US Strategy Weekly: Housing and Yield Curves

Rumors of improving discussions between Russia and Ukraine helped foster a rally in equities this week. The advance generated changes in our technical indicators as well as in the charts of the popular indices. However, to date, there is nothing to suggest that recent gains are anything more than a short-covering rally coupled with institutional accounts making portfolio adjustments at the end of the first quarter.

At present, both equities and commodities, particularly crude oil, are experiencing tremendous volatility and appear to be captive to ever-changing headlines, but the underlying economy is little changed. Inflation continues to be a major threat; monetary policy is destined to be unfriendly, and the combination is apt to be detrimental to the economy, the consumer, and corporate profits. The real question is how big a hurdle the combination of rising prices and rising interest rates will be for economic activity, particularly for the housing and auto sectors.

This week we will get data on personal income and personal expenditures for February, March employment, final fourth quarter GDP with corporate profits, plus vehicle sales and the ISM manufacturing report for March. These reports should give investors a better feel for how businesses and consumers are reacting to the Russian invasion, inflation, and rising interest rates. More importantly, in the coming weeks earnings reports for the first quarter will begin and as we have noted in the past, this could become a market-moving event. History has shown that stock markets can perform well in an environment of rising interest rates – the caveat is that earnings must be rising faster than before to compensate. This seems unlikely to us, but if earnings are better than expected, this could provide good downside support for stock prices.

Housing is Weakening

An index of pending home sales fell to 104.9 in February. This was the lowest reading since May 2020 and the fourth consecutive month of declines. Note that monthly new single-family home sales peaked in July 2020 at 85,000 and the year-over-year growth rate in units sold has been negative since June 2021. Unit sales dropped to 65,000 in February. We expect that rising rates will make housing less affordable and unit sales will continue to fall. See page 3.

New home unit sales, including multi-family, single-family and condominiums, were 772,000 in February, a 6% decline from a year earlier. However, while unit sales are slipping, prices are rising, and the average price of a new single-family home rose 25% YOY to $511,000. The median price of a single-family home rose 10.7% YOY to $400,600. These price gains are significant. When we index personal income and home prices to a baseline like 1973 it becomes clear that from 2008 to 2021 personal income was consistently rising faster than home prices. That made homeownership more affordable. Sadly, this changed in 2022 and prices are now rising faster than personal income, and this is one reason homeownership may become more challenging later this year. See page 4.

GDP growth requires rising capital investment, and we fear housing may face a slowdown in the second half of this year. Residential construction spending was $50.3 billion (SAAR) in December, a solid 15.3% YOY increase, although a deceleration from the 31.8% YOY increase recorded at the May 2021 peak. At present, the residential construction market appears solid, but home builder confidence has been slipping in recent months. The National Association of Home Builders survey for single-family sales showed that “expectations for the next six months” fell to 70, the lowest level recorded since September 2019. In general, the survey shows that homebuilder confidence peaked in November 2020 and has been slowly declining since that time. Builders are indicating that pricing pressures and the knowledge that mortgage rates will be rising as factors that make them uncertain about the future. See page 5.

The Yield Curve

The 10-year note yield rose from 2.16% to 2.41% this week yet despite rates rising on the long end, fears of an inverted yield curve are escalating. In our view, an inverted yield curve requires inversion between the fed funds rate and the 10-year Treasury note yield to truly warn of a recession. Moreover, inverted yield curves have historically preceded recessions by six to twelve months, on average, and therefore the angst regarding an inversion today appears to be overdone and too early, in our opinion. However, given the expectations of seven to nine fed fund rate hikes this year, the risk of an inverted yield curve, and a recession in 2022, is a possibility. But keep in mind that the Fed has control over the short end of the curve, but not the long end of the curve. When investors believe the Fed has tightened too much, and a recession is at hand, this is when the long end of the curve collapses and the curve inverts. At present, interest rates are rising on the long end, and we find this a bit reassuring. See page 7.

Technical Indicators and Charts

The major head-and-shoulders top formation that we have been discussing in the S&P 500, that had downside targets of SPX 4000 and SPX 3800, was nullified this week by the advance seen in the SPX. The index rallied above all its moving averages, including the 200-day moving average, which is a positive for the overall market. See page 8.

In terms of technical strength, the SPX displayed the greatest price momentum in recent days. The DJIA also rallied and has edged above key resistance at the DJ 35,000 area. But we believe the DJIA needs to sustain this advance to demonstrate that this is not a false breakout. The Nasdaq Composite has moved up toward its resistance level defined by the combination of its 100-and 200-day moving averages, but it lags its counterparts and is yet to breach this resistance. See page 9.

The charts of the Russell 2000 index (RUT – $2133.10) and (AMZN – $3386.30) continue to look similar and since they were leaders at the top of the market it is also possible that they will be leaders at establishing a low in equities. AMZN is clearly outperforming the RUT; but the RUT is unfortunately the weakest of all the main market indices. It is about to test its 100-day moving average at 2143.85 and 200-day moving average at 2197.08 and we will be watching to see if this index can better resistance. Even so, while the SPX and DJIA have surpassed their respective resistance levels, further gains are required to confirm that these moves are indeed “breakouts” from resistance and not merely a short-covering rally and portfolio window dressing. See page 10. Our 25-day up/down volume oscillator is at 2.38 this week and close to an overbought reading above 3.0. An overbought reading would be surprising and suggest that the market is in a long-term trading range, not a bear market. The 10-day averages of new highs and lows are 133 and 177, respectively. Again, the combination implies a neutral market. Overall, we remain cautious for the near term.

