US Strategy Weekly: See You in September

In last week’s Strategy Weekly, we wrote (“Neither Bear nor Bull” – August 24, 2022): “While technical indicators have their bright spots, we feel investors may have become too optimistic too soon. Re-emergence of meme stock investors is one sign that speculation has returned to the market too quickly. Expectations of a Fed pivot this year are quite likely to be wrong, or at least premature. Economic indicators are mixed but many are showing definitive signs of weakness and the possibility of a recession.

Although we were skeptical of the recent rally, from a broad macro perspective, we still believe the equity market is in a bottoming phase. However, we should explain what this means. Toward the end of a classic bear market decline, equities often suffer an intense sell-off on heavy volume which is often accompanied by margin calls. June had many of these characteristics. In subsequent months, bear market lows are typically retested, and it is normal to see the popular averages hit a lower low which can trigger more selling panic. But the distinctive feature of a successful bottoming process in a bear market cycle is that breadth indicators show that the new lower low was made on less volume, accompanied by less selling pressure, with less extreme oversold readings, and with less extreme breadth statistics in general. These are all signs of a waning bear market and a successful test of the low. The rebound from this lower low should also contain a series of 90% up-volume days as further confirmation that the final low has been made.

With this as a historical backdrop, one should expect the June lows to be retested in the second half of the year. And keep in mind that the August-September months tend to be a seasonally weak period for equity prices. Actually, September ranks as the weakest of all twelve months averaging a 0.7% loss over the last 71 years. Although October has a bad reputation and is associated with bear markets, the truth is that October tends to be a “bear killer” or a turnaround month. Twelve of the last 48 declines of 10% or more in the S&P 500 were made in October, far more than any other month. Next in line is March with eight lows and June with seven.


Seasonality does not always work as planned, and it can be overridden by geopolitical or financial events. Still, it is wise to be aware of the seasonal tendencies of equity markets. A retest of the lows in the September/October timeframe makes sense to us for many reasons in addition to seasonality. First, it will be the start of another important earnings reporting season. Despite recent headlines suggesting that second quarter earnings results were “better than expected” the reality is that they were better than the very worst expectations. In truth, earnings for this year and next year came down substantially in recent weeks. The S&P Dow Jones consensus earnings estimate for 2022 fell $13.68 since the end of June. The IBES consensus estimate for 2022 fell $4.21 in the same period. As a result, our recently reduced forecast of $218 for the S&P 500 for this year is under review and may be in jeopardy.

Second, the next FOMC meeting is scheduled for September 20-21, and this will be followed by another meeting on November 1-2. The final Federal Reserve meeting of the year is set for December 13-14. However, the September meeting is the one we expect will set the tone for monetary policy for the rest of the year in terms of how much tightening the Federal Reserve expects it will do in the final months of 2022. More importantly, we believe the consensus will continue to be disappointed regarding monetary policy in 2023. For example, New York Federal Reserve Bank President John Williams recently stated that the Fed will “likely need to get its policy rate above 3.5% and is unlikely to cut interest rates at all next year as it wages a battle against far too high inflation.” That means no “Fed pivot” in the next sixteen months!

Third, September could be the month in which the energy crisis in Europe unravels and heating fuel is rationed. Unrest in Iraq could negatively impact energy supplies. China’s economy appears to be weakening despite several attempts to stimulate activity. Plus, as a result of a landmark audit deal between Beijing and US regulators, Alibaba Group Holdings (BABA – $93.84) will be the first Chinese company to be audited by US audit watchdog – Public Company Accounting Oversight Board (PCAOB) – in Hong Kong in mid-September. In sum, September has the potential of being a very important and eventful month.

Economic Review

The first revision for second quarter GDP indicated growth declined 0.6% versus the initial 0.9% decline. Nonetheless, economic activity weakened for two quarters in a row. Economists denying the first half of the year was a recession may be overlooking the debilitating impact of inflation. On page 3 we show the GDP deflator, which is currently at its highest level since December 1981. Note that similarly high inflation between 1970 and 1984 was a period marked by four separate recessions.

The most important data series, in our view, is real personal disposable income since this is the best measure of potential household demand. Fiscal stimulus bills boosted household income significantly in April 2020 and even more in March 2021, but these gains in personal income were one-time events and artificial. Real personal disposable income per capita was $45,464 in July, down noticeably from the pre-pandemic January 2020 level of $45,747 and down significantly from the stimulus-boosted level of $57,752 in March 2021. Government stimulus in 2021 simply added to inflationary pressures and households are now experiencing both higher prices and relatively lower income. It is a bad combination. Note that personal consumption has increased more than personal income in recent months and is a trend that is unsustainable. See page 5.

Technical Summary

All the popular indices tested their 200-day moving averages last week, but this resistance proved to be overwhelming. Unfortunately, neither the 100-day nor the 50-day moving averages provided support on the subsequent sell-off in the S&P 500, Dow Jones Industrial Average, or the Nasdaq Composite index which implies the June lows are apt to be tested. The 25-day up/down volume oscillator fell to 1.63 and is neutral this week after its mid-August overbought reading for seven of eight consecutive trading sessions. However, the August 26 session was a 91% down day coupled with a 1,008-point decline in the DJIA.

