friday actually saw the counterpart to those days, a 90% up volume day.  Those are not so easy to come by, and occur one assumes when selling is out-of-the-way, when stocks move up as though in a vacuum.  The problem is lows sometimes see a pattern of these 90% days.

A couple of weeks ago this market began to remind us of 2000.  There were, and still are stocks coming down in clumps, much like the dot-coms back then.  Of course this time these weren’t the dot-coms, they were stocks of a bubble called “stay at home.”  The poster child here is the ARK Innovation ETF (ARKK-43), and includes names like Roku (97), Teladoc (33), Zoom Video (91), Spotify (106), and so on.  Unlike the 2000 dot-com unwind, this market is in the process of unwinding by our count five or six bubbles.  Who could forget those MEME stocks, brought to you by the Boyz in the HOOD (10 down from 85), GME (91 from 483), and AMC (13 from 73).  Then there are the EV stocks other than Tesla (709) – Rivian (28 from 180), Lordstown (2 from 32).  Also up in smoke were MJ stocks like Canopy (6 from 56).  And remember when they gave money to someone to buy “something” maybe – the SPACS.   The jury may still be out on cryptos but Grayscale (20) has made it to 8 from 58.

Putin’s apparent ill health could be a concern if you’re long oil.  His demise likely would result in a knee-jerk drop in crude’s price.  Then, too, some last gasp nuclear foray would have the opposite effect.  To step back from these unknowns, oil stocks seem likely to go higher.  History suggests when they start the year well, they end the year well.  Some have suggested if China were to fully reopen the commodity would be $150.  Perhaps most positive for the stocks, they still remain under-owned.  It’s an obvious exaggeration, but how much selling can there be when no one owns them?  The answer, of course, is enough to hurt.  Meanwhile the stocks are holding their own with most trading around their highs.  The problem as suggested above, bear markets tend to get to everything.  If a silver lining there, the last to give it up typically are the first to make it up.

Bitcoin has become correlated with stocks and therefore no hedge, but it is disappointing the same has been true of Gold.  This may have changed Thursday when the stocks finally seemed to have a pulse.  Another reason for some optimism is the stocks are stretched.  At its recent low, for example, the Gold Miners ETF (GDX-32) was some 20% below its 50-day.  Stretched of course is relative, it’s different for different stocks and stretched can always become more stretched.  That said, GDX is stretched and we understand there’s a little inflation out there.  Meanwhile, have we ever mentioned bear markets aren’t easy?  They get to everything before they’re done, they make you just want to walk away.  The recent positive Friday to Tuesday sequence seemed a particularly dirty trick come the Wednesday rout.  And here we were worried about the Fed when we should have been worried about retail?  What the selloff in the big retailers makes clear is the consequences of rising inflation.  Wednesday, another 90% day, could’ve cleared the air, or not.

Frank D. Gretz

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DJIA:  32,997

Bad news is good news … in bear markets.  Bad news induces selling, and getting the selling out of the way is how lows happen.  When it comes to the overall market, it seems opinions follow price.  When markets go up, so does the bullishness, and that’s probably true for individual stocks.  As for weakness, that seems different.  Investor tolerance for weakness is surprising but let the news change, give them a reason to sell, and they often do.  Likely it’s the built-up frustration that’s behind the sale, new bad news being just the excuse.   The market already has discounted bad news and with the last spate of selling, like that on the invasion news, then moves higher.  Market lows literally are a give-up event.  Bad news is just a cover to do what sellers have been wanting to do.  Investors would rather be wrong in a crowd than right on their own.  How else would you explain Cramer?

Given the focus on the Fed, China doesn’t seem in the forefront of anyone’s attention.  Yet the country’s rapidly depreciating currency and COVID lockdown present the possibility of a Chinese shock to global growth.  The currency recently dropped an amount equal to that which sparked months of near crisis conditions in the world markets.  Aside from the negative implications of the currency depreciation there’s also the issue of COVID.  COVID in China is now widespread but what most don’t know is the numbers from Bank of America show cases rising in 20 different provinces that account for three-quarters of China’s GDP.  These issues haven’t been completely ignored as the CSI-300, covering the biggest companies in Shanghai and Shenzhen recently hit a two year low.  As we suggested when it comes to our own market, lows are about bad news and the selling that comes with it.  For the Shanghai only 4% of stocks are above their 10-day average, 6% are above the 50-day average and 12% are above the 200-day average.  Some 82% of stocks are at one-month lows and 70% or at three-month lows, according to SentimenTrader.com.