Gail Dudack

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It’s a Rally in a Bear Market… But We’ll Pretend to be Open-Minded

DJIA: 34,707 It’s a rally in a bear market… but we’ll pretend to be open-minded. A bear market is being defined these days as a decline in the S&P of 20%. That strikes us more like a definition for a bear market’s end. Down 20%, now you tell me it’s a bear market? And down only 8% or so in the S&P, this isn’t a bear market – tell that to the third of NASDAQ stocks down more than 50%. If you’re looking only at the market averages, you are looking at the wrong thing. And in bear markets looking at the averages is dangerous. Seeing the S&P down only 8% or so, there’s hope for all those losers you hold, hope the averages will drag them up. It doesn’t work that way. Eventually the weak drag down the strong, leaving you there with hope and a lot less money. When it comes to definitions, our favorite for a bear market – it’s when they sell my stocks. So maybe it’s not a bear market, they’re not selling those commodity stocks. Last week’s rally was impressive. It was, however, pretty much a rally in those stocks beaten the most, that is, Tech. We argued that in markets like this, where the weak get overdone on the downside, down the most turns to up the most. That we’ve certainly seen. When this happens it typically becomes either/or, in that what had been acting well falls from the forefront. And Oil and Gold and the other commodities did pull back a bit – but not much. If you look at the Metals and Mining ETF (XME-63), a veritable smorgasbord of commodities, it’s right back to new highs. In terms of leadership, that pretty much says it all. Though admittedly it could still be early. You can’t say the same of even the best of Tech. If there was a misunderstanding of Powell’s comments last week, that wasn’t the case this week – rates are going up. The market went completely unscathed last week and has done pretty much the same this week. And, in our gesture to being open-minded, maybe the market has gotten it right. Powell went to some length to counter the point that the central bank cannot hike rates enough to dampen inflation without causing a recession. And, indeed, there are “soft landings” where rate hikes did not cause recessions. The stock market, however, seems another matter. Higher bond yields tend to be bad news for stocks as they make high stock valuations hard to justify. More than rates, the eventual move to QT from QE could be what really does things in, so to speak. We just keep coming back to the tired but wise old saying, don’t fight the Fed. Let’s say you’re walking down the street doing your oligarchy thing and bam, your money is frozen. You’re probably wishing you had a little of that crypto stuff. We hadn’t looked at bitcoin, the only crypto we follow, in some time. We hadn’t paid much attention because stocks like Marathon Digital (30) and Riot Blockchain (22) have been in downtrends since late last year. Maybe it’s just coincidental with confiscation worries, but over the last few weeks these stocks have acted much better. Of course Gold has acted well and indeed, so too have most commodities. A stock like Archer Daniels (90) is trading at an all-time high, little wonder we suppose when you look at the ETFs for Corn (CORN-27)) and wheat (WEAT-10). After all the volatility in late February, Deere (432) now seems out of its nearly yearlong consolidation. There have been some impressive aspects to the recovery, and we’re not just pretending. When the market reversed a month or so ago, the day of the invasion, we expected a tradable rally, maybe back to the 50-day in the averages. We’ve done that and more in some cases. But it’s not what the market has done, it’s how it has done it. Last week saw back-to-back 4-to-1 up days in NYSE A/D numbers. Sure Wednesday was a bad Dow day, but not for the average stock – more than 1400 stocks advanced. We haven’t seen the kind of weak rally, up in the averages and poor A/Ds we admit to having expected. On the NASDAQ we’ve seen four consecutive 1% up days, very unusual and historically positive. Then there’s the backdrop – VIX down, stocks up, despite the risk of nuclear war? Correcting the speculative bubble of the last few years likely means more than 8–10% correction, but for now there’s likely more upside.

Frank D. Gretz

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US Strategy Weekly: A Russian Bear

Current Reuters headlines include: “Russian strikes turn Mariupol into ashes of a dead land,” “Russia trades barbs at the UN with the US and UK about chemical weapons in Ukraine,” “Traders warn of Russia-related diesel and gas shortages in Europe,” “Fed policymakers lean into bigger rate hikes to fight inflation,” “Biden’s Supreme Court pick Ketanji Jackson defends representing Guantanamo detainees,” “Hackers hit authentication firm Okta (customers include FedEx and Moody’s Corp.),” and “Biden approval rating drops to a new low of 40% – Reuters/Ipsos poll. ” These headlines include a wide range of topics, yet each is individually disturbing. Nevertheless, this is the backdrop for what has been a healthy rally from the March lows.

The rebound has been greatest in technology stocks as seen by the 12% gain in the Nasdaq Composite index, as compared to the gains of 6.7% or 8.1% seen in the Dow Jones Industrial Average or S&P Composite index, respectively. However, the “outperformance” of technology should be expected since it has been the high PE stocks within the technology sector that have declined the most from all-time peaks made over the last five months.

The question, therefore, arises whether the current rally indicates the lows have been found, or if it is simply a short-term rotation of leadership from value to growth, i.e., a bounce within a larger bear market decline. In our opinion, the bear market has not ended even though it is possible that many stocks may have found their lows. Nonetheless, the landscape ahead remains treacherous, and we remain wary. Not only does the future include a hawkish Fed, but the risk of war in Europe, defaults of Russian sovereign debt, a consumer burdened by rampant inflation leaving little discretionary spending after transportation and food expenses, and therefore, a downside risk for earnings.

