The S&P 500 lost 3.3.% for the quarter ending September 30th, and while positive for the year, this is entirely due to a handful of large-capitalization companies. On an equally weighted basis, that index is now negative for the year.

In our July commentary, we emphasized the importance of interest rates, and rising rates are the major problem today. It would be easy to blame the Federal Reserve for the market’s weakness, but the Fed has been signaling “higher for longer” for many months. U.S. consumer confidence has weakened but retail sales continue to surprise on the upside as jobs and asset values are still supporting consumer spending. It would appear that interest rates haven’t been high enough for long enough to fulfill the Fed’s aim of bringing inflation back to 2%. We would expect, therefore, that a “data-dependent” Fed will continue their restrictive policy until there is clear evidence that its objective will be met. The downside of this approach is, of course, that the economy could suffer a sharp slowdown.

At least some explanation for the economy’s resilience lies with the wealth of American households, which are estimated to have increased by some $40+ trillion since the start of 2020. We can thank a good stock market and booming housing market for a substantial part of this increase. The downside is that this was all made possible by unrealistically low interest rates and massive government deficit spending.

While interest rates are beginning to normalize, government spending continues and deficits continue to rise. This latter factor is important for bond investors as they will demand a higher interest rate for holding a longer-duration instrument.

As we enter the fourth quarter, we are optimistic that we will see a year-end rally, and historically the third year of a presidential cycle is the strongest. There is increasing evidence, moreover, that the Federal Reserve may be done raising interest rates, at least for this year. For the market to move appreciatively higher, however, we must see increasing corporate profits and a decreasing cost of money.
October 2023

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War is Hell…The Bond Market Not Much Better

DJIA:  32,784

War is Hell … the bond market not much better. It’s hard to talk about markets considering the suffering in the Middle East, but both have had their impact on stocks.  We just don’t recall a time when for bonds it has been so much so.  The week started with the 10-Year teetering around 5% for the first time since the summer of 2007.   Just when all seemed lost, stepping up to save the day was not the Fed but Bill Ackman – well, covering a short position.  Credit where credit is due, but this hardly seems the rationale.  Consider Ackman’s Pershing Square has some $18 billion under management versus the $24 trillion value of the Treasury market.  Such is the rate concern these days that the relief rally in bonds briefly lifted stocks.  Of course, as Bloomberg’s John Authers points out, the risk is that rates will keep rising until they break something, which only then will cause them to fall.

If not breaking, Financials certainly are bending.  And not just the Regional Banks, which look more broken than bended.  Weak too have been the credit card guys like Capital One (90) and Discover (81), and the same day lenders – what could go wrong there?  Or look at Blackstone (92), not exactly in the above category, but with its own recent downside gap.  In this market there’s pretty much no place to hide, for Financials it seems particularly so.  In terms of making a low this isn’t such a bad thing.  If you’re reading this, you have been through this kind of market before and know the feeling – pretty much one of the nausea.  This sort of feeling probably tells you as much as the VIX which so far is only around 20, while a number closer to 30 seems more likely for a low.

Price gaps as you know are one of our favorite chart patterns.  The textbook says these come in different varieties with somewhat different implications.  For now suffice it to say stocks tend to follow through in the direction of a gap be it up or down.  There have been several gaps recently, perhaps none more noteworthy than last week’s gap in Netflix (404), one which historically at least makes our point.  A gap occurs when the low in a stock is some two or more percent above the previous day’s high.  Last Thursday NFLX opened 17% higher, the 15th time it had done so by 15% or more. After a few days of consolidation, the stock moved higher over the next 15 sessions, at a win rate of some 80% or more, according to  Of course, Russian roulette has the same win rate, but with considerably more risk.

Investor psychology is tricky, and sometimes almost amusing.  Take Nvidia (403).  Back at the end of August it was a must own, have to have it stock, with everyone just hoping for the elusive pullback.  Now that the pullback looks more like a bottomless decline, it’s hard to buy.  Granted it’s a different market than back then, the war, rates, and so on, but still.  Meanwhile, Verizon (34) is a hard stock to buy mainly because it’s Verizon.  It’s one thing to lose money in a cool stock like NVDA but sort of embarrassing to lose money in a stock like Verizon.  And even if you make money, are you going to belly-up to the bar and brag about it?  What’s cool is making money however you do it.  Verizon has been kicked around long enough you might think whoever wanted to sell it has done so.  The stock has a turn, including a gap higher the other day.

There are lows of the garden variety, and there are lows of the washout variety.  Stocks above their 200-day average already are around the mid-20s, close to the garden variety low of March.  Washout variety lows like last October saw a number around 17%.  And even March saw a VIX around 30, October around 35.  Financials as you know are many, and therefore impact the A/D Index.  Long ago we were told that’s why the A/D Index works – Financials are important.  The A/D Index has significantly underperformed relative to the Averages themselves, opposite of a bull market.  Against this pattern It seems increasingly likely the market will see a washout sort of low. Plenty of things could provoke that, the unknowns associated with the war, another spike in rates, it’s hard to say.  Then, too, it could be the Magnificent Seven themselves that do it.

Frank D. Gretz

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US Strategy Weekly: Spooked

Halloween is quickly approaching, but the financial markets are spooked for other reasons. It is already an unsettling time with Iran and Russia sparking wars in Israel and Ukraine and many of the world’s major cities experiencing disturbingly large demonstrations in support of the Hamas terrorist group. The breadth of antisemitism seen both domestically and abroad has been a frightening revelation for many. A small consolation is found in the growing number of industry leaders stating they want the names of pro-terrorist demonstrators seen on Ivy League campuses because they will not hire them. University donors are also pulling money from universities that are supporting Hamas, or do not differentiate between Hamas or other terrorist organizations and Palestine. These are small steps in the right direction in very troubling times.