We don’t know that we’ll see those Shanghai numbers.  These sort of numbers are not carved in stone and, in any case, it’s not always about perfection.  Still, we doubt when it comes to stocks above the 200-day that the recent 36% is going to get it done.  For our market something south of 20% is more of the historical norm.  Another sign of downside washout involves volume, what they call 90% down days – days when 90% of the day’s volume is in declining stocks.  Lows most often involve a few of these, and they need a 90% up volume day to confirm.  If stocks are truly washed out, they should move up with relative ease.  We arguably have seen a couple of these or at least a couple of close days.  So no compression in stocks relative to their respective moving averages, and no volume washout, there still seems more bear ahead.  Then too, bears don’t move in a straight line, as we’re seeing this week.

Typical of bear markets is they get to everything.  So getting to even the sacred like Amazon (2328) and Apple (157) is perversely a good sign – another inducement to sell.  Rallies in bear markets produce their own perversity.  Down the most turns to up the most, relative strength turns to weakness – Microsoft (277) outperforms while Hershey (224) turns weak.  Weakness resumes, that pattern again reverses.  Hershey, by the way, is the far better chart here and that could persist.  Commodities stocks across a broad spectrum took a hit a week or so ago, worrisome since they have been the market’s leaders.  Oil shares have regrouped and look higher, Nat Gas already is at new highs.  Want to hedge up gassing up, buy a little Valero (126).  Energy started the year in a leadership position and history suggests it will end the year that way.

Wednesday’s rate hike rally reminded us of the invasion rally.  Both were a little perverse – rally on war and rally on higher rates.  In both cases, the bad news had seemed pretty much anticipated and, therefore, discounted.  And, indeed, Wednesday’s was a better than good rally.  It was the most positive reaction to any Fed move in 40 years, and more importantly A/Ds were better than 4-to-1up, and up volume near the Holy Grail of 90%.  Then, too, we have pointed out many of the best one day rallies happen in bear markets.  And other big rallies following Fed moves have had their problems.  The key in all of this is follow through.  And Thursday’s weakness made painfully clear a lack of follow through.  So it’s back to looking for more washout numbers, more compression in stocks above their relevant moving averages, and better follow through. Hardly a silver lining, but the last two days may help get there faster.

Frank D. Gretz

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DJIA:  33,917

He’s behind the curve … but not for long.  They berated poor Powell for being late to deal with inflation and rising market rates.  Then as he seemed to favor the idea of bigger rate hikes in a speech last Thursday, the Dow fell close to 1000 points the next day.  Is it be careful what you wish for, or for the stock market does bad news only matter when the market says it does.  Sure it was just a day, but a different day.  If rates suddenly matter, can’t wait for the day QE turns to QT, long our bigger concern.  In a way we almost find more worrisome last week’s reversal in the commodity stocks.  Sure it was related to China’s problems, but it seems more a matter of the market making the news or, in this case, not looking beyond the news.  Commodity stocks have been the market’s leadership, and when the market leaders stop leading it’s not a good sign.

The market opened higher both Wednesday and Thursday on the numbers from Microsoft (290) and the beleaguered Meta (206).  We briefly thought we had missed the cease-fire in Ukraine, news inflation is under control, and the Fed won’t raise rates, the things that matter.  Markets rally, even bear markets.  However, bear markets don’t end on good news.  They end on bad news because it’s bad news that begets selling and getting the sellers out-of-the-way is what ends bear markets.  Recall the day of the invasion back on February 24.  After a consistent two weeks of decline, the Dow was down more than 800 points before reversing to close higher.  Sellers not buyers make lows, so we particularly don’t like to see up openings.  Regardless of whether the market is sold out, you can argue Tech especially is due for a bounce. Both Microsoft and Meta have rallied back to but not quite through their respective 50-day averages.  These seem key points.   

Together with most commodities, Gold reversed last week and the Gold Miners ETF (GDX-35) dropped below its 50-day average.  The metal itself had made a run at $2000, a level above which it has closed only once, back in August 2020.  The recent weakness makes it easy to dismiss this latest run as just another in a series of such moves over the years.  When most think of Gold they think of inflation and there’s plenty of that.  Gold, however, can be a hedge against many things, just ask your local oligarch.  Back in 1929, a period of deflation, a 10% holding in Homestake Mining would have hedged the rest of your portfolio.  Gold coin sales rose about 48% in 2021 from a year earlier, data from the US mint show, while purchases of gold ETFs hit a record last month, according to a recent Barron’s piece.  Technically speaking, the miners have gone from fewer than 10% above their 200-day average to more than 90%.  Similar cycles over the past 40 years have led to medium to long-term outperformance, according to SentimenTrader.com.