In sum, we expect there will be disappointments ahead in terms of monetary policy and earnings results, and in our view, these risks have not been fully priced into equities. We believe portfolios should be concentrated in sectors where earnings are most predictable and are both inflation and recession-resistant. These include areas such as energy, utilities, defense-related stocks, staples, and healthcare. 

Gail Dudack

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Four-to-One and Six-to-One Down … Sounds Like a Shot Across the Bow

DJIA:  33,294

Four-to-one and six-to-one down … sounds like a shot across the bow.  Those were Advance-Decline numbers last Wednesday and Friday, followed by another five-to-one down day on Monday.   We know we said the bad down days aren’t the problem, but these kind of numbers get our attention.  A week earlier we had seen a couple of five-to-one up days.  It’s rare to see things change so quickly.  Through Monday the Dow had lost over 1000 points in four days, while the Advance-Decline Index lost 5000 net advancing issues.  That’s a lot to make up and it’s important that it be made up.  A weak rally, a few bad up days, and we will be left with a divergence – higher highs in the averages and lower highs in the A/D index.  Sufficient unto the day, but divergences rarely end well.  It’s no time for bad up days.

It’s not exactly raging, but the debate goes on – new bull market or bear market rally?  If you believe it the latter, you’re not too happy having missed the 17% rally in the S&P, and more in the Naz.  But to answer the question – who cares.  Back in June there was ample evidence stocks were washed out.  And the rally has turned out to be quite credible, call it what you like.  The S&P 500 is yet to reach a new high but an Advance-Decline Index of the 500 component stocks has made a new high.  This configuration has been followed by a new high in the S&P Index itself every time – more of the average stock leading the stock averages.  Yet, this time doesn’t have to be different for things to go wrong.  What could go wrong is simply a change in the pattern, not just for the S&P and its stocks, but for the market as a whole.  Bad up days mean a narrowing market, and narrowing markets lead to corrections.  Would you call down 10% a test of the low or a correction in a bull market, and does it matter.

Energy shares have had a good year, though not exactly one that could be called linear.  As measured by the SPDR ETF (XLE-84), the shares are up some 45% this year, including a little 26% setback from their June peak.  Having tested the 200-day a few times, earlier this month most recently, the move above 80 seems to have reestablished the overall uptrend.  At still only about 4% of the S&P by market cap, the stocks aren’t exactly over owned, despite their 9% share of S&P earnings.  It also seems worth noting the stocks are outperforming crude, which, based on the US Oil Fund (77) is in a trading range below its 50-day.  In our experience, when it comes to commodity versus stock disparities, the commodities more often than not follow the equities.  A similar pattern to that of XLE may be unfolding in the SPDR Metals and Mining ETF (XME-53) as it consolidates just above the 200-day.  A move above 53 would suggest a resumption of the overall uptrend there.

Peloton (11) could be the poster child for stay at home, and for its subsequent unwind.  The stock rallied 20% Wednesday on news of its hook up with Amazon (137).  We get the benefits but if you don’t want a Peloton, does it really matter who’s selling it?  We don’t mean to pick on Peloton, or for that matter, Zoom Video (86) which missed earlier in the week.  And we won’t even pick on ARKK (46) which is loaded with this stuff.  ARKK, however, has become interesting analytically.  The ETF itself was the poster child for the excesses of stay at home.  When it put in its low on May 11, well ahead of the S&P low June 16, that seemed encouraging – the excesses had been wrung out.  The near 50% bounce off the low also seemed impressive, though that retraced only a few percent of the stock’s decline.  More importantly, the ETF now is back below its 50-day, not a good sign for it and perhaps the market as well.

Finally it’s showtime!  Of course by the time you read this, it will be showtime dissecting time.  We find it hard to believe anything said will differ greatly from what the rest of the crew have been saying for a while now.  And historically these get-togethers have not been market movers, though most have not had the hype of this one.  The real point, however, is it doesn’t matter what Powell had to say, what matters always is how the market reacts to what he said.  The news doesn’t make the market, the market makes the news.  The market is entitled to the recent spate of weakness we’ve seen, it’s just that we didn’t like the character of the weakness.  Thursday’s 3-to-1 up day was a shift again, and more of what we would like to see.

Frank D. Gretz

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US Strategy Weekly: Neither Bull Nor Bear

Market peaks and troughs are often confusing intervals because both are periods of transition, volatility, and mixed signals. And at risk of oversimplifying the current environment, we expect confusion will heighten among investors and market forecasters based upon the facts that the technical condition of the equity market has been improving while the economic condition of the economy has been deteriorating. This is not an unusual combination at a major low.

It has been our view that the first half of the year was a recession or a recessionary period. This is the good news and the bad news. History shows that stocks tend to bottom out midway or in the latter half of a recession. If we are right about the economy this precedent is positive for today’s investors. However, a recession is also destructive to earnings and while many stocks have discounted a significant decline in earnings growth, this is not true of all stocks. In short, risk remains, and optimism may be a bit premature, especially at recent elevated prices. Although short-term trading opportunities will continue to present themselves, we believe portfolio holdings should be concentrated in sectors and companies that are both inflation and recession resistant, such as energy, utilities, defense-related industrials, staples and healthcare.

Our strategic view has been that 1.) the stock market began a bottoming phase in June, 2.) the major indices have probably seen their bear market lows, but 3.) the lows will be retested in coming months. Our optimism is supported by the fact that some technical indicators are defining a likely shift in long-term momentum from bearish to, at a minimum, neutral.


