A Yogi Berra Market… Not Over Until It’s Over

DJIA:  32,764

A Yogi Berra market… not over until it’s over.  Without question this is the most divergent market we’ve seen in some time.  That everyone seems to get it doesn’t make it less so.  And seeing it also doesn’t make its negative implication less so.  Narrow markets are a reflection of the liquidity and its decline.  There isn’t enough to push up as many stocks as there once was.  This shows up in the A/D Index, the Equal Weight S&P, and perhaps most clearly in stocks above the 200-day, a decent proxy for stocks in uptrends.  Currently around 40%, it’s down from 74% in February but it’s relative.  The S&P now is higher than it was in February, meaning the performance gap between big cap stocks and the average stock has significantly widened.  This kind of divergence doesn’t end well.  Still, there’s no magic timing or levels here, it can go on until it doesn’t.

History has its examples of markets like this outlasting the naysayers, 1972 and 1999–2000 being prime examples.  Both had their themes, 1972 the Nifty 50, and 2000 of course the Dot-com’s.  What is often forgotten about both, and especially the Dot-com period, was how poorly everything else performed.  During this market phase it wasn’t just that only the Dot-coms were going up, the rest of the market was not only not going up, it was going down.  This past Monday we thought we were back there again – Pepsi (184), down five points and Tech up, the Dow down more than 150 points. and the NAZ up 50 points.  Back in 2000 everyone saw the divergence to the point they named it “old economy” versus “new economy,” which is beginning to look familiar.  Still, the divergence went on, the NAZ continued higher though the Dow did not. 

In these diverging markets, at least one of the major Averages moves higher – the Dow in 1972, the NAZ in 2000.   The leaders, the few, drive the Averages, in this case the NAZ.  The insidious part of this is that it offers hope for the rest, the poor, the downtrodden, the huddled masses – the Equal Weight S&P.  The history isn’t promising here, likely because the liquidity just isn’t there to pull up the rest.   It’s not just that the leaders lead, in this case Tech, it’s pretty much them and little else.  AI no doubt will change the world just as Cisco (49) did back in 1999–2000, when it sold for 80 and change, roughly double where it has sold since then.   On the plus side, just like the Nifty 50 and the Dot-com’s in their day, there’s money to be made in this market, provided of course you’re pretty much focused on Tech.

After that diatribe on Tech, we should point out a couple of other areas acting better.  The Saudi‘s have said don’t short oil, which would be interesting if you thought you could believe anything the Saudi’s say.  We do believe price action, however, and USO (64) seems about to cross above its 50-day, which should drag equities higher as well.  The other area to come alive recently is Biotech, though not the Amgen‘s (217) and other household names.  If you look at the iShares ETF (IBB-127), it’s market cap-weighted whereas the Equal Weight SPDR (XBI-84) shows a much different and better picture.  Unlike the overall market, here small seems better, perhaps anticipating more consolidation.  You might also look to the Ark ETF (ARKG-31) which has a number of positive charts.

The Kabuki dance that is the debt ceiling negotiations has put a damper on the market, and rightly so.  The odds of an unfavorable outcome are low, but so too are the odds of an unfavorable outcome in Russian roulette.  In both cases, the consequences of a losing outcome are severe.  The good news is that good news should be met with a make-up rally, and then we can get back to normal worries like the Fed’s next move, employment numbers, and the mess in banking.  Although we’ve been doing this for a while now, we really don’t recall a stock more loved than Nvidia (380), and apparently rightly so.  Not to rain on a parade that should continue, we’re always reminded that stocks are pieces of paper, not companies.  Overloved stocks become over owned stocks, and eventually who’s left to buy?  But there’s that word again, eventually.  The A/Ds, you might have noticed, were almost 2-to-1 down and the Equal Weight S&P unchanged amidst Thursday’s euphoria.    

Frank D. Gretz

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Buy the S&P or Sell the S&P… Yes!  

DJIA:  33,535

Buy the S&P or sell the S&P… Yes!  And you thought we couldn’t take hedging to a new level.  There is, of course, the S&P Index and it is pretty much the benchmark for the world.  The other S&P to which we are referring is the so-called Equal Weight S&P, where all stocks are created equal by market cap.  In this case equal isn’t such a good thing since it’s the larger cap stocks that are in favor.  These dominate the Averages by virtue of their market weight construction.  If you’re thinking Tech for the most part you ‘re right, but don’t forget a few names like McDonald’s (294).  The distinction between these two measures of the S&P these days is a bit dramatic.  The Index has traded in a range since mid-April, just below the early February high.  The Equal Weight Index by contrast is below its April peak which, in turn, is below the January peak.  It’s a narrow market favoring the big.