However, here at home, there is another potential crisis. It began with the historic ousting of House Speaker Kevin McCarthy on October 3 which exposed the large schisms in the Republican party and how a small number of Republicans could wield control over the election of the Speaker of the House. Without a speaker, the House is unable to conduct government business, to continue its subcommittee investigations, or to push through bills, including vital spending bills that would prevent a government shutdown on November 18. As we go to print, a third candidate, Tom Emmer, Minnesota Congressman, who was nominated by fellow Republicans as Speaker candidate earlier this week, abandoned his bid due to party infighting. The House has now gone 22 days without a leader and a US government shutdown looms on the horizon. Government paralysis in the face of massive global disruptions and significant fiscal hurdles will not be good for the securities markets.


It is not surprising to us that the 10-year Treasury yield broke above the 5% resistance level in recent sessions. Treasury bonds are facing two strong and opposing crosscurrents. On the one hand, deficit spending has continued to increase. Year-end data from the September 2023 Monthly Treasury Statement of Receipts and Outlays of the United States Government show that the deficit for FY 2023 was $1.7 trillion, $320 billion higher than the prior year’s deficit. As a percentage of GDP, this was 6.3%, an increase from 5.4% in FY 2022. The Office of Management and Budget estimates that the FY 2024 deficit will be 6.9% of GDP. See page 3.

With both deficits and interest rates rising, interest payments on the debt have increased 33% from $534 billion in FY 2022 to $711 billion in FY 2023. In comparison, defense spending grew 7% from $727 billion to $774 billion in the same period. If this pace continues, interest on the debt will overtake defense spending next year. See page 4. In the near term, the anticipated record issuance of debt in the next few quarters has worried bond investors. But in the longer term, interest payments on this debt and its impact on deficits will soon become a Catch-22 problem for debt markets.

The other crosscurrent that is now helping the bond market is the war in the Middle East. Not only is the US bond market seen as a safe haven in a time of war, but this flight to safety is also having a positive impact on the price of gold and bitcoin. In sum, the cross currents in the bond market are as powerful as we have seen in a long time.

Higher interest rates seem likely over the intermediate term, although we doubt the Federal Reserve will raise rates in November, ahead of a possible escalation of the Israel-Gaza conflict. It will only raise rates once it has prepared the market for higher rates. Yet, the impact of rising interest rates is being felt throughout the economy. Mortgage rates have increased 425 basis points in the 24 months ended August 2023, and this is impacting the residential housing market. The August NAR housing affordability index dropped to its lowest level since June 1985, and mortgage rates have increased in the interim. The September report will be released November 9. The October NAHB confidence survey fell to 40, dropping 16 points since July and is now at its lowest level since January. See page 5. In short, the housing market is slowing, and we expect higher rates will impact auto affordability as well in the coming months.


This is one of the busiest weeks in terms of third quarter earnings releases and as we noted last week, it includes a number of the large cap technology darlings. To date, the results are mixed. Microsoft Corp. (MSFT – $330.53) beat estimates for fiscal first quarter results in all segments, but Google-parent Alphabet Inc. (GOOG – $140.12) missed its cloud business revenue estimates and the stock was pummeled. The S&P Dow Jones consensus estimates for 2023 and 2024 are $218.71 and $244.97, respectively, down $0.84, and up $0.18, respectively as of October 20. LSEG IBES estimates for 2023 and 2024 are $219.74 and $246.91, down $0.72, and $0.05, respectively. This is the first time that the IBES estimate has dropped below $220. And based upon the IBES EPS estimate of $219.74 for this year, we believe equities remain overvalued. A PE multiple of 19.3 times is high given that inflation remains above average at 3.7%. The sum of inflation (3.7) and the market’s PE (19.3) equals 23.3 and this is barely under the 23.8 level that defines an overvalued equity market. See page 6.

Technical Indicators in Focus

The Nasdaq Composite index is the only index that has not broken below its 200-day moving average in the last week, although it did have an intra-day test of this long-term average recently. To date, it is unclear if this test will prove successful. The S&P 500 index rebounded after breaking below its 200-day moving average, but it is now trading only marginally above this long-term average. The Dow Jones Industrial Average and Russell 2000 are both trading below their 200-day moving averages as noted last week. Nonetheless, a break below the 200-day moving average is not unusual for a market that is in a long-term sideways trend. However, at 1679.50, the Russell 2000 is perilously close to key support at the 1650 level. This support has contained selling sprees in the past and it would be a major negative if this support level were broken. If it breaks, we believe it would be a precursor to further price weakness. See page 7

The 25-day up/down volume oscillator is at a negative 2.54 reading this week and neutral, but only after being in oversold territory for two consecutive trading days on October 20 and October 23. This follows oversold readings for three out of four trading sessions in early October. These oversold readings could be mirror images of the overbought readings seen in August, when no overbought readings lasted the minimum of five consecutive trading days. In short, August’s rally was unconfirmed. Now that this indicator has had oversold readings of minus 3.0 or less, the same is true – five consecutive trading days in oversold are needed to confirm that recent weakness is a confirmed downtrend. To date, there have not been five consecutive trading days in oversold, which means the decline is not confirmed and the longer-term trend remains vulnerable, but neutral. See page 8. We remain cautious but believe a buying opportunity could materialize before year end.

Gail Dudack

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Sure It’s the End of the World … Could it be Discounted?

DJIA:  33,414

Sure it’s the end of the world … could it be discounted?  So it might seem to look at the market’s resilience.  It’s not just the Middle East, last week’s numbers weren’t exactly market friendly.  Yet for the most part things have held together pretty well – ignoring bad news being a good sign, if you believe it’s the market that makes the news.  More quantifiable, the A/Ds have been positive 6 of the last 10 days.  And while a bit of a backhanded compliment, there have been no what we call bad up-days.  When the market goes down, bad A/Ds are to be expected, it’s those up-days with poor A/Ds that cause problems.  Meanwhile, since the end of July the market has been in what the textbook would call a correction in an uptrend – a correction that has held the 200-day in terms of the S&P.  What’s needed is a little upside momentum, a push through the 50-day around 4400.