We have long been of the opinion that equities needed a valuation adjustment due to high inflation spurred on by too much monetary ease. And while equity prices were peaking before Russia invaded Ukraine, the war only exacerbates the existing problems. It translates into tremendous geopolitical uncertainty in the months ahead, and also means that diminished supplies of energy and grain will make the inflationary problem more severe. In short, if equities were facing a bear market in 2022; it is now worsened by the Russian invasion. This is a complex situation for a Federal Reserve, particularly since they were already slow to curb inflation. Strategists are now forecasting several 50 basis point rate hikes by the Fed and the Fed’s own dot-plot implies the fed funds rate will reach 2.8% by 2023. The sum of all this points to the risk of stagflation, the possibility of an inverted yield curve, and/or recession by the end of the year.


In our view, the earnings results for the first quarter and the comments made by companies about earnings prospects for the full year could become a market-moving event. If companies are optimistic about earnings, it will provide fundamental support for equities. If not, pessimism could generate another selling wave. Keep in mind that our valuation model for 2022 indicates that the appropriate PE multiple is 15.8 times earnings, which also happens to be the average trailing PE over the last 75 years. In our view, this is where value is found in the broad equity market. A 15.8 multiple with our $220 earnings estimate for this year equates to a downside risk to SPX 3475. The S&P 500 may not have to fall this far, but to date, we do not believe the lows have been made.

Technically Speaking

From a technical perspective, all the indices have rebounded above their 50-day moving averages, which is well within the characteristics of a bear market rally. More importantly, the 100- and 200-day moving averages are trending on a path that suggests they may soon converge in the indices. If so, this converging will define important resistance points in the near term. In the Dow Jones Industrial Average, the 100-day moving average is 35,145 and the 200-day moving average is at 34,975, implying that the DJIA 35,000 area will be a critical level for the intermediate-term. See page 9. One hopeful sign is found in the S&P 500 index where the move above the 200-day moving average has the potential to negate the major head-and-shoulders top formation we have discussed in recent weeks. If the index betters the 100-day moving average, which is now at SPX 4550, this will help to neutralize this bearish pattern. See page 8.  

Economic Trends

Recent economic releases should be analyzed with the knowledge that the numbers preceded the Russian invasion of Ukraine, the Fed’s first rate hike, and statements by board governors that the FOMC may become more hawkish in coming months.

On a seasonally adjusted basis, retail sales for February rose 0.3% month-over-month and 17.6% YOY. It should be noted that gas station sales rose 5.3% for the month and 34.6% YOY, which is the impact of higher gasoline prices. When auto and gasoline sales are excluded, retail sales fell 0.4% in the month, but still rose 15.8% YOY. The more interesting tidbit in retail sales data showed that February’s unadjusted retail sales fell 1.55% YOY; however, February or March tend to be the seasonal low point for retail sales. This means that March and April releases should be more revealing about the current status of household spending. See page 3.

The National Association of Home Builder confidence index fell from 81 in February to 79 in March, which marked the third consecutive month of declines. The sharpest decline in sentiment was seen in “sales expectations for the next six months” which fell from 80 to 70, the lowest reading since June 2020 during the pandemic. The pending home sales index is reported with a lag, but the January index fell to 109.5, its third consecutive decline and the lowest level seen since April 2021. Given the NAHB readings, we expect pending home sales will continue to fall. See page 4. Existing home sales for February were an annualized rate of 6.02 million, which was a 7.2% decline for the month and decline of 2.4% YOY. The weakest segment of the market was the northeast where sales were down 11.5% for the month and down 12.7% YOY. Nevertheless, the median sales price of a single-family existing home was $363,800, a gain of 15.5% from a year earlier. See page 5. The housing market will be one of the most important areas of the economy to monitor in the months ahead. Interest rates are clearly headed higher, but inventories remain low, and prices are steady. Wages are increasing, and this could offset some of the increase in housing costs. Still, there have been anecdotal stories of millennials who recently purchased homes but underestimated the cost of maintenance, taxes, and heating. In our opinion, all signals point to a slower housing market in the second half of 2022. And if rates rise quickly, the housing market could come to a quick halt. This will be a drag on GDP and will again, make the Fed’s job of taming inflation without throwing the economy into a recession all the more difficult. We remain cautious.   