Good markets always have their leadership, and that leadership by definition outperforms and like now sometimes significantly so.  It’s not something to lose sleep over, some stocks will always be better than others and the better tend to dominate.  So when 5 or 10 stocks account for most of the gain in the S&P, it happens.  When it’s a problem is when the rest of the Index isn’t following – when the rest of the Index is moving down.   Measures like the Advance-Decline Index and stocks above the 200-day average show this as well.  Stocks above their 200-day are hovering around 40% while the averages dance around their highs, a rather dramatic discrepancy.  We wish we could say there’s some magic number here, but there is not.  We can say the many eventually drag down the few, but the key word here might well be eventually.

They like to call this market a trading range, but which market?  The NASDAQ certainly isn’t a trading range, even the Composite let alone the NDX.  The Russell 2000 has been in a trading range since its mid-March low, but that range is well down from its earlier February high.  The S&P has been range bound of late, but well up from the March low, which in turn was up from the December low.  If you look at the series higher lows from last October, it’s an uptrend.  The problem is the average stock is different.  NASDAQ A/Ds made a new low not long ago.  If the NAZ is literally 100 stocks, let’s further refine it to 10 via the Micro Sectors FANG Plus Index, FNGU (133).   It’s clear what’s working, and you have to be careful with the rest.  When the Averages are doing well, it’s easy to hope the others will come along, but you know what they say about hope as an investment strategy.

So why can’t the few drag up the many?  In theory we suppose they could, it just never seems to work that way.  The explanation here we suspect is sideline buying power – there isn’t enough to continue to push up all stocks, just enough to push up strong stocks and eventually not even enough for them.  Sideline buying power or liquidity is only restored in an eventual market correction.  Meanwhile, enjoy it while you can.  These diverging markets can last for a while, including through 1972 and 1999.  There was money to be made as long as you were in the Nifty 50 or the Dot-com’s.  The leaders will be the last to give it up as will the big-cap beverages they include.  There’s an old Wall Street story about a wonderful party, everyone was having a good time and no one wanted to leave, yet they knew it would end – but the clock had no hands.

The Advance-Decline Index is another proxy for the average stock versus the stock averages. It peaked in early February, had a lower peak in mid-April, and a pattern of lower peaks since then.  In other words, it’s very similar to the unweighted S&P, and other measures showing the bifurcation.  Recently, however, the A/D numbers have been mixed.  We have long pointed out it’s not bad down days but bad up days that cause problems.  Recently we saw a day with the Dow basically unchanged and 700 net declining issues – not a good day.  Then there was a modestly up day with 1300 net advancing issues.  Given how selective the market has been we are almost surprised the numbers haven’t been worse.  That said you don’t want to see them become worse.  Those up days with poor A/Ds are a warning. 

Frank D. Gretz

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Go Big… Or Go Home

DJIA:  33,309

Go big… or go home.  Well, you don’t have to go home, but if you don’t go big you probably want to go to the sidelines.  The ratio of small-cap stocks to large-cap stocks has tumbled to a multiyear low.  This proved a warning sign in 2007, but other years not so much.  Of course, it does speak to where you want to be in this market, if not specific stocks or groups.  It’s as simple as Microsoft (310) and McDonald’s (295), one sells burgers and one sells software but that’s not what matters – they’re big.  It has been a while since we thought of the FANGs as a group, but we have recently.  They have a few things in common as well.  And like Apple (174) and Microsoft, the FANGs have almost taken on the mantle of defensive.  This narrowing in the market rarely ends well, but clearly it has yet to end.

Whatever happened to that China reopening, the one that hopefully was supposed to lift all ships.  A look at Oil pretty much tells you that didn’t happen.  And China itself again seems to be in trouble.  China had a tough time last year, and Tech especially amidst a storm of political controversy.  Shares cratered into October, but in doing so created some noteworthy technical extremes.  The subsequent rally into January was impressive, but since then selling has resumed.  At the time nearly every Tech share was above its 50-day average, but since has fallen to fewer than 7%, according to SentimenTrader.com.  Looking at stocks above the 200-day, more than 95% had recovered to that level, but a couple of weeks later fewer than 30% were holding there.  While Chinese stocks clearly have suffered, they probably haven’t reached an extreme that would suggest the high probability of a durable rebound.

When they’re worried about their bank deposits for goodness sake, this should be a more than decent backdrop for Gold.  While there’s only so many bars you can bury in your backyard, there are ample opportunities here including many old fashion mutual funds.  Or, if you’re feeling pretentious, you can always stuff a couple Krugerrands in those penny loafers.  Perhaps the most compelling argument for Gold is what seems an important peak in the dollar, and what seems an imminent further break.  We are always uncomfortable when stocks or markets have an opportunity to go up but fail to do so.  The stocks have done nothing wrong in terms of their patterns, but we didn’t buy them to have them do nothing wrong.  And we sometimes find that if you give charts doing nothing wrong enough time, they will do something wrong.  Realistically, time sometimes takes time and in this case they may need that break in the dollar.  For GDX (34) a move above 36 should extend the uptrend.