The market may make the news, but the news these days has made for some considerable volatility, and then there’s the bond market, pretty much responsible to the minute for Tuesday’s good start and poor finish.  If war and rates were not bothersome enough, then there’s China.  Markets are always rife with cross currents of sorts, this one perhaps more so than most.  We continue to think Staples are worth a look, oversold doesn’t mean over, but in this case they are historically so.  Aerospace/Defense shares have their obvious appeal, as well as the appeal of good charts.  Oil also seems a hedge of sorts.

Is Gold the new Bitcoin?  And if so, is that a good thing?  Both have seemed a good hedge only against making money.  To be fair Gold has regained a pulse of sorts, but it’s hard not to be skeptical.  We like a market that can ignore the chance to go down, we don’t like that Gold has ignored many chances to go up.  However, it has shown a better than typical response to recent events.  And to look at the usual suspects like the ETFs, GDX (30) and GDXJ (35), they are at least back above their 50-day averages.  Bitcoin has been worse than Gold, though it did come to life on the false rumor that a cash ETF was about to be approved.  There is already an ETF based on futures, and with the backing of Blackrock, a former Bitcoin denier, approval eventually seems likely.  A clear beneficiary here is Grayscale (22).

We place a good deal of emphasis on Advance-Decline numbers, that is, what the average stock is doing.  It’s always relative, of course, relative to what the stock averages are doing. Even daily it’s not good to see the two out of sync.  Down days in the Averages the A/Ds likely will be down as well.  Up-days in the Averages the A/Ds should be positive as well.  When they’re not, when there’s what we call a bad up-day it leads to problems, often sooner than later.  While we argue down days and negative A/Ds happen, there is a caveat.  And it comes about when as this last week you see a couple of outsized negative A/D numbers relative to the Averages.  This leads to divergences that are difficult to correct, and divergences eventually lead to weakness in the Averages. The timing here is unknown, but with fewer stocks participating, it speaks to a difficult market in any event.

Biden warns don’t mess with Israel!  What about messing with Taiwan?  Who was thinking about Gaza a week ago?  We haven’t even mentioned Iran – clearly there’s a lot going on.  Contrary to the norm, this sort of news can make the market – the unknown, unknowns. Little wonder the S&P finds itself backing off of the 50-day and teetering in its recent range.  Then, too, this seems as much about the other war, the bond market war.  The 10-year Treasury Yield is now back above its level on the eve of the Hamas attacks.  What happened to the flight to quality?  The prevailing fear of many, recently articulated by Paul Tudor Jones, is that investors will grow leery of US deficits, and demand higher yields.  That’s called a buyers’ strike, and still higher yields.

Frank D. Gretz

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US Strategy Weekly: Action/No Action

There has been a lot of volatility in recent days, yet there was very little progress in the popular indices. This is not surprising to us. There are almost too many variables and risks to monitor at the moment and so the indices are whipsawed by the ever-changing news of the day. Aside from the economic backdrop, the Israeli-Gaza war creates a frightening and unpredictable global environment, and the sad state of affairs in the US House of Representatives — which seems incapable of electing a new Speaker — has put a dangerous halt to US fiscal and foreign policy. (Shouldn’t we stop paying their salaries until they do their jobs?) US border officials have released thousands of migrants onto the streets of the San Diego area and Russia states that it no longer needs to obey the UN Security Council restrictions on giving missile technology to Iran since the restrictions will soon expire. It does make your head spin.

The Magnificent 7

In times like these, it is always important to monitor earnings and valuation. In this regard, Refinitiv IBES, in conjunction with Lipper Alpha Insight, released an interesting study on third quarter earnings season. It included information reminding investors that the S&P Dow Jones earnings estimates are share weighted, not market capitalization weighted. It then looked at what they called the “Magnificent-7”. These are Apple Inc. (AAPL – $177.15),, Inc. (AMZN – $131.47), Alphabet Inc. (GOOG – $140.99), Meta Platforms, Inc. (META – $324.00), Microsoft Corp. (MSFT – $332.06), Nvidia Corp. (NVDA – $439.38), and Tesla, Inc. (TSLA – $254.85).

IBES noted that these seven stocks have a market cap weighting in the S&P 500 index of 29.9% — an all-time high — but have earnings and revenue weights of 15.6% and 9.7%, respectively. The Magnificent-7 also has an aggregate forward PE of 27.6 times, which represents a 55% premium to the overall index. A table from this report is presented on page 11 with the 11 sectors of the S&P 500, their market cap weighting, earnings share weighting, revenue share weighting, and forward PE multiples. It basically shows that the technology sector is by far the most expensive segment of the S&P 500, while financials and energy are the least expensive. It is an interesting macro view of valuation.

Given their excessive weighting in the S&P index, the earnings reports from these seven stocks will be important to monitor. Tesla, Inc. will be the first to report on October 18, followed by Microsoft Corp. and Alphabet Inc. on October 24, Meta Platforms, Inc. on October 25,, Inc. on October 26. Apple Inc. and Nvidia Inc. report on November 2 and November 21, respectively.

Economics in Focus

There were many economic releases in the last week which we would summarize as showing weakness in business and consumer sentiment, stickiness in inflation, resiliency in retail sales, and better-than-expected industrial production led by autos. All in all, these reports would probably lead to another fed funds rate hike in November, if all things were equal. But all things are not equal in the Middle East or in the US and as a result,  we do not expect the Federal Reserve to raise rates. Keep in mind that another debt ceiling crisis will materialize before the end of the year.

The NFIB small business optimism index fell slightly in September, from 91.3 to 90.8; however, the business outlook fell from -37 to -43 and “expected credit conditions” dropped from -6 to -10. See page 3. Preliminary data for October’s University of Michigan sentiment survey showed a decline in consumer sentiment even though gasoline prices had declined. The main index fell from 68.1 to 63.0; present conditions fell from 71.4 to 66.7; expectations fell from 66.0 to 60.7. Conference Board indices fell in September and October data will be released at the end of the month. See page 5.

