DJIA:  34,395

Toto … I have a feeling we’re not in Jackson Hole anymore.  Though brief, Powell’s comments back then sent the market reeling some 1000 Dow points just that day, and another 1300 points into the October low.  So what got the market up 700 points on Wednesday?  Granted the speech had a conciliatory tone, but the rally may not have been about the speech at all.  The market, simply put, was loaded for bear.  The Dow had fallen 500 points on Monday, was down most of Tuesday, and was even down 300 points before Powell’s comments.  It’s not exactly a stretch to say expectations were low.  To give the market its due, the overall technical background had seemed sound coming into the week.  And the good news about the speech – it’s over.

Diamonds recently have been everyone’s best friend.  The “diamonds” we are referring to are the ETF for the Dow Jones Industrial Average, the symbol for which is DIA (344), hence diamonds.  It’s surprising to realize the Dow is down only about 5% this year and, therefore, your best friend.  That’s all the more true considering the S&P is off 14% and the NAZ some 30%.  The secret of the Dow’s success is pretty clear, Microsoft (255) is the only Tech among its top 10 holdings.  As you probably know, the Dow has the quirk of being price-weighted, making a $500 stock like United Healthcare (537) its largest holding.  Also among the top 10 holdings are companies like Caterpillar (236) and Honeywell (217).  Meanwhile, the Nasdaq is referred to as “tech heavy,” and Tech has made it just that.  While the S&P obviously is broader and more diversified, it is market cap-weighted making a stock like Apple (148) 7% of the Index.

A few weeks ago, courtesy of SentimenTrader.com, we pointed out that Materials had made a remarkable turnaround.  In less than two months every stock in the group had gone from below its 50-day moving average to above that average.  There is a small sample here, but all of the occurrences showed positive returns in the next 2 to 12 months.  A somewhat similar pattern now has occurred with Industrial stocks.  As of last week nearly all had climbed above their 50-day while less than two months ago only 3% had done so.  A similar pattern occurred in August with poor short-term results, but over the last 70 years the pattern preceded six-month gains every time.  Another positive here is that both XLI (102) and XLB (83) have moved above the 200-day moving average as well.

To look at the SPDR Energy ETF (XLE-91), Oil isn’t what it used to be.  And yet the ETF is simply consolidating, and doing so less than five points from its high.  That said, it is doing so while only just back to the high in June, and that after a couple of nasty drawdowns.  Meanwhile, the January to June rally had been one of the most consistent and orderly uptrends we’ve seen in sometime.  Uptrends, of course, all have their corrections.  The fact that XLE has made it back to the highs seems very positive.  Of late a concern has been the divergence between the stocks and the commodity – down 4% and 40%, respectively.  Some say this reflects a newfound religion among producers.  We say the stocks just might have it right, and the commodity will follow.

News out of China sent markets lower Monday, though we’re not sure that too wasn’t more to do with Powell phobia.  And at least for the S&P and its 200-day, reminiscences of last August could have had something to do with it as well.  There is, however, an important difference between now and last August – S &P stocks are outperforming the S&P Index.  While the Index still struggles with its 200-day, more than 60% of its components are above their 200-day.  Typically, participation is the key, and that’s why 5-to-1 Advance/Declines is important as well.  The number of S&P stocks above the 50-day also is impressive, having cycled from 3% to close to 90%, another pattern with positive 6 – 12 month results.  The shift in momentum for both the XLI and XLB also augers well for year-end results.  As Thursday once again made clear, however, nothing in this market comes easy.

Frank D. Gretz

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DJIA: 33,546

Don’t fight the Fed … but don’t tell the market. Despite the Fed’s hammering it’s not done, for the most part it seems to be falling on a market without ears. Or, is it a market that sees more than the Fed? Ironically, most are seeing it the Fed’s way, when the Fed doesn’t exactly have the best record here. Then, too, history is replete with rallies in bear markets. And the idea that most of the best one day rallies happen in bear markets has to make you wonder about last week’s 1200 point CPI gain. We get all of that, but this time there’s a bit of a difference. This is not about one day, this time stocks above their 200-day moving average have cycled from 12% to above 50%, a dramatic improvement. Historically, readings above 60% have been followed by above average forward returns, and spikes above 70% have marked new bull markets.

When it comes to stocks in general, it pretty much comes down to the haves and the have nots. More recently, it might better be said of the former, the have hads. These are the stocks that have held well through the weakness but recently have corrected. These would be names like McDonald’s (273) and PepsiCo (180), and certainly the healthcare names which have turned surprisingly weak. Meanwhile if we go through our list of potential short sales, there are virtually none left. We are told Goldman has a basket of most heavily shorted stocks which was up 10% one day last week. Another proxy for this kind of stock is Cathie Wood’s ARKK ETF (37), which recently was up more than 20% from its low a week ago. As we pointed out, often down the most turns to up the most. Meanwhile, what likely still are the leaders take a breather.

It might be time to get back to basics. You probably don’t spend too much time pondering Sherwin Williams (237), let alone Ecolab (148) and Linde (330). They are a part of the SPDR Materials ETF (XLB – 79), which has gone from no components above their 50-day, to all components above their 50-day. Over the past 70 years this shift has happened only a few times and, in this case, in less than six months. Like virtually all of these momentum shifts, positive returns were seen over the next year, according to SentimenTrader.com. Moreover, at no point was there a drawdown greater than 5%, while all showed gains of 15% or more. LIN is the largest position of XLB, and probably the best chart. Among the top 10 holdings are Freeport McMoran (36) and Nucor (142), both beneficiaries of a better China. In regard to the steel stocks, you might also look to the ETF there (SLX – 59).

We know the stock market can be more than a little perverse. When everyone is bearish that’s a good thing, but at least we know why. When everyone is bearish the selling gets done and it’s that selling that makes a low. We’re not quite sure why but consumer sentiment seems to work much the same way. The latest University of Michigan Survey showed depressed readings on present and future intentions. A six month average has now dropped to the lowest on record, exceeding the worst pessimism during the financial crisis and the S&L mess years ago. Other than being early in the financial crisis, all coincided with the end of bear markets, or were close.

They don’t let up – they being the Fed. If they’re not raising rates they’re talking about raising rates. Both have their impact on markets but so far at least, only temporarily. The Fed doesn’t want to see the market up, the wealth effect we suppose. As it happens, it’s the home builders that have been most affected by higher rates, and those stocks are all up from late October. Of course, everything is up from June when nearly 50% of all stocks made a 52-week low. We doubt we’re going back there, so you might argue the bear market is over. There’s a difference, however, between putting in a low and starting a new uptrend, a new bull market. Let’s talk about that when we get to 70% of stocks above the 200-day. In the meantime, suffice it to say they look higher and will continue to look higher until something changes, likely the A/Ds. Strength in the averages needs corresponding strength in the average stock.

Frank D. Gretz

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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

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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

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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

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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

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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

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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

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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

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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

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