While technical indicators have their bright spots, we feel investors may have become too optimistic too soon. Re-emergence of meme stock investors is one sign that speculation has returned to the market too quickly. Expectations of a Fed pivot this year are quite likely to be wrong, or at least premature. Economic indicators are mixed but many are showing definitive signs of weakness and the possibility of a recession. A good example of this is this week’s S&P Global Flash US Composite PMI Index which fell to 45.0 in August, down from 47.7 in July. This was the second successive monthly decrease in total business activity, below 50 (contractionary), and was at a 27-month low. Excluding the period between March and May 2020, the decline in total output was the steepest seen since the series began nearly 13 years ago.

The S&P Global Flash US Services Business Activity Index was 44.1 in August, down from 47.3 in July, and the fastest decrease in business activity since May 2020. Service providers noted that hikes in interest rates and inflation dampened customer spending because disposable incomes were squeezed. This decline in spending was predictable in our view. As we have often noted, inflation destroys the purchasing power of consumers, higher fuel, transportation, and raw material costs pressure corporate margins, and while inflation has a negative impact on both consumption and earnings, it also lowers PE multiples. In sum, inflation is a triple threat to investors.

Some economic news was better than expected. Total retail & food service sales were $686.8 billion in July, a 10.3% YOY increase. Excluding motor vehicles and parts, sales were $557.9 billion, a 12.3% YOY gain. Sales of motor vehicles and parts dealers were $124.95 billion in July, a 2.1% YOY gain, and the first real year-over-year gain in autos since February 2022. See page 3. However, after adjusting for inflation, i.e., priced in 1982 dollars, real retail & food services sales were $231.25 billion in July, a much more modest 1.7% YOY gain. Nonetheless, this was the first positive year-over-year gain in real retail sales since February. But in terms of investments, it is important to note the changing composition of retail sales. There have been relative gains for gas stations, food services & drinking places, and nonstore retailers. But as a percentage of monthly retail sales, the losers have been autos, general merchandise, food & beverage, and clothing & clothing accessories stores. See page 4. These shifts in consumption are also reflected in sector performances with energy and utilities the only S&P 500 sectors to show year-to-date gains.

Meanwhile, the housing slump continues. Census data shows new home sales fell from 585,000 units in June to 511,000 units in July, the lowest level since October 2015 and 30% below a year earlier. Existing home sales fell from 5.1 million in June to 4.81 million in July, a 20% drop below the July 2021 level. Nonetheless, the median price of a new home rose from $414,900 to $439,400 in July, up 8% from a year earlier making homes less affordable in a rising interest rate environment. See page 5. And as home sales have been slowing, inventories have been rising. Existing home inventories have increased from the January 2022 low of 850,000 to 1.31 million units in July and the supply of single-family homes increased from 1.5 to 3.3 months in the same time period. Not surprisingly, building permits and starts have been falling in recent months. See page 6.


The S&P Dow Jones consensus EPS estimates for 2022 and 2023 rose $0.06 and fell $0.02, respectively, this week. Refinitiv IBES consensus EPS forecasts rose $0.16 and fell $0.03 respectively. However, the nominal earnings range for 2022 changed to $210.56 to $225.50 and earnings growth rates for this year were unchanged at 1.1% and 8.4%, respectively. But we want to point out that our DRG 2022 estimate was lowered from $220 to $218 in early August, and given the results of the second quarter, and the S&P estimate of $210.50 for this year, our estimate could still be too optimistic. See page 8.


The charts of the popular indices show that stocks had a convincing rally to their 200-day moving averages but have since retreated. See page 9. A test of the 200-day moving average is typical of a bear market rally and is not predictive; but other indicators suggest that the underlying momentum of the rally points to a weakening bear cycle and the possibility that the lows for many stocks may have been made in June.

The 25-day up/down volume oscillator fell to 2.19 this week but it was overbought for seven of eight consecutive days between August 10th and August 19th. It also reached a peak overbought reading of 5.26 on August 18th, the highest overbought reading since December 10, 2020. This is important since extreme and/or long overbought readings are rare in a bear market and if they appear, the readings tend to be brief, or less than six consecutive trading days recently seen. It is also important to note that the last two 90% days were up days on July 19, 2022 (92%) and August 10 (91%), an indication that momentum could be shifting from a bear cycle to, at worst, neutral. Still, the near-term market appears extended. In our view, investors are currently too optimistic that Fed tightening is nearly over, and this could change with Chairman Powell’s speech this week at Jackson Hole, WY. We would remain invested but concentrate on companies with predictable earnings streams and/or above average dividend yields.

Gail Dudack

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Forget the Bad Down Days … Worry About the Bad Up Days

DJIA:  34,000

Forget the bad down days … worry about the bad up days.  Wednesday was certainly the former.  The Dow muddled around all day before closing slightly lower.  Advance-Decline numbers, however, were 4-to-1down, our idea of a bad day.  The market can live with that, it’s those days when the averages rise and the A/Ds are flat that cause problems.  This measure of the average stock has probably been this market’s best feature.  The A/D Index for the 500 stocks in the S&P just reached an all-time high, impressive in its own right, but more impressive is it has done so while the S&P Index itself remains some 10% below its own high.  This divergence, new high in the A/Ds versus the Index, has led to higher prices one year later every time, according to  Similarly, stocks above their 50-day average have moved above 90%, a level which also has led to higher prices every time.  Over the years betting “this time is different” has cost a lot of people a lot of money.  Then, too, you never know.  Heraclitus, the famed technical analyst of 550 BC once observed, you never step in the same river twice.  

