It’s the Most Wonderful Time of the Year… Thank You J. Powell

DJIA:  37,248

It’s the most wonderful time of the year… thank you J. Powell.  In reality, it’s the market’s momentum off of the October low that should be thanked.  We have alluded to the 6-to-1 up day a couple of weeks ago and the 10- to-1 up day of 11/14, and now Wednesday’s 7-to-1 up day.  It’s important to remember these occurred within a cluster of positive days, recently five, rather than standalone events.  Stocks above their 200-day have more than doubled from the October low, and more than half of the S&P reached a 21-day high last week.  This also happened a year ago when the market began an 8% rally.  Perhaps most important in any discussion of momentum is the idea of its durability – it doesn’t turn on a dime, rather it takes time to unwind. The other part of the analytical equation is investor psychology, or sentiment, always difficult to interpret this time of year.  The VIX has dropped to 12 from the low 20s, not a worry in December.

It may be a wonderful time of year, but December isn’t always easy.  Recently, IBM (163) has outperformed Microsoft (366) and Intel (45) has beaten Nvidia (484).   As measured by the Roundhill Magnificent Seven ETF (MAGS-33), those leaders have been stalled for a month now.  We suspect this might simply be called December.  Meanwhile, Monday saw six of our Other Magnificent Seven reach 12-month highs, and Parker Hannifin (455) had done so a few days earlier.   Either we are better than we thought or there’s more to this market than just Tech.  Then, too, it could be an early indicator of a shift away from over priced/over loved Tech, but it seems a bit premature to go there.  Certainly the charts are intact, and for now pause seems more the correct take.  When it comes to our Other Mag Seven, the added appeal seems their long-term uptrends – see the monthly charts.

Of our Other Mag Seven, many have an economic leaning. We’re thinking here of names like Cintas (563) and Fastenal (64) among others.  Grainger (829) has a segment called “endless assortment,” Cintas deals in uniforms and other workplace supplies, while Fastenal does nuts and bolts – not very techy techy, as Penny might say. That these companies act as well as they do helps assuage our worries about the economy.  Nonetheless, and you can quote us here, you never know.  While the tightening may be done the lag effects of that tightening may not be completely clear.  On the positive side, the world did change in October.  Yields peaked, the Banks and every other rate-sensitive area began strong rallies.  Rates remain high enough to impact the economy, but the market has taken a decidedly optimistic view here.

Natural gas has been under pressure to the point that the worst may well be over.  However, there is a seasonal pattern which started November 4 and will persist until February 15.  During this period Nat Gas has been lower 25 of 32 years.  If not lower, odds are for continued underperformance. Since Nat Gas is typically in Contango, a Spanish dance we presume, there is a downward bias to the UNG ETF (5), according to Also of note is an apparent washout in Consumer Staples.  Back in October half of the stocks in the XLP (71) reached a 52-week low, capitulation sort of numbers.  Stocks there above the 50-day were only 5% and since have moved above 80%.  This sort of extreme momentum shift has led to higher prices in almost every case. The real impact starts around now, typically some two months after the washout.

Good news out of Powell?  Who would’ve guessed.  We had expected his usual “lean against” performance, which the market then ignores.  The Fed it seems now sees what the market has been seeing for a while. Meanwhile, of course, it’s the market that makes the news, and it’s a market that has acted well since the October low.  Someone once said the secret to forecasting is to keep forecasting.  Forecasting is hard – we prefer to stick with observing.  It’s a strong market.  When that changes we will follow the advice of Keynes and change our mind. The change, of course, will typically show up in the average stock rather than the stock averages.  Through all this, there have been bad days, but no bad up days – days up in the Averages with negative A/Ds.

Frank D. Gretz

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Momentum Isn’t Something That’s Borrowed

DJIA:  36,117

They say November borrowed from December.  Momentum isn’t something that’s borrowed, it’s something that unwinds of its own accord.  Last Friday’s 6-to-1 up day and the 10-to-1 up day of 11/14 speak to momentum which will take time to unwind.  December’s early problems might best be blamed on December – it’s a good month but one rife with crosscurrents.  Will they continue to sell the winners, the Mag 7 and the rest of the Tech, and buy the losers, the Financials and the rest?  Or will they revert to the winners – Apple (194) did break out on Tuesday.  Regardless of the outcome there, the sold out seem just that – sold out and unlikely to go lower.

All Bitcoin wants for Christmas is its ETF.  It may not be for Christmas, but it’s said to be in early January.  What is seen as inevitable rate cuts also has been a driver for Bitcoin, and the usual suspect short covering.  We are not quite sure of the logic here, but we are sure of those lines on a piece of paper called a chart.   It’s an impressive break out and uptrend.  Bitcoin, of course, isn’t for everyone.  And it may well be another case of buy the rumor, sell the news.  Still, it seems another case of momentum not likely to go away in a hurry.  The existing ETF, BITO (21) seems a reasonable way to participate.