Industrial production rose a better-than-expected 0.3% in September. Nonetheless, total IP was barely above the level seen a year ago, nondurable production was down 0.3%, but durables, led by auto production, rose 1.7% YOY. However, auto and truck production appears to be rolling over after its May-June peaks. See page 4.

Advance estimates for September’s retail and food services sales were $704.9 billion, up 0.7% for the month, and up 3.8% YOY. This was much better than the consensus expected; yet, after inflation, real retail sales in September were up only 0.1% YOY. At the end of August, real retail sales had been negative on a year-over-year basis for nine out of ten consecutive months. We believe this is an important point since year-over-year declines are typically seen only during recessions. See page 6.

The key reports last week were related to inflation. The PPI is usually a leading indicator of the CPI, and the good news was that core PPI, while still high at 3.4% YOY, appears to be decelerating. On the other hand, headline PPI, after being negative for months, has begun to uptick again and reached 2.5% in September. Similarly, core CPI, still high at 4.1%, appears to be decelerating, but headline CPI rose slightly in September to 3.7%. See page 7. Most of the major components of the CPI rose more than headline, both on a monthly and a yearly basis, and all items less food and energy rose 4.1% YOY. Stemming an even bigger jump in inflation in September were the declines seen in fuels & utilities and medical care. Still, since transportation costs typically lag the price of oil which has been rising, there is an upward risk to future inflation numbers. See page 8.

The Federal Reserve is most concerned about service sector inflation which eased only slightly from 5.39% to 5.16% in September. Owners’ equivalent rent inched down from 7.3% to 7.1% and rents of primary residences eased from 7.8% to 7.4%. Medical care pricing was negative for the third consecutive month falling 1.4% YOY. However, other services, with a 9.4% weighting in the CPI, are trending higher and were up 4.4% in September. See page 9.

The biggest risk to future inflation could be higher crude oil prices. This is likely given the chaos in the Middle East. After months of YOY declines, WTI rose 14.2% YOY in September and to date, is up 1% YOY in October. Equally important, the chart of WTI turned bullish once the price broke above the $80 resistance level. See page 10. Again, if it were not for all the domestic and global political risks, the Federal Reserve would likely be raising rates in November.

Technical Guides The Russell 2000 continues to trade below its 200-day moving average, the Dow Jones Industrial Average broke below its long-term average before recovering in recent sessions. The S&P 500 rebounded after an intra-day test of its 200-day average, which was technically impressive. The Nasdaq Composite, led by the Magnificent-7, continues to trade well above its long-term average. But overall, the patterns of the major indices remain characteristic of a long-term neutral trading range. This is best represented by the 1650-2000 range in the Russell 2000. If the Russell were to break below the 1650 support, it would be bad news for the broader market, in our view, but this is not our expectation. Our 25-day up/down volume oscillator was oversold for three of five trading sessions in early October but is now neutral. In short, it too suggests the market remains in a long-term trading range.  

Gail Dudack

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Market Lows…They’re about the Sellers

Market lows … they’re about the sellers not the buyers. Most think lows are made when the buyers step up. To the contrary, it doesn’t take all that much buying when the sellers are out of the way. No selling and prices move up as in a vacuum of sorts. And when are the sellers out of the way? There are a couple of ways to analyze that, and both seemed at play last Friday. Going into Friday the S&P was down only some 8%, while most stocks were down much more. Indeed, by the end of last week stocks above their 200-day had dropped from 38% to 30%, and that included Friday’s upside reversal. For the 200-day, that’s quite a weekly drop, enough to perhaps suggest much of the selling was out-of-the-way. By comparison, the declines in March and again in May saw this number around 36 – 37%. Being down a lot of course doesn’t mean they have to go up. Last October the number was around 17%.

The other part of determining if the selling is out-of-the-way is pretty simple – have they stopped going down and started going up. Here we will make the point we always make about news like Friday’s Jobs number. It’s never about the news, it’s about what the market does with the news. Bad news and the market goes down, that’s what you would expect it to do, you learn nothing. Friday’s news was worse than bad, but after a down opening the market reversed higher. You never know, but you have to say that seemed a market that didn’t want to go down, a market that didn’t in fact go down because the sellers were out of the way? Not only did it not go down, it turned into a decent day to the upside – 3-to-1 up. Monday seemed less dramatic despite the horrible news and its far-reaching market implications, yet the market again managed to reverse higher.

With the market under some pressure recently, you might have expected defensive stocks to come to the fore. That has not been the case, rather just the opposite. To some extent the bond market seems at blame, especially when it comes to the Utilities. Staples have been under pressure as well, even prior to the obesity drug concerns. Meanwhile, the McClellan Summation Index for Staples, a measure of supply and demand, is near the worst levels in history, a level from which it tends to rebound. shows one-year gains of 20% following such extremes. Interesting too, Staples have one of the highest ratios of Put/Call buying in a decade. At the same time corporate insiders have been buying shares and lessening their selling, pushing the Buy/Sell Ratio to one of the highest levels in more than a decade.
The stock market is a place where simple logic doesn’t work – Staples being yet another example. And for all the fuss over earnings, being in the right place always seems more important, though for sure that’s a movable feast. For now, the right place seems Tech generally, but most of FANG+ specifically. They seem and act like the new defensive stocks, giving up little in market weakness. And if higher rates were the problem, it too may now be a tailwind. Defense stocks have had a run, but Cyber stocks have seemed surprisingly dormant for a while. Perhaps no longer to look at names like Palo Alto (261) and CrowdStrike (188). We mentioned United Health (526) last time, noting the appeal of having the group as a whole acting well.