So bad down days aren’t the problem, they are to be expected.  The market averages don’t go up every day and when they go down it’s more than likely more stocks will decline than advance.  A little less than 4-to-1 down would have been nice on Wednesday, but it’s more about the next up day and how the numbers recover.  Rallies quit when they start to lose participation.  Monday was a bit of an interesting day in that the Dow reversed to rally some 150 points while the A/Ds were barely positive.  The overnight China news sent oil and other commodities stocks lower, and financials seemed weak as well.  Simply put, there are a lot of commodity stocks and a lot of financial stocks to the point we were a little surprised the A/Ds were positive at all.  That said, you don’t want to start making excuses for the numbers.  And that said, typically it takes a pattern of bad up days to cause problems.

Last time, courtesy of the Leuthold Group, we pointed out that the S&P outperforms when Tech outperforms.  While that may seem obvious, less obvious is Tech performs best when it performs slowly.  The Nasdaq Composite and other Tech indexes have rallied more than 20% off their 52-week lows.  The rally took 40 days, relatively long by historical standards.  These rallies that took longer, however, had more staying power, according to  When we think of good rallies this seems somewhat counterintuitive – good rallies don’t give you a good chance to get in, and all that.  Especially when it comes to Tech, however, the quick rallies, even if 20%, often can be about short covering.  The more drawn out rallies are where, dare we say it, the fundamentals have a chance to evolve.  If you’re keeping score, this seems another plus on the rally’s side.

There once was a time we used to talk as much about volume as we do now about A/Ds.  That was when volume was NYSE volume, and that was pretty much it.  The importance of volume cannot be overstated.  The problem for us became, whose volume?  These days volume seemingly comes from everywhere.  For sake of consistency, and because it is in many ways THE market, we’ve been tracking SPY (428) volume, that’s volume in the SPX ETF.  The market and stocks should go up on rising volume and fall on declining volume, it’s that simple.  We recently resurrected an indicator combining volume with A/Ds.  By now you know we consider A/Ds more important than the averages, so we have an A/D index using only days when volume is higher than the previous day’s volume.  The indicator bottomed on 7/14, but it’s the direction that’s important.  Since then it has been in a consistent uptrend.

As the A/Ds would suggest, there’s more to this market than just Tech.  Indeed, at what might be thought of as the other end of the spectrum, Staples have performed quite well.  And utilities these days are not your father’s Oldsmobile.  In any event, on the back of green names like Nextera (90) and Constellation Energy (82), XLU (78) is probably outperforming XLK (151).  The area we really think deserves attention is energy, and probably commodities generally.  Energy led the market into early June before declining sharply into mid-July.  Since then most of the stocks, and ETFs like XLE (79) have moved back above their 50-day averages, which now should act as support on any pullback.  With the commodity itself having been under pressure lately, the hype seems to have corrected as well.

Frank D. Gretz

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US Strategy: Expectations

The current rebound has carried the broad indices between 14% (Dow Jones Industrial Average) and 23% (Nasdaq Composite Index) above their June lows and the rally has created a number of positive technical changes in our indicators. These technical changes are encouraging for the intermediate-to-longer term. Still, we would not be chasing the rally at this juncture. Walmart’s (WMT – $139.37) better-than-feared earnings report for the second quarter, was a sign that some companies are beginning to adjust to the hurdles facing them in this difficult economic environment. But while WMT jumped more than 5% for the day, its earnings report did not suggest the economy and the consumer are about to return to normal. In fact, Walmart’s results suggest that higher income families have shifted to Walmart to buy groceries. This is not a sign of consumer strength, in fact, it appears to be the opposite.

Plus, there are numerous signs that speculation is returning to the equity market. In particular, the performance of meme stocks during the August 16th trading session suggests that “risk” is back in vogue. Bed Bath and Beyond (BBBY – $20.65), halted at least twice for volatility during the day, rose 29%. GameStop (GME – $42.19), also halted for volatility, ended the day with a gain of 6.3%. Meme favorite AMC Entertainment Holdings (AMC – $24.81) rose 2.5%, fuboTV (FUBO – $6.35) jumped 45% and Vinco Ventures (BBIG – $1.13) soared 58.8%. Meme favorites tend to be beaten down stocks with high short interest levels that attract speculators looking for high risk and quick gains. In short, this activity does not represent true equity investors and it is a short-term negative.

We continue to have an overweight rating in stocks and sectors that have the most predictable earnings streams, and these areas also tend to be equities that are both inflation and recession resistant. Sectors such as energy, utilities, staples, and defense-related stocks in the industrial sector have these characteristics. Healthcare, where we have a neutral weighting, is also a “necessity” for most households and also tends to be inflation and recession resistant.  


The return of the speculators suggests that some investors feel the worst is behind us and the economy is about to rebound after a weak and recessionary first half of the year. The University of Michigan consumer sentiment indicator for August suggests there is some truth to that thought. The August reading of 55.1, was up from July’s 51.5 reading and was a nice rebound from the record low of 50 recorded in June. Expectations also rose from a very weak reading of 47.3 in July to 54.9 in August. But strangely, the current conditions index fell from 58.1 in July to 55.5 in August. See page 7. In other words, consumers are not feeling great at the moment, but are hopeful that the future will get better. This may have a lot to do with the decline in gasoline prices in the last four weeks.