Frank D. Gretz

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US Strategy Weekly: Great Expectations

The yield on the 10-year Treasury note plummeted over 50 basis points during November and expectations for a fed funds rate cut shifted from late in 2024 to the first quarter of the new year. This sentiment shift supported a rally in US equities and in gold since gold tends to move inversely to interest rates. In other words, the market has been pricing in a Goldilocks scenario that consists of lower inflation, a soft landing or non-recession, Fed easing early in 2023, and a rebound in corporate earnings in 2024. However, as Mohamed El-Erian noted on CNBC this week, believing this scenario is possible in the current complicated environment is the equivalent of believing a pilot could land a jumbo jet without any passenger feeling any landing at all. The risks are therefore high, that the consensus will be proven wrong.


Perhaps if the US were functioning on its own, a soft landing might be possible. But there are risks on the horizon. The largest of these could be China. We have often written about the problems facing the Chinese economy in terms of its property crisis, but this week Moody’s lowered its rating on China’s A1 debt rating from stable to negative. This was the first rating shift on Chinese debt by Moody’s since 2017 and the company commented that the costs to bail out local governments and state firms while controlling its property crisis would weigh heavily on China’s massive economy. China’s total outstanding off-balance sheet debt is estimated to be somewhere between $7 trillion and $11 trillion, according to the International Monetary Fund. This figure would include corporate bonds issued by thousands of local government financing vehicles which borrowed money to build roads, bridges, and other infrastructure. According to a senior economist at UBS, most local government financing vehicles currently depend on capital injections from local governments, government subsidies, and external funding because they do not generate enough cash from their operations to cover the interest payments. The longer-term risk is that this massive debt problem becomes systemic to the Chinese banking system and becomes a global banking problem.

Meanwhile, China’s CSI 300 Index (000300.SS – 3,394.26 CNY) is trading at its lowest level in nearly five years. This backdrop of falling real estate prices, risk of debt defaults, falling stock market prices, and a weakening currency, explains why Chinese consumers are actively buying gold (GC=F $2038.30). According to the latest Chinese retail sales data, gold and silver jewelry have been among the best-performing consumer goods in China this year, with a 12% rise in value year-on-year in January-October and outpaced only by garments. A Chinese consumer survey released in late October found that 70% of consumers between the ages of 18 and 40 intend to purchase pure gold jewelry. Together, China and India, the world’s two biggest gold buyers, account for more than half of total global demand. And according to commodity analysts, China is the world’s top buyer of physical gold has been an increasingly important driver behind this year’s rally in global spot gold prices. Gold has clearly become the safe haven trade for Chinese investors. Perhaps the rally in bitcoin (BTC – $43,886.05) is also a result of Chinese investors looking to protect themselves from a weakening currency and falling stock and property prices.

Pivotal Points in Technical Indicators

As we noted last week, the technical charts of the popular equity indices remain bullish with the first level of resistance encountered at the July highs and the second, and most important resistance, found at the all-time highs. Only the DJIA has exceeded its July high on the recent advance, touted by many to be the start of a new multi-year bull market. The July highs of 4600 in the SPX and 14,500 In the Nasdaq Composite have not been bettered and stock prices retreated as they tested those levels. The Russell 2000 index, which is our personal favorite for defining the broad marketplace, broke above its 100-day and 200-day moving averages last week, but the index remains neutral in its long-standing trading range between 1650 and 2000. In sum, the recent uptrend is unconfirmed. See page 8.

The 25-day up/down volume oscillator is at a positive 3.49 reading this week and has been in overbought territory of 3.0 or higher for four consecutive trading days. This is a positive development, but to confirm the recent advance this indicator should remain in overbought territory for a minimum of five consecutive trading sessions. In short, this indicator is close, but has not yet corroborated the recent uptrend as a significant trend. To date, both downtrends and uptrends have failed to sustain oversold or overbought readings for a minimum of five consecutive trading sessions. See page 9. However, this is in line with our long-held view that the stock market is in a broad trading range, which is a substitute for a bear market. We expect this range, best seen in the Russell 2000 index, to remain in force until inflation has been clearly brought under control.

The American Association of Individual Investors (AAII) survey showed a 3.5% increase in bullishness (48.8%), and a 4.0% decrease in bearishness (19.6%) last week. Bullish sentiment remains above average for the fourth consecutive week and bearishness is also below average for the fourth consecutive week. But more importantly, bearishness is at its lowest level since the January 3, 2018 reading of 15.6%. This extreme bearish reading in 2018 was followed by a 10% decline in the S&P 500 by February 8, a 13.6% advance by September 20, and a 19.8% decline by December 24. For the full year, the S&P 500 fell 6.2% in 2018. This too supports a view of a volatile trading range marketplace.