The devil is dancing in the Middle East. The question is how far? Yet the market had seemed to be taking it in stride, along with a less than friendly Jobs number, PPI, CPI and even the auction on Wednesday. This changed with Thursday’s auction when the market abruptly tanked. Are rates still that important, was the auction that much of a surprise? Or could it simply be the market being the market. The low last Friday and subsequent rally, though impressive made a setback likely. We believe they’re going up; we don’t believe straight up. The low last Friday is one thing, a new big uptrend another. The latter takes time, some backing and filling, call it what you like. On a very short-term basis, even when the Averages were up Thursday the A/Ds were negative – always something to note. One day is just that, but consecutive days of 2-to-1 up this week were impressive.

Frank Gretz

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US Strategy Weekly: Awaiting CPI Data

Our heartfelt prayers go out to all those impacted by the barbaric invasion of Israel, and we are shocked by the unspeakable atrocities enacted by Hamas. If it is proper to measure people by their actions and not their words, it is clear that terrorists like Hamas, have no desire for peace but seek only to terrorize and control others. This should remind all Americans of the beauty of our Constitution, the purpose of strong borders, and the need to fight terrorism wherever it exists. We will never forget, and we pray for Israel and all those who believe in and fight for democracy and peace.

It is difficult to write about equities when the newswires are dominated by the war taking place in Israel. Particularly since Syrian shells, purportedly shot by a Palestinian faction, landed in Israeli territory on Tuesday and Israel responded by firing back. This points to the risk of the Gaza-Israeli war spreading in the Middle East, and as a result, it is currently overshadowing the Russia-Ukraine war, where again, a sovereign nation was invaded by Russia. Ironically, wars are not usually bad for equity markets, however, note that neither war has been good for the equity markets of any country involved. However, it is a positive for defense stocks, particularly for makers of bullets and missiles, and since both the Middle East and Russia are oil exporters, it has been good for energy stocks.

Israel has also pushed important news about China into the background. Country Garden Holdings Co. LTD. (2007.HK – 0.75) announced it had defaulted on a principal payment which sets the stage for one of the country’s largest debt restructurings. Simultaneously, China Evergrande Group (3333.HK – 0.265) failed to get regulatory approval for its offshore debt restructuring proposal which will likely lead to its liquidation at a hearing set for October 30. The potential debt defaults of China’s two largest property developers will have devastating impacts on stakeholders, customers, supply-chain vendors, China’s economy, financial creditors, and to a lesser extent, holders of China’s US dollar-denominated bonds. Therefore, we are not surprised that Fed officials are sounding more dovish this week. An unstable world is not the right environment for another rate hike, particularly since previous rate hikes are already having an impact on consumers.

Decoding Employment Data

September’s employment report was a huge surprise, Not only was the addition of 336,000 jobs nearly double the consensus expectation, but revisions added 79,000 jobs in July and 40,000 jobs in August. This means that employment was 119,000 higher than previously reported, which makes one wonder how rigorous government data really is. Moreover, September’s year-over-year job growth was 2.1% in the establishment survey and 1.7% in the household survey. These percentages are both well above their long-term averages of 1.7% and 1.5%, respectively. See page 3. September’s 336,000 new jobs also lifted the 6-month average by nearly 20,000 to 233,670 which is well above the 50-year average of 128,000 new jobs per month. Charts of the labor force and employment show that there has been a steady increase in both since the end of the Covid lockdown. See page 4.

From a historical perspective, the US economy is at risk of a recession whenever job growth turns negative. But since job growth in September was definitely robust, it appears that the US economy is not at risk of slipping into a recession any time soon. This could support those who are expecting the US economy to remain in a lengthy period of stagflation.

However, some details in September’s job report tell a slightly different story. Multiple job holders increased by 368,000 in the month, suggesting that holding one job is not sufficient for some individuals and households. Meanwhile, those working part-time for economic reasons fell by 156,000. It is unclear if part-time workers found full-time jobs or are now holding two jobs. See page 5.

In September, average weekly earnings rose 3.6% YOY for all private industries and increased 3.7% YOY for production and non-supervisory employees. These statistics raised concern that wage growth is now fueling inflation. However, since inflation has accelerated in recent months it means that real hourly earnings have decelerated. For example, average hourly earnings grew 4.5% in August and 4.3% in September. This means that real hourly earnings rose 0.8% YOY in August and potentially rose 0.65% in September — if inflation does not increase from August’s 3.7%. See page 6.

The CPI for September will be reported later this week, and we fear it may be disappointing. After eight straight months of year-over-year declines in oil, the WTI rose more than 14% YOY in September. This jump in energy prices could easily create a higher-than-expected headline number in the CPI. In short, the 5-month stretch during which earnings grew faster than inflation may have come to an end in September. This will be a handicap for consumers.

September’s ISM data was interesting, and it showed a switch in the normal pattern. The ISM manufacturing index displayed more upward momentum than the service index. Yet even though the headline index for ISM manufacturing rose 1.4 points in September, its reading of 49 remained below 50 for the eleventh consecutive month. The headline ISM services index fell 0.9 to 53.6. Production, or business activity, rose 2.5 to 52.5 for manufacturing and rose 1.5 to 58.8 for services. New orders rose 2.4 to 49.2 in manufacturing but fell 5.7 to 51.8 in services. Manufacturing could get a boost from the defense industry in the months ahead and this could help both the economy and employment. See page 7.

Consumer credit growth slowed significantly in August. Overall credit balances grew 4.0% YOY versus 4.9% in July. Revolving credit grew 8.6%, down from 10.5% in July, and nonrevolving credit growth rose 1.8%, down from 3.1% in July. On a six-month rate of change basis, revolving credit contracted 0.2%, the first contraction since May 2016. It is not surprising to see credit card, or revolving credit, decline given that interest rates on credit card plans at commercial banks rose to 21.2% in August. However, it is important to note that sharp declines or contractions in consumer credit are signs of a recession. See page 8.