This optimism may be supported or upturned by the retails sales report coming out this week. We will be watching to see if real retail and food services sales can turn positive and show gains even after being adjusted for inflation. The last four consecutive months of negative growth in real retail sales is a classic sign of margin pressure on retailers, and a sign that consumers are actually consuming less in real terms. Moreover, it tends to be a sign of a recession. See page 7.

In our view, it is too early to celebrate, or to believe that the Federal Reserve has managed to steer the economy into a soft landing. Monetary policy is as tricky to predict this year as we have seen in many years. Inflation remains a hurdle. July’s CPI was up 8.5% YOY, down from June’s 9.0% YOY, but still extremely high. Core CPI was unchanged at 5.9% YOY last month. PPI for finished goods was 15.5% YOY in July versus 18.5% in June. Core PPI was 8.7% YOY in July versus 8.9% in June. In sum, by all price measures inflation remains well above the long-term average of 3.4% or the Fed’s target of 2%. And though inflation may have decelerated a bit, it remains dangerously high. See page 3. This poses a problem for the Fed. Although the high end of the fed funds target rate has increased from 25 basis points in February to 250 basis points in August, it is likely to go much higher. The reason for this is that the real fed funds rate is still negative 5.2% relative to the CPI and negative 4% relative to the PCE index. This is the equivalent of 520 or 400 basis points, which means it would not be surprising if the fed funds rate increases at least 200 basis points, or more, before it truly impacts inflation. See page 4. Unfortunately, these interest rate hikes will do damage to the economy and to corporate earnings.

Housing is very interest-rate sensitive, and the housing sector’s combined contribution to GDP generally averages a sizeable 15% to 18%. We believe housing is either already in a recession or about to slip into one. And though interest rates may be only halfway through their rise, housing affordability is already at its lowest level since late 1985. The NAHB confidence indices are also plummeting and looking quite bleak. See page 5. Housing prices continue to rise, due in large part to low inventories, but as a result, the median existing home price relative to income per capita at its highest point on record. This, coupled with rising mortgage rates account for the big decline in affordability. Not surprisingly, both building permits and housing starts are rolling over in July, with housing starts falling nearly 10% in the month and down 8% YOY. See page 6. With this as a backdrop, it will be difficult for the Fed to navigate the economy to a soft landing.

Lower crude oil prices will lower inflation in coming months, but this was not a result of monetary policy. Oil prices are down due to signs of progress on the Iran nuclear talks and the possibility that Iran could add a million barrels a day to global production. Also dampening oil prices were the surprisingly weak economic data coming from China (the world’s largest crude oil importer). This was coupled with worries of a global slowdown and signs of massive demand destruction after peak gasoline prices. However, all this could be temporary since the European Union’s embargo on Russian oil is set to take effect in December and could shift the supply/demand balance. In sum, investors may be too optimistic about inflation and a Fed pivot in rates.

We also feel investors are too optimistic about current and future earnings growth. The S&P Dow Jones consensus EPS estimates for 2022 and 2023 fell $6.38 and $1.01, respectively, this week. Refinitiv IBES consensus EPS forecasts rose $0.16 and fell $0.55, respectively, however, IBES does not adjust for actual earnings or adjust for GAAP accounting, which is why we prefer S&P data. Which means with the S&P estimate for 2022 now down to $210.50, a 1.1% YOY gain, we may have to lower our $218 estimate once again. In short, expectations for earnings may be too optimistic.

Technical Indicators Show Promise

The 25-day up/down volume oscillator rose to 4.93 this week, the highest since December 8, 2020, and has been in overbought territory for four of the last five consecutive trading sessions. This is an interesting juncture for this indicator because bear markets rarely record overbought readings and if they do the readings are brief. If this oscillator can remain overbought for five consecutive days this week, it would be a sign that most stocks have already seen their lows and the worst of the bear market is likely behind us. Nonetheless, the current reading of four overbought trading days already implies that the broad market may have seen its worst, and is likely to remain in a wide trading range for the rest of the year. The S&P 500 and Russell 2000 index are currently trading above their 200-day moving averages (MA) and the longer they trade above this key level, the more likely the rally will push higher. However, in all the indices, the 200-day moving average continues to fall, which remains a sign of a bear market trend. At a minimum, we would like to see the 50-day MA better the 100-day MA in each index, to suggest a bottoming trend is in place. In short, things have improved but expectations may be too high. We would not chase stocks here and continue to focus on earnings growth for stock selection.

Gail Dudack

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New Bull Market or Bear Market Rally… Does it Really Matter

DJIA:  33,336

New bull market or bear market rally… does it really matter.  This remains a technically sound rally.  Sure Wednesday saw the market rip higher, but with the Dow up only 29 points on Monday advancing issues outnumbered decliners by better than two to one.  That’s not how markets get into trouble.  Bear market rallies end but so too do bull markets.  Those numbers will flip – up averages and flat A/Ds – before important weakness.  The bear market rally thesis also seems to be flipping, in keeping with our long-held belief that opinions follow price.  And prices themselves are on the edge of being convincing.  As of last Friday the S&P had retraced 43% of its decline and was 13% off its low.  With maybe one exception, that doesn’t happen in bear markets.  Similarly, stocks above their 50-day average have cycled from 5% to 75%, a move that typically produces sustained rallies.  Call this what you like, it’s better than not bad.

