A Shot Across the Bow… or a Shot into the Bow

DJIA: 43,969

A shot across the bow… or a shot into the bow?   Last Friday’s selloff was blamed on the employment report. However, pre-market the Dow had been down big already, making it more of a follow-through to sell on the news Thursday. When stocks can’t react to good news, it smacks of buyers’ fatigue. It’s never about the news, corporate or economic, it’s about the market’s reaction to the news. It’s also about complacency. Below 20 in the VIX suggests that, as does the equity only P/C ratio back to the February Lows. For the VIX its narrow range is also a worry as it is typically resolved higher, meaning lower stock prices. And then there’s July, one of the best ever, with multiple new highs in the S&P. Unfortunately, that tends to steal from August. While short term, the market has some issues.

The market’s biggest issue is not in the stock averages, but the average stock. Our go-to indicator here is the A/D index, which made a new high just a week or so ago. This index, however, just measures direction, stocks up versus stocks down. Typically, this tells an accurate story of the average stock.  It does not tell you where a stock is in terms of trend, and here there’s a rather big discrepancy. A 200-day moving average is a good guide to medium term trends and hence its wide use. As of last Friday, NYSE stocks above their 200-day were less than 50%. The idea that the S&P is dancing around its highs while more than half of stocks on the NYSE are in downtrends presents a dramatic negative divergence.  These divergences typically don’t end well.

If there were a poster child for “sell on the news,” it would have to be Bitcoin. Passage of the recent legislation now makes it almost legal to lose money.  Meanwhile, the weakness isn’t so much about Bitcoin per se, as it is about the miners and associated stocks like Coinbase (COIN – 311) and Circle (CRCL – 153). Gold is in a seasonally weak period until early October, but stocks like Kinross (KGC – 19) and Gold Fields (GFI – 31) broke out anyway. Seasonality is something to keep in mind, but it is not a trading strategy of itself. And the overall trend in Gold and Silver for now can pretty much override most things. Speaking of trading strategies, how about that 30-year cycle in commodities? There’s still plenty of time left in the 15-year up cycle, making the long-term chart of the Metals and Mining ETF (XME – 78) worth a look.

Tech still runs the show, but not all Tech is equal. Meta (762) and Microsoft (MSFT – 521) stand out, and Apple (AAPL – 220) is trying to break out. There’s Nvidia (NVDA – 181) and Palantir (PLTR – 182), but then there’s Qualcomm (QCOM – 146) and Arm (136).  Another way to go about AI seems to be through those utilities like Constellation (CEG – 336) and Vistra (VST – 206). Also noteworthy are the so-called infrastructure stocks like Sterling (STRL – 300) and Vulcan (VMC – 282). With only about 50% of NYSE stocks above their 200-day, obviously there are some poor charts out there. Disney (DIS – 113) seems one of those, with a not so well received recent report. It also comes to mind because of a letter to the editor in Baron’s pointing out the parks are expensive. That in turn brings to mind a comment by ConAgra (CAG – 19) that they are seeing a consumer cut back, even in snack foods.

Back in October 2018 there were three consecutive days of higher highs in the averages, accompanied by three consecutive days of negative A/Ds. By the end of December the market was down 20%. In 1987 the A/D index peaked in March and continued a pattern of lower highs as the averages continued a pattern of higher highs, that is, until the crash in October. Divergences like those above are not good, but they’re clearly not a timing tool. It’s nice to think divergences can be corrected, but it rarely works that way. Divergences happen because there’s no longer the liquidity to drive up all stocks, it’s the big-cap averages that are left standing. The lack of downside follow through to last week’s poor action suggests at least for those large cap stocks, it’s likely not over.

Frank D. Gretz

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