Technical Update

The Dow Jones Industrial Average and the Russell 2000 index are trading below their 200-day moving averages, the S&P 500 recently tested its 200-day average on an intra-day basis and Nasdaq Composite continues to trade well above its long-term average. Nevertheless, the major chart patterns remain characteristic of a long-term neutral trading range, best seen by the 1650-2000 range in the Russell 2000. If the Russell 2000 breaks well below the 1650 support, it would be bad news, but this is not our expectation. The 25-day up/down volume oscillator is at a neutral reading of negative 1.92 this week but has been oversold for three of the last five trading sessions with readings of negative 3.0 or less. This oscillator failed to confirm the July advance and we would not be surprised if it fails to confirm the recent decline with five consecutive oversold days. To date, the longer-term trend remains neutral.

Gail Dudack

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Rates, Rates, Rates … We Hear They’re Going Up

DJIA:  33,119

Rates, rates, rates … we hear they’re going up.  In fact, that’s all you hear.  Having reached the mainstream media, perhaps it will do what talk of $100 Oil did for Oil.  The yield on the 10-year Treasury has reached an extreme, or has it?  In any event, it’s hard to argue this has been anything but bad for stocks and most of the commodities.  We had thought the market could live with higher rates, of course that was when the market was acting like it could live with higher rates.  It has since become less technically healthy and remains so.  You would think those Regional Banks would be a particular concern, given what happened in March when rates were not even this high.  Not surprisingly the charts there are not so wonderful.  It may not be the level, but the abrupt change in rates that causes something to break.  We wonder if rates had anything to do with the hit to Oil recently or look at American Express (147).  It’s not unusual to find out only later who is vulnerable, who was swimming without their suit as Buffet likes to say.

We had looked at this weakness as your garden-variety correction, a correction in an uptrend.  After all, on the whole this year has shown some impressive momentum, the kind that doesn’t turn easily or quickly.  In terms of the Averages, it still falls in that category.  However, the intensity of the selling, if that’s the term for it, makes it look possibly different.  In terms of the A/Ds the market fell for nine consecutive days through September 27, and likely 4 of 6 through Thursday.  Two of this week’s down days were 5.6-to-1 and 4.6-to-1, not exactly garden-variety selling.  Mercifully, the A/Ds were respectable in Wednesday’s rally.  These numbers are a bit worse than those in the March weakness, then too it may be too soon to say.  At issue here is a garden-variety decline versus something more severe.  The former is a gradual move to a sold-out turn, the latter a more violent one.  More days like Wednesday would argue for the former.

For all of the market’s problems, there are a few stocks/areas that are interesting.  In corrections, the good guys stand out, if only because they either stop going down or never went down.  The most obvious here is Nvidia (447), interesting in the sense it arguably got the correction going.  You might recall – good news and the stock reversed lower back at the end of August.  That it has been holding the last couple of weeks, against a weak market for Tech, seems interesting.  It’s toying with the 50-day, while a move above it would be positive for it and the market.  A kindred spirit here is Super Micro (288), which is already above its 50-day, at least for now.  Then there’s Tesla (260) which failed a couple weeks ago, after we praised the pattern, now again above the 50-day.  And finally, there’s United Health (516), which because of some violent moves always seems difficult.  It’s back to recent highs and with the group seemingly behind it, impressive in this market.      

IBD will tell you as much as 75% of the movement of any stock is a function of the market’s overall trend. We couldn’t agree more, and that’s why we got into this business. We noticed our wonderful stock picks somehow did better in good markets.  They seemed to go up and down with the market, which made us think this market thing might be worth looking into.  To get to some point here, given the recent A/Ds, 75% might be a little light.  This tide has sunk most ships.  To us the market is about the A/D numbers.  Easy to be a good trader on those 5-to-1 up days versus those 5-to-1 down days.  We’re happy with 2-to-1 up days.  Easy to be a good trader when 70% of stocks are above their 200-day, that is, in uptrends versus 30% now.  As per the above, there are some things to look at here, but it’s best to have that market wind at your back.

If we had a brother at the Labor Department, and knew ahead of time the Jobs number, we pretty much wouldn’t care, especially this month.  After all, in this environment what is a good number?  A bad number, that is one good for the market, means the Fed can stop raising because the world is coming to an end.  A bad number, the economy is still humming along, but the Fed will keep tightening.  Then too, thinking what we’ve already been through, a little more selling could put in a low.  Keep in mind, it’s selling not buying that makes lows. When the selling this out-of-the-way, you don’t need much buying to lift prices.  We’re not predicting the number and we’re not predicting the outcome. The real point is it’s not about the news.  It’s about the market’s reaction to the news. The best outcome might be a number the market shouldn’t like, but it rallies anyway.

Frank D. Gretz

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US Strategy Weekly: Oh Congress!

There were plenty of things for investors to worry about before the US House of Representatives voted to unseat House Speaker Kevin McCarthy on Tuesday. For example, Federal Reserve Chairman Jerome Powell has made it clear in recent weeks that there could be another rate hike in the near future and interest rates would not be coming down any time soon. This spooked the debt markets, and the 10-year Treasury bond yield broke above the 4.4% resistance level like a hot knife through butter.

The United Auto Workers strike does not look like it will be ending soon, and auto companies have begun to lay off workers. While the Writers Guild of America settled its strike recently, SAG-AFTRA, which represents 160,000 film and television actors, remains on strike. The 75,000 workers at Kaiser Permanente are set to go on strike this week and this would be the largest healthcare strike in US history. Meanwhile, big capitalization technology stocks are being sued by the Department of Justice and the Federal Trade Commission for monopolistic behavior and the goals appear to be to break companies like, Inc. (AMZN – $124.72) and Alphabet Inc.’s Google (GOOG – $133.30) into smaller pieces.