When it comes to stocks above the 50-day average, the Holy Grail is 90%.  That has happened 30 times in 70 years, and since 1942 the market was higher one year later every time, according to  It’s the idea that strength begets strength, and strength begets opinion change.  There almost seems a little FOMO in the air.  It’s one thing to see stocks in general go up, it’s another to see stocks you wanted to buy go up without you.  Opinions certainly have changed in the world of option traders.  Not that long ago they were loaded for bear but lately have seen the light.  If this is a new bull market that’s not a problem, you have to expect traders to be bullish in uptrends.  If a bear market rally, that’s another matter.  But if the latter, we would have expected momentum to be changing around now as well.

Semiconductors remind us of that guy with a can of tuna.  The can keeps being bid higher and higher until finally he opens it to find – it’s just a can of tuna.  It’s explained to him it wasn’t for opening, it was for trading.  Semis never seem just right – there’s always too many or not enough.  Years ago we remember shorting Micron (62) because even we had figured out the so-called shortage then wasn’t real.  Even we had figured out everyone had double ordered.   Finally with the stock around 90 we gave up because the stock just wouldn’t go down.  We shorted it again around 30 when it was growing about 40% per year and selling for about four times earnings.  Yet that was a much easier trade.  It’s hardly an insight to say semiconductors are important in many ways.  It’s just that they sometimes trade like tuna.

In a database we use there are over 500 stocks in the category of Biotechnology.  After going through them recently we have two thoughts.  First, we really need to get out more.  The second, there are roughly 400 must buys.  Granted many of these you could buy by the handful – they are two dollar stocks.  And for most it’s just about sold out bounces.  But it seems more than just that, and in a way reminiscent of Energy at the start of the year.  To that point, how much Biotech do you own?  We are still positive on Energy particularly those that have moved above their 50-day averages.  We feel the same about Biotech, which really had become underloved and likely underowned.

A thought the other day was why not just buy Microsoft (287).  If we’re not going to overthink this bull market/bear market rally thing, why overthink what stocks to buy.  It may be hard to find a semi in a long-term uptrend, it’s not hard to find other Techs in long-term uptrends, and Microsoft is one of them.  And the fact is, market uptrends don’t get far without Tech.  Data from The Leuthold Group shows over the last hundred years, but who’s counting, the S&P 500 only outperforms when the Tech sector does so as well.  Of Tech’s leadership cycles, only the period between December 1964 to November 1967 saw the S&P make only modest gains.  The rest saw gains of up to 36%.  Meanwhile, the Fed seems to be going out of his way to lean against the rally.  Perhaps they’re human after all – they were late to tighten, they don’t want to be wrong again by being early to ease.  May be time to fight the Fed.

Frank D. Gretz

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US Strategy Weekly: TMI (Too Much Information)

This week the BLS will release price data for August, and although we believe it is too little too late, inflation data is getting a lot of attention from market watchers. Investors are hoping that price data will begin to decelerate, and if so, it will ease the pressure on the Federal Reserve to be aggressive in terms of raising interest rates. However, they may be disappointed. A deceleration from the CPI’s 9% YOY pace in June would be nice; yet many are pinning their hopes on the fact that WTI oil futures are down more than 20% from their May close. But this ignores the fact that oil prices are up 33% YOY, a percentage that will continue to add to inflation pressures. Moreover, the geopolitics around energy is complex, volatile, and unpredictable, particularly since the leaders in many oil-producing countries like Brazil, Iraq, Iran, and Russia are facing a multitude of domestic issues, making any long-term forecast for oil prices nearly impossible.

Still, it is clear that inflation data for July and August will be important, and they will set the tone for the next FOMC meeting set for September 20-21. So too will employment data and that is one of our two main topics this week.

Employment Data

The July employment report showed a surprisingly strong monthly increase of 528,000 jobs and an equally surprising dip in the unemployment rate from 3.6% to 3.5%. Given the gloomy backdrop from other surveys such as the ISM manufacturing and nonmanufacturing surveys, this big jump in employment was clearly unexpected.

However, with July’s increase, the total number of people employed in the US rose to 152.54 million, beating the previous record of 152.50 million workers in February 2020 by 32,000. This was important in our view, since the fact that the total level of employment had not exceeded its February 2020 peak was one indication that the post-pandemic recovery was weak. It also helped explain the declines in GDP.

Also in July, the participation rate inched lower to 62.1% while the employment-population ratio rose 0.1 to 60% in July. However, both remained below their respective February 2020 peaks of 63.4% and 61.2%. These ratios show the relationship between the labor force and/or employment to the overall population. What July’s data indicated was that both remain below the 2020 peak levels. See page 3.

One reason for this weakness is that the labor force has been shrinking. In July, those no longer or “not in the labor force” rose to 100.15 million, the highest level seen since October 2021. There can be a variety of reasons for people to leave the labor force, but the percentage of those no longer in the labor force yet indicating they want a job increased to 6.3%, up from the February 2022 level of 5.3%. Separately, discouraged workers jumped from 386,000 to 471,000 in July. Keep in mind that the decline in the labor force is what contributed to the unemployment rate falling in July. See page 4.