Aerospace/Defense stocks seem a good hedge, perhaps not so much for what’s happening now, as for what may come to pass in terms of an escalation – Nuclear/Bio.  As for what is going on now, we wonder.  The logic is simple enough – war, missiles, these stocks makes sense.  The problem is, who hasn’t thought of that?  The charts here are good enough, so perhaps we shouldn’t go looking for trouble.  Still, we always hesitate when it comes to easy trades, and against the war backdrop, buying Aerospace/Defense stocks has to be up there when it comes to easy trades.  There was a time not all that long ago it was easier to buy Twitter (49) than to buy Tesla (878), and we all know how that worked out.  We also recall losing money in Aerospace/Defense after 9/11 when the stocks initially rallied, and then went dormant, to put it mildly.  It gets back to our basic belief that when it comes to the stock market, what we all know isn’t worth knowing.

It’s one thing to talk about getting the selling out of the way, how do you actually know when the selling is out of the way?  One measure is what they call 90% down days.  These are days when 90% of the volume is in stocks down on the day.  Until last week we had gone more than 350 days without one.  The catch is there is usually more than one of these days before a low, and you need a similar day to the upside to confirm the low.  The theory here is if stocks are sold out, they should move up easily.  Another way to view stocks as being sold out is when extremely few are in uptrends.  On the NASDAQ the other day only 14% of stocks were above their 10-day average.  Unfortunately, there are no magic numbers here and stocks above their 50 and 200-day averages still have room to the downside.  Of course, this doesn’t rule out interim rallies, though they’re likely rallies to sell.  Meanwhile, did Teladoc (33) split 10-for-1?  Stay away from stay-at-home.

Frank D. Gretz

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DJIA:  34,792

It was the best of times… really?  Things are so good the market rallied 500 points on Tuesday and another 250 on Wednesday?  Let’s see, there’s been a record surge in credit as consumers resort to almost desperate measures against an inflationary backdrop.  And there were those healthy-looking retail sales numbers which actually would have been down without gasoline sales.  Scarier still, however, might be the 50% drop in trucking activity in a recent week owing to flat retail sales and already excessive inventories.  Some would say all this says recession, as has the thoughtful though often gloomy David Rosenberg. The Consumer Sentiment Surveys say we’re there and have been for some time.  Then, too, is the market looking beyond all this?  Or, is it that some of the best one-day rallies happen in bear markets?  Time will tell, to coin a phrase. We are still pretending to be open-minded.

It’s a market with more than a few cross currents in terms of what’s working and what’s not.  At the start of the year, we sort of divided the world into Tech and Staples, and Staples morphed into Commodities.  After a March fade Staples have come back on again, and then some.  Meanwhile, after their March relief rally, Tech has turned weak again, especially anything to do with stay-at-home.  The other broad area that can’t find its way is Financials.  Not surprisingly, all this has left the overall market background a bit mixed but with a clear negative leaning.  Anytime you have the S&P down only a few percent but only about 40% of stocks above their own 200-day moving average, you know the averages are masking a lot of weakness in the average stock.  This doesn’t end well.

Utilities have been on a tear, something the textbooks used to say was not supposed to happen when rates were rising.  Right now, however, higher yields are the result of the Fed trying to slow economic growth, and that’s making investors think of defensive areas like Utilities.  A slow down would hinder profits in most cyclical sectors, while Utilities earnings should be stable as they can keep raising prices.  Analysts actually expect earnings here to grow almost as fast as the S&P’s 10% rate.  So the fundamentals seem fine and so far so too do the charts.  The problem might simply be too much of a good thing.  The XLU (76) has enjoyed its second largest 30 day rate of change in 20 years, and half the stocks recently reached new highs in a 10-day period.  That’s a 23-year record according to SentimenTrader.com.  Momentum extremes like these, in the past have caused problems – just saying.

If any questions remained about stay-at-home stocks, Netflix (217) answered that.  To look at Disney’s (122) hit, the problem doesn’t seem one of competition.  And to look at Etsy (102) and Peloton (20) before it, it’s the concept and not the companies.  Worried about competition, maybe we should be worried about Tesla (1009), Tesla at least is the only major car company that doesn’t have to spend time transitioning to EVs.  Another big difference, the stay-at-home stocks all have had terrible charts, Tesla does not.  If there’s a silver lining to the Netflix news and the reaction of the stay-at-homes, it does seem tangible evidence of reopening post-Covid.  It also seems a reflection on human nature as it relates to the stock market – investors were pricing stocks that did well in the pandemic on the assumption that lockdown behavior was forever.  Who knew – things change.