Gail Dudack

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Down 20%… Mea Coupa

DJIA: 34,480

Down 20%… mea Coupa. Coupa Software (82) shares fell 20% Thursday after the company gave guidance that was below analysts’ estimates. The company said it was looking for first quarter revenue of $189 – $191 million, while analysts were looking for $191.4 million – quite the miss? Our favorite part in these things is Key Bank cut its price target for the shares to $125 from $175, once again, opinions follow price. To look at the chart, we would simply say welcome to the world of Tech over the last year. Granted Coupa may not be a household name, so try AMD (112) or Nvidia (248), both down some 40% from their highs. Tech is making the S&P look good this year, and the S&P is making commodity/value look even better. For Tech, days like Tuesday and Wednesday make hope spring eternal. Meanwhile, the best one day rallies are found in bear markets. So the market has held the January lows, but there’s a bit more to it than just that. Measures like stocks above their 50-day and 200-day averages, and the level of 12-month new lows held well above their own January lows. Divergences can be positive as well as negative, and in this case signaled diminished selling pressure into the decline. Add to that a market stretched to the downside, oversold as they say, and sentiment of doom and gloom, and you have the ingredients for a rally. We doubt this is more than another bounce in the downtrend, but we will concede the numbers haven’t been bad – 4-to-1 up days like Wednesday always get our attention. Had we seen strength in the averages along with flat A/Ds that would have been a real warning, and would caution in markets like this the numbers could change quickly. Bubbles are hard to recognize when you’re in them. When over, they’re embarrassing to recognize. Here in this happy place called retrospect, it seems clear we’ve had a few, most of which indeed are past tense. That’s not certain when it comes to bitcoin, though using Marathon Digital (27) as a guide, the move from 85 to 25 suggests it could be. Because of its relative obscurity, one of our favorite bubbles was that of the electric vehicle makers. We’re not talking Tesla (872) here, we’re thinking of Lordstown Motors (3), 31 to 3, Fisker (12), 31 to 10, or Canoo (6), 25 to 5. Another favorite would be the SPACS. Give money to someone to buy an unknown something and hope for the best. What could go wrong there? The Next Generation SPAC ETF (SPAK-17) has gone from 35 to 16, while an individual name like Skillz (3) has dropped from 46 to 3. And let’s not forget those Meme stocks. If the measure of bear market risk has to do with the speculation that preceded it, we would suggest there’s still considerable risk out there. Sometimes you have to ask yourself, do you want to be cool, or do you want to make money? We doubt many are comfortable bellying up to the local bar bragging about the utility stocks they own. And maybe that says it all. If you look at the XLU (71) chart on the other side, the SPDR Utilities ETF, you might mistake it for a Tech or, these days, an oil stock. Speaking of oil stocks, if you want an investment strategy that has worked pretty well over the years, follow the nice people at Dow Jones and Co. or, should we say, fade those nice people. They added (210) to the Dow, now down about 35% from its peak, and deleted Exxon (79), recently up some 38%. It’s not the fault of the keepers of the Dow, they’re only human, and human nature typically dictates that you go with what is working at the time. Another reason to worry about Tech, and another reason to think of utilities. The news from the Fed could not have been much worse – seven hikes! Rather than selling on the news, Wednesday saw buying on the news. It seems more that the much anticipated news was discounted, as they say. When the market was in its uptrend and the Fed compliant, the cry was don’t fight the Fed. We suspect that still could be sage advice, especially as quantitative easing turns to quantitative tightening. Meanwhile, peace scares have played a bit of havoc with the commodities trade, that and the idea most of the stocks had become a little stretched. The uptrends remain intact. Particularly given the strength in oil, it has been surprising the solar stocks haven’t acted better. As measured by the Solar ETF (TAN-75), the stocks are down some 25% from their highs. To look at the ETF, however, there is the suggestion that things may be changing. The downtrend has been broken and most of the stocks are above their 50-day.

Frank D. Gretz

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US Strategy Weekly: A Week Full of Events

The big event of the week will be the Federal Reserve meeting and Chairman Jerome Powell’s commentary since monetary policy is expected to change for the first time in two years. The fed funds rate is expected to rise 25 basis points to a range of 25 to 50 basis points on Wednesday, and this will be the Fed’s first interest rate increase since December 2018. The shift is meaningful, but widely expected and fully priced into stock prices, in our opinion.

But while the Fed may be the media focus on Wednesday, the day is also notable for the fact that Russia has a $117 million payment due on US dollar-denominated Eurobond coupons. This will be the first of several key payments due on Russia’s sovereign debt in coming months and the first since the Fitch rating system downgraded Russian debt to a “C” rating, indicating that a sovereign default is imminent. Most economists now expect Russia to default since it has become the pariah of the Western banking world. Following Russia’s invasion of Ukraine many countries froze Russian reserves of dollars and euros held at banks and this crippled Russian liquidity and will make payment difficult. However, a nonpayment usually initiates a notice of a 30-day grace period to the issuer before defaults are officially triggered. Still, it will be interesting to see how Russia responds to this week’s likely default since it is apt to be the first of many. Several more payments will be coming due in the weeks ahead and we will be watching to see if these defaults have unexpected consequences. Russia’s debt is not large enough to worry about a major banking crisis, but it could result in some unexpected private losses.

To a large extent, the only response to Russia’s invasion of Ukraine have been economic sanctions by the US and other NATO nations. Therefore, a sovereign debt default may be the first of many tests of how well Russia and its economy can weather the sanctions from the West and still continue to wage a costly war in Ukraine.

Oil and Interest Rates

The stock market rose ahead of this week’s FOMC meeting but this rally could have been due to a variety of factors. First, the price of WTI crude oil ($95.15) dropped $28.50 this week after jumping $20 last week. This decline was a welcomed event however, the technical chart of the WTI future shows it still remains above all its key moving averages and remains in an uptrend. Keep in mind that crude oil ended the year at $75 which means it is up 27% year-to-date, despite this pullback. See page 8.

We think the most interesting chart of the week is the 10-year Treasury note yield, which rose from 1.82% to 2.16%. This 34 basis-point jump, ahead of the Fed meeting is somewhat consoling since it reduces the immediate risk of an inverted yield curve, but we are curious about the move since it did not appear to be linked to “economic strength.” The risk of an inverted yield curve in 2022, and of a recession, continues to be significant in our opinion. In short, we believe this week’s equity rally is best for traders. Unfortunately, the problem that inflation brings, its impact on consumers, investors, profit margins, the Fed and PE multiples will not go away any time soon.