An Economic Mix

The headline ISM manufacturing index was unchanged in November, but six of the 10 components fell. The backlog of orders component declined to 39.3, its lowest reading since May 2020. The non-manufacturing index rose from 51.8 to 52.7, but the rise was mostly due to a buildup in inventories to 55.4. Order backlog also fell from 50.9 to 49.1. Readings below 50 indicate a contraction. See page 3.

The 5.2% GDP pace in the third quarter was the fastest rate recorded in nearly two years. Inventory build was a big contributor, consumption rebounded from a weak second quarter, and trade was a drag. However, this was the fourth consecutive quarter of negative real retail sales, which is typically associated with a recession. The key risk factor for the 2024 economy will be the strength of the consumer. See page 4.

Personal income rose 4.5% YOY in October, down from 4.8%. Disposable income rose nearly 7% YOY, down from 7.4%. Real disposable income increased 3.85% YOY, unchanged from September. Personal savings were $768.6 billion, up $19.6 billion, and the savings rate rose from 3.7% to 3.8%. But this remains well below the average long-term savings rate of 5.7%. See page 5.

Personal consumption expenditures rose 5.3% YOY in October and personal disposable income rose nearly 7% YOY. This marked the tenth consecutive month in which income exceeded consumption and it follows 21 consecutive months of consumption exceeding disposable income. Note that wage growth is decelerating for most employee sectors of the economy, except government, where wage growth was 8% YOY in October. See page 6.

Gail Dudack

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Sufficient Unto the Day… Is the Evil Thereof

DJIA:  35,950

Sufficient unto the day… is the evil thereof.  Less biblically, it’s good enough for government work.  Of course, we’re talking about the rally off the 10/27 low – it’s good, but yet to be great.  While we don’t find instant coffee fast enough, we are told these things sometimes take time.  Meanwhile, there’s enough to at least muddle us through year-end.  The enough in this case is momentum, and it goes back to 11/14 if we were to single out just one day.  That day saw advancing issues 10 times greater than those declining, and it was a 90% up day.  Also, more than a quarter of all stocks rose by 4% or more, according to, a real rarity.  Stocks follow through to this kind of momentum pretty much across all time frames, the only problem being the small sample size.

While Nvidia (468) garners all the attention, of all things Intel (45) recently has outperformed. Together with almost daily new highs in IBM (159) and Dell (76), it’s enough to make you think PCs are here to stay. These may not be as much fun as the Mag 7, but that’s only true if you define fun as volatility rather than making money.  In any event, the real point here is that it is encouraging to see stocks like these acting well, in addition to the Nvidia’s of the world.  Meanwhile, the Cyber stocks make so much sense it’s a wonder they haven’t done better, but they did have a great week.  Perhaps most interesting was the price action in Zscaler (198).  The stock gapped down eight points or 4% at the open Tuesday yet managed to close modestly higher on the day.  Of course, opening gaps don’t really matter if they’re filled during the day.  And gaps typically don’t matter unless they change the price trend, which in the case of ZS was unlikely.

Obviously, there has been more to the upside than just one good day.  For what seems a good rally, however, it holds some concerns. The percent of stocks about their 200-day, for example, remains below 50%. While up from its low around 30%, the S&P is up some 12% from its low.  There’s no magic number here, and while the A/Ds have been positive throughout the recovery, we are surprised more stocks haven’t been pushed into uptrends, that is, above their 200-day. Meanwhile, on the NASDAQ 12-month lows numbered more than 300 issues, also a surprise given the 10% recovery there. None of this is rally killing, and for now we are happy to buy into the progress not perfection argument. However, these numbers need to improve.

Had you invested 10% of your portfolio in Homestake Mining back in 1929, it would’ve hedged the rest. What is surprising is that was a period of deflation, not the inflationary backdrop against which Gold typically is associated. Perhaps the recent better price action in Gold is suggesting at least a period of disinflation. Meanwhile, whatever the driver Gold is acting better, though Gold and “false dawn” have become almost synonymous.  Gold is in one of its historical four year down cycles which should last through next year. However, after the always difficult October, Gold tends to rally through the following February.  Also, the Dollar is now a tailwind.

While the market looks higher through year-end, we doubt it will prove as easy as it looks.  December may be one of the most positive months of the year, but typically there’s a downdraft someplace along the line. If not actual weakness, there’s the jockeying which comes with year-end – buy the winners or is it sell the winners, it’s never quite clear. If anything usually proves true, it’s don’t sell the losers, which by now are usually sold out. We may have seen a little of these cross currents Wednesday and Thursday when Tech sold off despite for the most part good news.  If worry you must, the market did sell off when Nvidia reported last July. Through what could be a lot of noise in the coming month, it’s even more important to watch the average stock, the A/Ds to gauge the market’s health.

Frank D. Gretz

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