China’s property development sector continues to struggle and now Country Garden Holdings Company (2007.HK – 0.87), the largest company in the sector, is in default, following a similar pattern to that of China’s Evergrande Group (3333.HK – 0.41). Crude oil prices have surged to $89.44 a barrel and are now up 14% YOY. This will not be good for consumers, or for September’s CPI report. Perhaps more importantly, the rise in the dollar makes energy even more expensive for most non-US consumers. The triple-threat of higher interest rates, a strong dollar, and soaring energy prices will present problems for US consumers, but it could be even more damaging to emerging market economies. See page 8. Higher interest rates will also pressure regional banks since this could exacerbate deposit outflows and weaken balance sheets as Treasury bond prices fall. See page 4.

All the above makes previous concerns about the resumption of student loan payments and California personal income tax payments in October seem like child’s play. Nonetheless, these are all problems for equities. But the most immediate obstacle for equities is the 10-year Treasury yield which is closing in on 5%, and some people are beginning to think it could rise to 7% before the cycle is over.

Goldilocks or Recession

Nothing has really changed from our perspective. We were never advocates of the Goldilocks scenario which included a soft economic landing coupled with lower interest rates. We always expected interest rates to remain higher for longer and we also think that a recession is likely. Recessions are a normal part of an economic cycle and not all recessions are prolonged and systemic like in 2008. In fact, most recessions last for two to four quarters and are not even recognized as a recession until it is almost over. But historically, there has never been an inflationary cycle that has not been followed by a series of recessions. Hopefully, this cycle will see a slow steady slowdown that will bring inflation back in line with the Fed’s target of 2%. But it will take time. Meanwhile, we believe the equity market will continue to trade in a wide trading range.

The Silent Tightening Cycle

The equity market responded rather dramatically to the Fed’s statement that the fed funds rate would remain higher for longer; however, the real problem may be that monetary tightening is occurring on multiple levels, not just with the fed funds rate. The Fed continues to reduce the size of its balance sheet which means it is no longer a major buyer of US Treasury securities or mortgage-backed securities. This downshift in demand is part of the reason why Treasury bond yields and mortgage rates are rising. And it is also why the money supply, as measured by M1 and M2, has been contracting at a historical rate. See page 4. In addition, as the long end of the yield curve moves higher, this adds to the tightening process by making auto loans, mortgages, and consumer loans far more expensive. It is important to note that August’s personal income and expenditure data shows that interest income rose 8.5% YOY, but interest payments increased 47.5% YOY! See page 5. This is just one example of how higher interest rates will lower consumption in the coming months.

Much is being made of the fact that China’s ownership of US Treasury securities has been declining, and China is part of the reason that interest rates are on the rise. First, foreign official investors tend to buy and sell US bonds at a slow and deliberate pace and rarely make sudden shifts in supply or demand unless it is needed to support their own economy. In other words, it is unlikely that China is the cause of last week’s surge in rates (even though China is clearly lowering its exposure to the US). In fact, Federal Reserve data shows that foreign official and international holdings of US Treasuries have remained fairly constant since 2013. See page 3. We believe the real catalyst for last week’s surge in bond yields was that money managers and hedge funds came to a sudden decision that the consensus view of falling interest rates was an error.


This brings us back to the US Congress, the unseating of Kevin McCarthy as Speaker of the House, and the burgeoning US deficit. The chaos in the House of Representatives could not have come at a worse time. With interest rates rising, the risk of a third downgrade of US debt by Moody’s on the horizon, and analysts expecting the supply of federal government debt will be $2.5 trillion this year, the debt markets are under extreme pressure. Since the House of Representatives is crucial in terms of budgetary issues and the debt ceiling, this week’s historical ouster of the Speaker of the House adds to the uncertainty surrounding the debt markets. History shows that financial markets can deal with good news or bad news, but they do not deal well with uncertainty.

Technical Update

As we indicated last week, with the Dow Jones Industrial Average and the Russell 2000 trading below their 200-day moving averages, it is likely that the S&P 500 and Nasdaq Composite will have a similar test in the days ahead. Nevertheless, the major patterns remain characteristic of a long-term neutral trading range, best seen by 1650-2000 in the Russell 2000. If the Russell 2000 breaks well below the 1650 support, it would be a major negative for the chart, but this is not our expectation. See page 10. The 25-day up/down volume oscillator is at a negative 2.90 reading this week, down from last week and closing in on an oversold reading of negative 3.0 or less. The oscillator generated overbought readings in 10 of 22 trading sessions ending August 1, but it never confirmed July’s advance in the averages. Strong rallies should have at least one extremely overbought day and overbought readings that last at least five consecutive days. If, or when, this indicator becomes oversold, the same will be true – five consecutive trading days in oversold are needed to confirm that the decline is more than a normal pullback in prices. All in all, the market appears vulnerable, but the trend remains long-term neutral. See page 11.  

Gail Dudack

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October: The Turnaround Month

After a spectacular equity performance in the second quarter of 2023, the six-month surge of 16% in the S&P 500 index was the best first-half performance seen in this index in forty years. However, it did not last. The third quarter took much – or in the case of the Russell 2000 index, nearly all – of these gains away. Losses in the third quarter were 2.6% in the Dow Jones Industrial Average, 3.6% in the S&P Composite, 4.1% in the Nasdaq Composite index, and 5.5% in the Russell 2000. By the end of September, the popular indices closed with more modest year-to-date gains of just over 1% in both the Dow Jones Industrial Average and the Russell 2000 index, nearly 12% in the S&P Composite, and a still substantial 26% in the Nasdaq Composite index. In short, a narrow list of large-capitalization technology stocks that dominate the Nasdaq Composite continued to be the outperforming segment of the stock market in 2023. On the other hand, the average stock ended mostly unchanged after the first nine months of this year.