There will be a number of key economic releases this week including retail sales as well as industrial production, housing data, and construction spending. However, all this data will be for the month of February and will not include the impact the Russian invasion may have had on the American public. History suggests that wars tend to be good for the economy, but this is mainly true for the industrial sector. The US is a consumer-led economy and wars can have a negative impact on consumer psyche and consumer spending, particularly when the price of gasoline and food is rising rapidly.


Headline inflation rose from 7.5% to 7.9% in February and core CPI rose from 6.0% to 6.5%. These numbers indicate that inflation continues to be a plague on the economy. Energy sector prices are the biggest issue, up 25.6% YOY in February. Nevertheless, inflation has become well-ingrained in the economy and all but 6.4% of the CPI weighting is rising well above the Fed’s target of 2%. See page 3. Transportation costs were up 21% YOY in February, the highest since early 1980.

As we anticipated, housing, which is 42.4% of the weighting of the CPI are now rising. Housing costs did not begin to rise until recently and had been a nice offset to rising fuel cost. But the housing sector saw prices up 5.95% YOY in February, the highest since early 1982. The worrisome issue is that housing costs are now accelerating dramatically and are adding to the inflation problem facing households. See page 4.

Producer price indices were also released this week and they show little signs of decelerating. The PPI for finished goods rose 13.8% YOY in February versus 12.5% YOY a month earlier. The core PPI for finished goods rose 7.7% YOY versus 7.0% in January. Only PPI final demand displayed any sign of stabilizing and was unchanged at a disturbingly high rate of 10.1% YOY. See page 5. The pace of inflation is a big concern, and it is now the steepest jump in prices since the OPEC oil embargo imposed on the US in 1973. The embargo in 1973 was related to the Arab-Israeli War and was imposed by OPEC when the US supplied Israel with military support. Note the US dependence on foreign oil and the impact this has on geopolitics. We find this to be a disturbing parallel in many ways.

The rise in inflation has now created a spread between the fed funds rate and inflation that is even larger than that seen in 1973. As we have often noted, the Fed’s failure to reduce monetary ease early last year to stem the growing tide of inflation, has now created a major problem. Our view of the number of fed funds rate hikes this year is evolving. It is likely that inflation will dampen consumption, weaken profit margins, and slow the US economy in 2022. The Fed must now balance between inflation and the risk of sparking a recession. It is a difficult decision.  

This risk is visible in sentiment indicators. The University of Michigan consumer sentiment index fell to 59.7 in March, a new cyclical low. The NFIB Small Business Optimism Index decreased by 1.4 points to 95.7 in March, the second consecutive month below the 48-year average of 98. Twenty-six percent of owners surveyed reported that inflation was their single most important problem in operating their business. This was a four-point increase since December and the highest reading since the third quarter of 1981. Not surprisingly, hiring plans fell from 26 to 19 in March. See page 6.

Little has changed in the technical area although the S&P 500 index has joined all the other indices in confirming a “death cross.” A death cross occurs when the 50-day moving average falls below the 200-day moving average and it is a negative configuration. But since a death cross tends to happen midway or late into a bear cycle, we do not find that meaningful. Still, we do not believe the lows have yet been found. Neither technical nor fundamental guidelines give us comfort this week, and both sets of indicators suggest there is more downside risk in the market. The safest equity sectors in the current environment are energy, staples, defense-related and companies that are insulated from inflation and have dividends greater than 2%. But we do believe a long-term opportunity to buy technology stocks is on the horizon.

Gail Dudack

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Changing Leadership and Changing Investment Styles

Frank is traveling this week. Rather than the normal Market Letter, hope you enjoy this note from Frank on changing leadership and changing investment styles.

Who among us hasn’t had a bad year or two? If you’re one of them, go stand in the back of the room with the other liars. Not to be unkind, Cathie Wood has brought much of this on herself. The issue seems to be in understanding this is a market of stocks. Stocks are not companies, they are pieces of paper. The biggest best most innovative companies can have stocks that perform poorly, for any number of reasons. And as per what follows, investment styles do change. That’s what keeps the business interesting.

What follows is a paragraph from our Market Letter of March 5, 2021:

“Woodstock is a fond memory … will the same be true of Wood’s stocks?  Cathie Wood has garnered quite a bit of fame, and deservedly so.  Those ARK Funds which she founded were up a gazillion percent last year, but who’s counting.  Nonetheless, we always find it a bit risky when everyone knows your name, so to speak.  It certainly proved so for Gerry Tsai when, after his success at Fidelity, he founded the Manhattan Fund in 1965.  By 1969 the funds collapsed, losing 90% of their value.  While his was an aggressive style of growth stock investing, that of Bill Miller’s was a value style of investing.  His fame resided in his record of beating the S&P for 15 years in a row.  When the market turned against value in 2006, a run of underperformance left him lagging the S&P by 50%.  Changing fortunes in both cases were not a matter of intelligence, it was a matter of changing investment styles.  For now, it’s about reopen/reflate, if that can be called a style.  Cathie Wood isn’t exactly covered in that look.”

