The Stock Market … Where Simple Logic Goes to Die

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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