Higher and Longer

There was a multitude of reasons for the price weakness experienced in August and September, beginning with the fact that a government shutdown was at hand. Financial markets have weathered many government shutdowns in the past without much difficulty. But distinct from other recent shutdowns, such as the record 35-day government shutdown that began in December 2018, the Federal Reserve’s monetary policy is currently restrictive and expected to remain so. It was different in December 2018 when the Fed was signaling it was tilting dovish and about to wrap up its hiking cycle. In short, the overriding problem at the end of the third quarter was that the 10-year Treasury yield hit a 16-year high above 4.5% and may continue to climb upward. This could become a major hurdle for equities in the months ahead.

The concept of higher interest rates was also made clear by Fed Chairman Jerome Powell and his fellow Board members. Although the Federal Reserve chose to pause rate hikes in September, comments following the September FOMC meeting indicated that additional rate hikes were likely in the near future and interest rates were apt to remain high throughout most, if not all, of 2024. This crushed the consensus view that rate cuts would likely materialize by mid-2024. Adding to the view that interest rates would remain higher for longer were comments by Jamie Dimon, CEO of JPMorgan Chase & Co. (JPM – $145.02) who stated that many businesses and investors were not prepared for a worst-case scenario in which interest rates hit 7% and stagflation grips America. As a result, investors were forced to reassess equity risk and valuation at the end of the third quarter.

October Turnaround

From a historical perspective, September tends to be a seasonally weak month for equity performance. In fact, September ranks dead last in terms of performance and is the only one of all twelve months that averages a loss. Conversely, October, which tends to have a worse reputation than September, ranks seventh of all twelve months with an average gain of 1.0% in the S&P Composite. What is unique about October is that it tends to be a turnaround month and while its performance has often been dramatic it has also been a month that includes a number of bear market lows. This year October could be a particularly interesting time since so many risks are on the horizon and apt to be discounted.

The End of Goldilocks

In addition to the risk of the government shutting down, there is a United Auto Workers strike that is ongoing and negotiations do not seem to be close to an agreement. Whatever agreement passes, it will be scrutinized by economists for signs of future wage cost pressures and linkages to inflation. In terms of household finances, the reinstatement of student loan payments on October 1st and the October 15th due date for individual tax payments for Californians are likely to take a bite out of future spending. This could slow the economy.

Large-capitalization technology stocks have been at the core of positive price performance this year, but the Federal Trade Commission and 17 State Attorneys General are currently suing, Inc. (AMZN – $127.12) for monopolistic and unfair business practices with an aim to break up the company into smaller pieces. Simultaneously, the Department of Justice and eight states are also suing Alphabet Inc.’s Google (GOOG – $131.85), the second DOJ antitrust lawsuit against the company in just over two years. This suit focuses on Google’s monopolistic activities in the online advertising business and seeks to make Google divest parts of its business. Both suits could produce landmark changes in the internet space and could unsettle the market in October.

From a global perspective, it is important to monitor the crisis facing China’s property development sector. China Evergrande Group (3333.HK – 0.32), collapsed in 2021 and set off a panic in global markets. Now Country Garden Holdings Company (2007.HK – 0.91), the country’s largest real estate giant, is in default. The property sector represents roughly a quarter of China’s economy, is closely tied to China’s financial system, and many Chinese individuals who paid deposits on properties could lose all of their investment if the company fails. Experts feel these real estate troubles could spread into China’s broader financial markets and this could do significant damage to the world’s second largest economy. If so, it would be a major negative for global economic activity.

Oil prices surged at the end of September after government data showed that US crude stocks fell to the lowest level since July 2022. This announcement drove energy futures to their highest settlement in 2023 and compounded worries about tight energy supplies as we head into the winter heating season. This event coupled with the previously announced production cuts of 1.3 million barrels a day by Saudi Arabia and Russia have energy analysts forecasting crude oil prices of $100 a barrel in the near future. The technical charts for WTI energy futures also suggest higher prices. Higher energy prices will be a problem for future inflation benchmarks and will only add to the view that further Fed rate hikes may be necessary in the future. All in all, the Goldilocks view of a soft landing for the economy, lower inflation, and lower interest rates was debunked in September and this left equities vulnerable.

Trading Range Market

However, this has not changed our view that the equity market will be stuck in a broad trading range in 2023. This range is best defined by the chart of the Russell 2000 index which has been trading between support at 1650 and resistance found at 2000. Trading range markets are not unusual from a historical perspective, and they typically result from an overhanging issue in the economy such as high inflation or broad-based debt problems. We believe they can be a substitute for a more dramatic bear market cycle, and they allow equity valuations to normalize. Keep in mind that equity prices rose substantially in the first half of the year, but earnings did not. As a result, equity valuations became stretched.

However, trading range markets do require a change in strategy since there tends to be a rotation in leadership throughout this “flat” cycle and this experience can be frustrating for long-term investors. Yet in the long run, buying stocks which represent good value, a solid predictable earnings stream, and an above-average dividend yield tends to generate the best overall performance. Look for stocks where earnings growth is greater than that of the S&P Composite, but the PE multiple is lower than the S&P. This combination should outperform in the long term.

Meanwhile, we would not rule out a decline in early October that creates an excellent buying opportunity!

*Stock prices are as of September 29, 2023

Disclosure: The information herein has been prepared by Dudack Research Group (“DRG”), a division of Wellington Shields & Co. The material is based on data from sources considered to be reliable; however, DRG does not guarantee or warrant the accuracy or completeness of the information. It is published for informational purposes only and should not be used as the primary basis of investment decisions. Neither the information nor any opinion expressed constitutes an offer, or the solicitation of an offer, to buy or sell any security. The opinions and estimates expressed reflect the current judgment of DRG and are subject to change without notice. Actual results may differ from any forward-looking statements. This letter is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the specific needs of any person or entity.

This communication is intended solely for use by Wellington Shields clients. The recipient agrees not to forward or copy the information to any other person without the express written consent of DRG.

Copyright © Dudack Research Group, 2023.

Wellington Shields is a member of FINRA and SIPC

Gail Dudack, Chief Market Strategist

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