Frank Gretz

US Strategy Weekly: A Bear is a Bear is a Bear

With the Nasdaq Composite and Russell 2000 down 20% from their all-time highs and many individual stocks, including most of the FAANG stocks, down much more than 20% (for example, Netflix, Inc. [NFLX – $341.76] has had a 50% decline), we believe it is only proper to define the current sell-off as a bear market.

The fact that the S&P 500 and the Dow Jones Industrial Average have declined only 13% and 11.3%, respectively, is a mere technicality, in our opinion; and listening to financial news anchors talk about the S&P reaching “correction territory” makes us scratch our head. As history has shown us, the large-capitalization stocks are often the last to fall in a bear market, so the outperformance of the DJIA and the SPX is not unusual or consoling. And unfortunately, we do not believe the lows have yet been found. Neither technical nor fundamental guidelines give us comfort this week, and both sets of indicators suggest there is more downside risk in the market.

In our annual outlook forecasts for 2021 and 2022, we indicated that inflation would be the biggest hurdle facing equity investors in the months and years ahead and this finally became widely accepted late last year. Russia’s invasion of Ukraine is a new factor that could make inflation even more crippling than we anticipated. Although crude oil and energy stocks broke out of major base patterns prior to the Russian invasion, and the energy sector has been the best performing sector all year, WTI has soared an additional 38% on a closing price basis and 50% on an intra-day trading basis in recent days. It is well-known that Russia is a major oil exporter, but Ukraine and Russia are also major exporters of wheat and corn. Russia is a major producer of nickel, palladium, and fertilizer. And as the conflict continues into its second week without any hope of an easy or quick resolution, commodity prices have begun to soar. It now appears that shortages of commodities will be global and will continue well into the future. This is not good news for inflation or most of the world economies. As a result, the Russian invasion appears to be escalating the existing shift in the underlying market from growth to value. However, the conflict is also triggering a shift from technology to energy, commodities, and defense stocks. Last week we noted the shift to defense and aerospace and downgraded the financial sector from overweight to neutral and upgraded the industrial sector from neutral to overweight. We have an overweight recommendation of the staples sector where food-related stocks are found, but the S&P 500 does not include pure commodity plays where many of the breakouts in chart patterns exist. Nevertheless, this week we are upgrading the materials sector from underweight to neutral and downgrading the communication services sector from neutral to underweight. We would not be surprised if there is also a shift in leadership within the technology sector and would emphasize cybersecurity and cyber-defense-related stocks. See page 14.    

Fundamentals are not encouraging

Fundamentals are important in a bearish market since they help define levels of value and identify potential lows in both stocks and the indices. With this in mind, we turn to our valuation model where we have a 2022 earnings estimate for the S&P 500 of $220, a 7% increase. Currently our forecast for inflation suggests prices will decelerate to a 4.4% pace, but recent developments suggest this may be too optimistic. Our interest rate forecasts indicate yields should rise to 0.8% in the 3-month Treasury and 2.2% in the 10-year Treasury note. This combination of inputs results in a forecasted “average” PE multiple of 15.8 times for 2022. Note that a 15.8 multiple is also equal to the average PE seen over the last 75 years. Our $220 earnings estimate coupled with a 15.8 multiple yields an SPX target of 3476. In short, our model predicts a decline of 27.5% in the SPX would be required to return the broad indices to “fair value.” This is an uncomfortable forecast but reasonable given the number of uncertainties that lie ahead for investors if the Russian/Ukrainian conflict is not resolved soon.

Prior to the Russian invasion, we believed the equity market had begun a correction that would bring prices and PE multiples back in line with traditional fundamental benchmarks. Unfortunately, the Russian invasion has upset the financial and economic landscape and puts even our modest forecasts for earnings, inflation, and interest rates at great risk. For example, higher commodity costs are likely to pressure profit margins and lower revenues for many companies and could make our $220 earnings estimate too optimistic.


This week both President Biden and several administration officials stated that US energy production is currently at record levels. However, we doubted this was true due to restrictions and regulations placed on the energy sector after the 2020 election. Data from the US Energy Information Administration (EIA) contradicts the administration’s statements. On page 3 we display an EIA chart with annual data that shows the US energy production peaked in 2019. A second chart shows weekly field production of crude oil in the US that confirms US oil production peaked in 2019. Industrial production data from the Federal Reserve Board of St. Louis also confirms that energy production peaked in 2019, fell during the pandemic, recovered, but is still well below 2019 production levels. In short, US production is not at peak levels and there is much more potential for energy production. If this were encouraged, Americans would not have to suffer the extreme prices currently seen at the pump and in energy bills.

The price of WTI crude oil jumped $20 this week and briefly touched $130 a barrel, exceeding the price target of $110 we noted last week. Some strategists are suggesting prices can move considerably higher, particularly after the Biden administration indicated the US will not buy Russian oil. Regrettably, there was not a simultaneous decision to increase US production. We expect the FOMC will decide to raise rates 25 basis points at the March meeting. And though the 10-year yield rose from 1.7% to 1.82% in the past week, the risk of an inverted yield curve in 2022, and a recession, continues to grow, in our view. See page 7.