Nice to see the market is doing its job if, as they say, the market’s job is to confuse the most number of people.  It was certainly easy to be impressed by Tuesday’s 500-point Dow rally, backed up by Wednesday’s 250-point gain.  And both saw advancing issues near 2-to-1 versus those declining, not blowout numbers but decent.  It wasn’t quite clear why the strength just as it wasn’t quite clear why Thursday’s weakness.  Perhaps most disturbing about Thursday’s weakness is it met our criteria for a bear market – they sold our stocks, the commodity stocks.  One day is just that, but this could mean we’ve entered a new phase of the bear market.  The better than 4-to-1 declining issues also suggests a seeming new urgency to sell.  This is the way markets go.  Bonds have been weak for a while now.  It’s not as though we don’t know rates are going higher.  Sometimes things just don’t matter until they do.

Frank D. Gretz

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DJIA:  34,584

Elon Musk a passive investor … and do you wanna buy a bridge?  Can’t wait to hit that edit button.  His 9% position in Twitter, the ultimate tweet of sorts, helped the NDX by 2% on Monday, rendering new hope for the forgotten, downtrodden, etc., that is, beaten up Tech.  Not quite the same as landing a rocket on a dime, but impressive.  And the other company, Tesla is it, isn’t doing so badly as well.  Names like Tesla (1057), Amazon (3153) and Google (2717) pretty much all peaked late last year.  After their hibernation, the irony might be they come back to outperform in a poor market, not exactly what most would expect.  That said, we still see what we’re calling the commodity stocks the likely ongoing leadership.  Exacerbated by the war, commodities across a broad range are in short supply.  The stocks themselves have another edge, they’re in short supply, that is, they’re under owned. News of Russian coal sent those stocks higher Tuesday, while not that long ago the Coal ETF was dissolved for lack of interest.

You say either we say ither. The debate eternal always seems to be between growth and value. You might also debate just what is a value stock and what is a growth stock. The good people at Invesco have done this for us with the Pure Value ETF (RPV-85) and the Pure Growth ETF (RPG-180).  As it happens we don’t particularly agree with either list, but at least here is something objective and from a credible source.  To look at the charts, clearly value is kicking growth, and we suspect it will continue to do so.  Our idea of growth is a bit more techie, and our idea of value is a bit more about commodities.  We should add some defensive names like Hershey (223) and Church & Dwight (103) act well.  If you compare the Tech Software ETF (IGV-336) with the Metals and Mining ETF (XME-60) the picture is the same, though the XME outperformance is more dramatic.  Again, we expect this to continue.

We have long thought where the stock market tells its economic story is the Transports.  Originally, and the theory behind the Dow Theory, both the industrials and the transports were supposed to tell the story.  This, of course, was when the Industrials were industrials, hardly the case these days.  Granted the “Transports” aren’t exactly the rails of old, they still pretty much get the stuff around.  Looking at the Transports relative to the S&P, last Friday’s weakness was the seventh worst day against the broader market since 1928.  When looking at other occurrences, this kind of move was associated with the most traumatic episodes in US market and economic history, according to Bloomberg strategist Cameron Crise.  While last Friday’s otherwise up day didn’t seem that traumatic, the trauma may be yet to come.  Meanwhile, as a proxy for economic activity in the US, the weakness in the transports is of some concern.

They say the consumer is in good shape.  That’s not exactly what those consumer sentiment surveys say.  They’re worried how high prices are going, and everywhere.  Even demand for products which target a more affluent consumer recently has fallen.  It’s a mystery what keeps home prices so high when you look at those homebuilder charts and associated names like Home Depot (303).  Wage increases, while enough to pressure businesses and keep pressure on the Fed, aren’t enough for consumers to keep up with inflation that is running close to 8%.  A report also shows real, or inflation adjusted disposable personal income per capita fell for the seventh straight month as rising prices outpaced employment and wage gains.  And they say we’re not even in a recession, though based on those consumer sentiment numbers, we would contend we are.  And while there are “soft landings,” there are none we know of when inflation was above 5%.

We’ve seen this recovery as a rally in a downtrend, a rally in a bear market.  We also see this rally, technically speaking, as better than we might have expected.  Then, too, bear market rallies usually make you wonder.  As often happens in these recoveries, things change quickly as was the case this week, going to a 4-to-1 down day Wednesday versus a 4-to-1 up day last Tuesday.  There were no divergences going into this weakness, weak up days, for example, so that may be yet to come.  Or this time was that hit to the Transports the warning.  Where would we be without Lael Brainard to tell us rates are going higher? Though, the mention of QT might have been the real culprit.  Whatever the case, the market lost something this week, and if a bear market rally that’s particularly worrisome.  Meanwhile, just say YES to drugs, those made by Lilly (309), Pfizer (55) and others part of the XLV (142) ETF.

Frank D. Gretz

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