Since employment data can have a major impact on monetary policy in coming months, we dug into the data in greater detail and we noticed several interesting things about July’s job report. The establishment survey showed seasonally adjusted employment rising 528,000 to a record 152.54 million, but not-seasonally-adjusted data showed a decrease of 385,000 jobs to 152.25 million. In short, unadjusted employment remained well below its peak of 153.1 million in November 2019. See page 5.

In addition to the establishment survey, the BLS conducts a broader household survey each month. This survey showed July employment at 158.29 million, a bit less than the 158.87 million recorded in February 2020. However, the not-seasonally-adjusted household series showed 159.1 million workers in July, matching the previous October 2019 record. All in all, a deep dive into job data left us questioning whether employment actually reached a record level in July.

And the BLS will add another complication to employment data. On August 24, 2022, the Bureau of Labor Statistics will release a preliminary estimate of the upcoming annual benchmark revision to the establishment survey. These benchmarks are derived from state unemployment insurance tax records that nearly all employers are required to file. A final benchmark revision will be issued with the publication of the January 2023 job report released in February 2023. Since benchmarks adjust data retroactively, it is nearly impossible at this moment to know if employment has really exceeded its February 2020 peak. We are skeptical particularly since seasonal adjustments are done on an active basis and pandemic layoffs have undoubtedly impacted normal seasonal patterns in employment. This may be too much information for some; but since the Fed is required to maintain full employment with moderate inflation, it is important to understand where US employment stands today. We think it could be weaker than the headlines imply.

Employment data is also a tale of the have’s and have not’s. The unemployment rate for workers with a bachelor’s degree or higher was 2% in July, well below the average, whereas the unemployment rate for workers without a high school degree rose to 5.9% in July, well above the headline 3.5%. The US workforce with a college degree has grown from 26% of all workers to 44% in July. It eclipsed all other groups in 2000. However, since the pandemic it is the only group that recovered to peak levels of employment. This means the other 56% of the workforce is yet to recover to pre-pandemic employment levels. See page 7.

Reducing Earnings Forecasts

Our other deep-dive topic is earnings. As we noted last week, financial headlines are full of reports of better-than-expected earnings results for the second quarter, but this too is misleading. Last week we discussed the difference between consensus estimates and whisper numbers. The whisper numbers, primarily among hedge fund managers, were far worse than the actual consensus earnings expectations and from this perspective, earnings were a positive surprise. Nevertheless, the S&P Dow Jones consensus earnings estimates for 2022 and 2023 fell $1.40 and $1.59, respectively, this week. Refinitiv IBES consensus earnings forecasts fell $1.52 and $1.97, respectively. Over the last seven weeks the S&P Dow Jones estimate for 2022 has dropped $7.36 and for 2023 has declined $6.26. IBES forecasts in the same seven weeks fell $4.07 for 2022 and $7.63 for 2023. As a result, the nominal earnings range for 2022 declined and is now $216.88 (S&P) to $225.50 (IBES). EPS growth rates for this year fell to 4.2% and 8.4%, respectively. To adjust for the weakness seen in second quarter earnings, we are lowering our DRG 2022 estimate from $220 to $218 and our 2023 estimate from $240 to $237, and fear that there may be more downside risk to these estimates. See page 10.   

Technicals Of all the indices the Russell 2000 has had one of the best performances from its June low. This is encouraging. We used the RUT as a leading indicator at the top and it may prove to be a good predictor of the low as well. Our 25-day volume oscillator is approaching an overbought reading. Bear markets rarely have overbought readings, and if they do, they are brief. Therefore, the current rally may be at a turning point. Without follow through in coming sessions and a solid overbought reading in this indicator, we would label the current advance as a bear market rally. We continue to focus on recession-resistant stocks and sectors. See page 15.

Gail Dudack

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US Strategy Weekly: Perception versus Reality

Earnings, and earnings growth, are the bedrock of the equity market. And they can be especially important in an environment like the present where recession fears are plentiful. Therefore, we continue to focus on second quarter earnings results, yet we are having trouble reconciling perception versus reality in this department.

According to Reuters, “US companies are reporting mostly upbeat news this earnings season, surprising investors who had been bracing for a gloomier outlook on both businesses and the economy. More than halfway into the second-quarter reporting period, S&P 500 company earnings are estimated to have increased 8.1% over the year-ago quarter, compared with a 5.6% estimate at the start of July.” However, data from IBES Refinitiv shows that their S&P 500 earnings estimates for 2022 and 2023 fell $1.25 and $2.02, respectively last week, after rising only a penny for 2022 and falling $0.78 for 2023 a week earlier. Similarly, forecasts from S&P Dow Jones indicate earnings estimates fell $2.42 and $2.91, respectively, last week and fell $2.48 and $0.36, respectively, a week earlier. These sharp drops in estimates during peak earnings season hardly support the statement of “better than expected” earnings in the second quarter.

However, Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, may have said it best in the U.S. Equities Market Attributes July 2022 (August 2, 2022) report. He noted that: “while earnings for Q2 2022 were expected to increase 13% over Q1, the whisper numbers were much lower, as was the concern over the second-half guidance. However, actual earnings (72.1% reported) did not make the expected 13% gain and now indicate a 7% gain, which is a headline disappointment for some, but not if you were one of those money managers (or traders) who traded into the whisper numbers (and sold). For them, it was an unexpected beat and a time to reallocate

In other words, hedge funds were positioned for sharp earnings declines and were relieved at the actual numbers, even though they did not beat the consensus estimates. This is quite different in our opinion from an actual increase in earnings growth — which did not materialize. In fact, the nominal dollar earnings range for 2022 fell to $218 (S&P Dow Jones) and $227 (IBES). S&P Dow Jones and IBES earnings growth rates for this year sank to 4.8% and 9.1%, respectively. And while second quarter earnings season is less than 75% complete, we find that our DRG 2022 estimate of $220, a 5.7% YOY increase from $208.19 in 2021, is at risk and is currently under review. See pages 11 and 18.

Moreover, what the Reuters article failed to mention is that even though the IBES report shows an overall blended earnings growth estimate of 8.1% for the second quarter, if the energy sector is excluded the earnings growth rate falls to negative 2.5%. This was an important omission. And we would advise monitoring the much-discussed Senate’s Inflation Reduction Act since it would currently reinstate the Superfund tax on crude oil and imported petroleum at 16.4 cents per gallon (indexed to inflation) and increase other taxes and fees on the fossil fuel sector. Obviously, this would hurt S&P earnings since so much of the earnings growth in the last 18 months has come from the energy sector. More broadly, the bill would instate a minimum 15% tax rate on all corporations. This again, would negatively impact earnings. In sum, we are not finding comfort in second quarter earnings results or current fiscal policy.

Monitoring Economic Data

With first quarter GDP growth already inked at negative 1.6% and second quarter falling 0.9%, the US economy is technically in a recession. Many will be debating this issue in coming months, but the calculation for GDP makes it rather difficult to record a negative number after a negative quarter. In short, 2Q22 GDP implies economic activity continued to slide in the April through June period. The GDP price deflator also jumped to 7.5% YOY in the quarter, the highest pace seen in this indicator since the December 1981 report of 8.4%. Note that the December 1981 reading took place in between the 1980 and 1981-1982 recessions. These two recessions were also triggered by Fed rate hikes as monetary policy struggled with an inflationary cycle. See page 3.

The ISM manufacturing index fell to 52.8 in July, the third consecutive monthly decline, the fourth decline in the past six months, and remaining below a six-month average of 55.5. New orders declined from 49.2 in June to 48 which is the second consecutive month that new orders were below the neutral threshold of 50. All in all, this is a display of declining momentum in manufacturing. See page 4.

Homebuilder confidence fell from 67 in June to 55 in July and is at its lowest level since early 2020. The June pending home sales index fell from 99.6 in May to 91.0 in June, which was the lowest reading since the March/April 2020 recession readings and the third lowest since data began in 2018. Still, the homeownership rate edged up to 65.8% from the first quarter reading of 65.4%, with the strongest gains seen in the South and West sections of the country. The housing sector began to slow well before the Fed increased rates this year and we expect it will continue its slump throughout the second half as interest rates continue to rise. See page 5.

The personal savings rate fell from 5.5% to 5.1% in June and sits at its lowest level since the 2008 recession. Real personal disposable income, which was $15.10 trillion in June, remains below its pre-pandemic February 2020 level of $15.16 trillion and is one sign of potential weakness in consumption. And despite recent monthly job reports, this does not tell the whole story. Total employment remains more than half a million jobs below its February 2020 peak level. See page 6. Inflation has also changed household spending patterns. See page 7. In the 18 months ending in June, household spending for gasoline and other energy goods increased 106%, transportation services increased nearly 50% and food services and accommodations rose nearly 45%. These increases have reduced household consumption of things other than energy and food. See page 7.

With the yield curve nearly inverted, the debate about whether or not more rate hikes will be implemented this year will intensify. Nevertheless, June’s personal consumption expenditures index, the favorite inflation measure of the FOMC, indicated price trends were accelerating and the index rose 6.7% YOY, the highest rate since January 1982. Excluding food and energy, the PCE index is rising at a 5% YOY pace, the highest since records began in 1987. This report implies more rate hikes are required to tame inflation. See page 9.

Multiple Signs of Recession

The WTI crude oil future is at $94.42 and below its 200-day moving average now at $94.70. The longer the future trades below the 200-day MA, the more likely oil prices will fall further to the $80-$85 range. This decline in oil would bring relief to future inflation, but it is not a result of Fed rate hikes. More exactly, energy is falling due to fears of weakness in China’s economy, as a result of shutdowns, weakness in manufacturing and troubles in the real estate sector. Meanwhile, the 10-year Treasury note yield at 2.74%, having recently reached an intra-day low of 2.52%, has become very volatile and is signaling economic weakness. With the fed funds future at 2.5%, a falling 10-year Treasury yield increases the likelihood that the entire Treasury yield curve will invert resulting in a classic sign of a recession.

And lastly, Technicals The recent equity rebound carried all the indices up to their 100-day moving averages which are now at roughly DJIA: 32,719; SPX: 4,119; NAZ: 12,335; and RUT 1,873. However, only the Nasdaq Composite is currently trading above its moving average. These moving averages are only first-level resistance points, yet they could prove to be pivotal for the intermediate term. At present, the market appears to be wobbling at this resistance level. In sum, we continue to maintain a relatively cautious stance focusing on stocks where earnings are most predictable, even in a recession. In general, this equates to energy, staples, utilities, and defense stocks.

Gail Dudack

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