Technical Death Crosses

We are not ardent followers of technical configurations called golden crosses or death crosses, but they are followed by many technicians and traders and are therefore worth noting. A golden cross occurs when a short-term moving average, such as the 50-day moving average, crosses above a long-term moving average like the 200-day moving average. A death cross is the opposite configuration. The first index to have experienced a death cross in the current bear market was the Russell 2000 index. This was followed by the Nasdaq Composite index, and this week, the Dow Jones Industrial Average is close to joining the group. Even the Wilshire 5000 index has formed a death cross. Interestingly, out of the five FAANG stocks, the only one that does not display a death cross is Apple, Inc. (AAPL – $157.44). The main reason we are not ardent followers of this technical pattern is that both the death cross and golden cross tend to appear late in a trend. Still, the importance of these death crosses is that the 200-day moving average becomes major long-term upside resistance in each stock and index. We continue to favor stocks over bonds and believe that stocks with a history of increasing dividends and yields in excess of 2.2% can best weather the volatility that is apt to continue in the first half of the year.

Gail Dudack

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Bad News So Bad… It’s Good News

DJIA:  33,794

Bad news so bad… it’s good news.  This seemed the case last Thursday, the news being the Ukraine invasion.  With all due sympathy for those suffering, the news finally seemed to result in the washout a market like this has needed.  As we’ve noted many times sellers, not buyers, make lows.  It’s bad news that provokes selling, not good news.  When the sellers are out of the way, stocks can move up with relative ease, as they seem to do on Thursday. We doubt this is the start of a new bull market, and history suggests much the same.  Those “reversal days” are real attention grabbers, but as we’ve come to say about the car we’re driving – looks better than it runs.  When the market is down 5% or more in a calendar week, and then closes above the previous week’s close, in the next 2 to 8 weeks it has made a new low 12 of 13 times, according to  We have a low and probably more rally, but not a new Bull market.

Sysco is the largest stock by market cap?  Actually, that was Cisco Systems (56), and that was 22 years ago.  Meanwhile Sysco Corp. (87), the distributor of food and related products to the food service industry, hit a new all-time high this week.  As they say, things change.  It’s a bit ironic too, this food distribution company should be acting so much better than the food sellers, that is, most of the restaurants.  It is, however, the kind of steady almost defensive sort of stock which, together with names like Coke (62) and Hershey (208), have done quite well this year.  Overall, of course, commodity stocks rule.  Oil is the most obvious and it’s not just about the Ukraine.  We pointed out in early January that when oil starts a year strongly, it goes on to lead.  Gold finally has come around, copper, steel and aluminum have acted well for some time.  Ag stocks are acting well – Archer Daniels (82) is making new all-time highs. Even coal stocks act well, and we’re not even close to Christmas.

Those surging commodity prices have made stellar performers of the related stocks.  This, in turn, has been beneficial to resource rich economies such as Brazil.  And, as Barron’s points out, the hostilities in the Ukraine have enhanced the outlook for price hikes in everything from oil to wheat and corn.  Part of the appeal of Brazil and other emerging markets is that they have underperformed for so long, but that may be about to change.  The McClellan Summation Index for Brazil has turned up, following this momentum indicator’s long streak in negative territory.  While some short term pullback is possible, since 1997 this configuration has produced a positive annualized return of 29%, again according to  By contrast, when this indicator is negative returns were -2%.  Aside from the country ETF (EWZ-35), a couple obvious beneficiaries here are Vale (20) and Petrobras (15). Normally the latter’s 14% yield would be enough to scare us away, but it just might be safe, at least as safe as anything can be in Brazil.

Has comfort gone out of style?  Purple Innovation (7) is a name you might not know.  The company designs and manufactures a range of branded comfort products, including mattresses, pillows, cushions, sheets and other products.  Since March of last year the stock hasn’t exactly been comforting, falling from around 40.  What we find fascinating here is that a brokerage firm has cut its price target to16 from 22 – mind you, the stock was 5.  At least they maintained their overweight rating.  Sure Purple Innovation isn’t exactly a household name, so let’s look at Block (114), formerly Square.  A few days ago the price target was cut to 175 from 275 –the stock is 115.  The point here is that opinions follow price – opinions chase the price.  And this is not just true of companies and it’s not just true of price weakness.  Those many who would not touch oil $20 lower now see reason for it to move higher.  When Goldman starts calling for 150 – 200, as they did back in the summer of 2008, time to really worry.

At the end of last week the market looked ready to rip higher.  After the initial shock of Russia’s invasion, the S&P rallied more than 6% in two days.  Things, especially Tech things, had gotten stretched and, as is typical, down the most turns to up the most as the spring uncoils.  Although not a new Bull market, there should be more recovery. We would look to the 50-day as a guide, both for the market, 4530 for the S&P, and for most of the rebounding Tech stocks.  As always, the Advance-Decline numbers will be important.  They have been almost surprisingly positive, but in a market like this they can change quickly.  Just a few days up in the averages with flat, let alone negative A/Ds would be a real warning.

Frank D. Gretz

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US Strategy Weekly: Pray for Ukraine

As we go to print, we are also preparing for President Joseph Biden’s first State of the Union address to Congress. It could be a pivotal speech and a crucial time for Biden because at the same time, a massive Russian convoy is spotted outside Ukraine’s capital Kyiv and Russian aggression continues for the sixth consecutive day. Insights into President Putin’s actions were revealed in remarks made prior to his invasion when he claimed his actions were to achieve “demilitarization and denazification” of the neighboring nation. Clearly Putin expected an easy takeover of Ukraine since the Russian state-aligned media outlet RIA posted, but quickly deleted, an article on 8 AM February 26th that hailed Vladimir Putin for victory over Ukraine as Russia helps usher in a supposed “new world.” The RIA article can be found here:

The geopolitical and financial backdrop could quickly evolve this week, but to a large extent, there is no change from the “Direct from Dudack” (Downside Risk Guidance) sent on February 24, 2022, in which we reviewed the downside potential of the equity market from both a technical and fundamental perspective. To date, the declines from recent peaks have been 9.97%, 11.9%, 18.8%, 20.4%, and 13.2% in the Dow Jones Industrial Average, S&P 500, Nasdaq Composite, Russell 2000, and Wilshire 5000 composite, respectively.

Fundamental Perspective

Although technical indicators tend to be best at forecasting market peaks, fundamentals become increasingly important in a bearish decline, in our view. They are tools that can help define levels of value, project best long-term buying opportunities and identify potential lows in both stocks and indices. For a fundamental perspective, we first turn to our valuation model. Models can only be as good as their inputs and for transparency, our estimates for 2022 begin with a forecast of $220 for S&P 500 earnings which equates to a 7% increase. We also expect inflation to abate in 2022, but only to a 4.4% pace. Our interest rate forecasts expect yields to rise to 0.8% for the 3-month Treasury and 2.2% for the 10-year Treasury note. Our model indicates that with this financial backdrop, the appropriate “average” PE multiple should be 15.8 times. Surprisingly, a 15.8 multiple is also equal to the average PE seen over the last 75 years. Applying our $220 earnings estimate to a 15.8 multiple yields an SPX target of 3476. In short, our model predicts a decline of 27.5% in the SPX is required to return to “fair value.” See page 4. Since our $220 earnings estimate is in line with the consensus, this also means that every earnings reporting season will be critical for the market. Positive or negative earnings surprises during earnings season could become market-moving events which could shift the perception of where “value” is found in the market. See page 5.

Technical Perspective

Many of our volume/breadth indicators revealed weakness in the latter half of 2021 and most of these indicators continue to point to a bearish trend. However, the chart of the S&P is of particular interest in the near term since a head and shoulders top formation has developed over the last three quarters. A head and shoulders top only becomes important once the “neckline” of the formation has been broken. The neckline in the SPX’s head and shoulders is irregular and can be drawn at several different levels, but we show the neckline at SPX 4300. See page 7. A break below the neckline of a head and shoulders formation triggers two separate downside targets – the difference between the height of the shoulder to the neckline and the difference between the head and the neckline. The first of these downside targets implies SPX 4000, which was nearly tested on an intra-day basis, in recent sessions. The second downside target is SPX 3800 which equates to a 20% correction. Note that a 20% correction in the SPX appears quite possible, and perhaps reasonable, given that the Russell 2000 index has already experienced a 20% decline from its record high.

The charts of (AMZN – $3022.84) and the Russell 2000 index (RUT – $2008.51) continue to intrigue us since they are ironically similar. See page 9. Both charts experienced sharp declines within days of each other and led the overall market weakness. Both are currently trading below all key moving averages. The recent rebound in AMZN after the company reported good earnings, failed to better the first level of resistance at $3223; however, this remains a key level to watch on rally days. However, the charts continue to parallel each other and after initial precipitous declines, both show that these lows were retested. To date, these tests have been successful. This is a favorable development and the longer the initial lows hold in both charts, it is a sign that the overall market is beginning to test and define significant lows. The support levels to monitor are $2700 in Amazon and $1900 in the RUT.

Federal Reserve Policy

Although we are only two weeks away from the important FOMC March meeting, it is being overshadowed by geopolitical events. In the current environment it is unlikely that the Fed will raise interest rates 50 basis points to fight inflation, but we do believe a 25-basis point hike is prudent. Still, the Fed has a very difficult job ahead of them. The fallout from Russia’s invasion of Ukraine is impacting them in two ways. First, commodity prices are spiking. The bullish crude oil chart has fulfilled upside targets of $90 and $100 and appears headed for a third target and key level of resistance at $110. See page 6. Rising energy and commodity prices make the Fed’s job of controlling inflation extremely difficult. Second, a flight to safety is taking 10-year Treasury note yields lower. The 10-year note yield is currently at 1.7%, down from a recent high of 2%, which makes the risk of an inverted yield curve in 2022 more likely as the Fed increases short-term rates. An inverted yield curve has been the best forecaster of economic recessions, and therefore the risk of recession appears to be growing.

Sector Shifts

The invasion of Ukraine impacts the US in a variety of ways but primarily it will raise inflation and thereby reduce household spending power. This could impact corporate earnings in 2022 which is why we continue to recommend an overweight rating in energy and staples. The sanctions imposed on Russia are necessary, but they do have the risk of impacting the global banking system, including US banks. For this reason, we are downgrading the financial sector from a recommended overweight to a neutral weight. Meanwhile, Russia has awakened the Western world to the risks of war and Germany responded by indicating they will spend 2% of their GDP on military defense. As a result, defense stocks are viewed as an area of the market that should have increasing revenues and better than expected earnings. The charts of many of the US defense corporations display bullish breakouts from long-term sideways patterns. We are upgrading the industrials from a neutral weighting to an overweight. In these uncertain times we still believe equities are the best holdings. We continue to also overweight energy and staples, but a balanced portfolio is emphasized. Companies with a history of increasing dividends and with yields in excess of 2.2% can best weather the volatility that is apt to dominate the first half of the year.

Gail Dudack

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