Semiconductor stocks were not created equal, and certainly not equal to Nvidia (286), or even AMD (97).  Indeed, to look at the SMH ETF (123) over the last six weeks they haven’t been so wonderful, even dropping modestly below their 50-day average.  This hasn’t been in every case just a drift as the gap lower in Qualcomm (104) a week ago makes clear.  As a key supplier to Apple, it left some surprised at that company’s report.  Skyworks (97) is another whose disappointment resulted in a gap, and there are others.  The point being like the Averages the strength in the Semis is the result of a few, while others have shown surprising weakness.  One of those few is AMD which itself did show some weakness last week.  The break and subsequent sharp recovery, breaking the late march downtrend, in this case has left it with a dynamic looking pattern.

There was nothing in April’s numbers to suggest the Fed should feel it has to keep raising, nothing to suggest they should start cutting.  The futures may be pricing in the latter, but be careful what you wish for here.  The only easy path to easing is if something goes wrong, and something going wrong wouldn’t be good for stocks.  The going wrong, of course, looks to be the Banks and other Financials generally.  Rather than going away, the banking issue seems to feed on itself, or is that why it’s called contagion.  We find it amusing that it’s still about blaming the short sellers rather than the reason for the short selling – the bankers.  Stocks above the 200-day have been hovering around 40% recently, but it’s relative.  With the big-cap Averages hovering around their highs, it’s a big negative. Certainly this number can drift lower as the big-cap dominated Averages continue higher, but you might want to recall the “nifty 50” or the “dot-com” days.  Narrowing or diverging markets eventually end poorly.

Frank D. Gretz

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Follow the Soldiers … Not the Generals

DJIA:  33,127

Follow the soldiers … not the generals.  In the stock market the average stock is often likened to the soldiers, the big-cap stocks that dominate the averages the generals.  Where the analogy breaks down is that in the stock market, it’s the soldiers that lead.  It may not always appear that way, but when all is well with Microsoft (305) and the like, it doesn’t mean all is well.  In reality, of late there has been distribution under the guise of strength in the averages.  The Advance-Decline Index is a reasonable proxy for the soldiers, the average stock, and that Index peaked in early February.  An easier and similar look is the percent of stocks above their 200-day average, the equivalent of looking at stocks in medium-term uptrends.  This measure peaked at 74% in February, while the April peak was only 49%.  As the S&P and NASDAQ touched highs on Monday, the number was down to 43%.

This is the anatomy of a market peak.  When markets diverge like this, the averages versus the average stock, it doesn’t end well.  Market lows are characterized by big volume and volatility.  Stocks become washed out and make lows pretty much all together.  Market peaks are almost the opposite.  Stocks tend to peak a few at a time or a group and a time – market peaks are a process.  As buying power is depleted, it’s typically the smaller or secondary stocks that give it up first.  It’s the bigger stocks that hold up.  Since these dominate the averages, the averages hold up as well.  This creates the divergences between the averages and measures like the A/D Index and stocks above their 200-day.  It’s tempting to think or hope the averages will drag up the rest, but it doesn’t work that way.  These divergences are about depleted sideline cash, and that’s typically only restored in a correction.

If market peaks are a process that eventually gets around to everything, this includes the big-caps that dominate the averages.  The key word here, of course, is eventually.  You do have to be careful of falling into the trap of thinking these are immune, thinking the few will drag up the many.  History is not on that side.  Meanwhile, there is a bull market in stocks that can only be called defensive – Staples and Healthcare.  It’s easy to think of this as temporary, as just another sign of a weak market and investors seeking shelter from the storm.  While there has to be some of that, it’s not quite that simple.  If you look at many of the long-term charts here, charts of Hershey (275), Lilly (429), Merck (117), Mondelez (77), Pepsi (193) and McDonald’s (295), you’re not exactly hiding out here.  In a really weak market these won’t be immune, but these are stocks you should be comfortable owning in any market.

Seems prudent to be more cautious here, perhaps considerably more cautious.  It’s not every day you see Regional Banks down 10-15% while the same day Brent falls 5%.  If caution seems sage advice, it’s also vague advice.  Regional Banks may be cheap and they may survive, that’s not a reason buy them.  At the risk of dancing on the dark side of funnymentals, their road to profitability seems more than a little difficult.  Ironically they’re likely to be hiring staff – to deal with those new regulations.  It also seems a good time to let go of those “hope stocks,” stocks like Zoom Video (62) where you’re still hoping it will get back to 600.  This seems the case when it comes to all of the stay-at-home stocks.  Bubbles may come and go, but when they go they stay gone.

Some time ago something went wrong in the office, and someone said blame the temp.  Amusingly, it was the temp who said it and who though innocent, didn’t run away from responsibility.  It’s somewhat amusing then that the weakness in bank shares to some extent is being blamed on short sellers.  In his little diatribe the other day Powell reassured us the banks are “sound and resilient,” though any need to reassure somewhat defeats the purpose.  It’s interesting that amongst the Fed there never seems a dissenter – apparently they don’t get out much.  The recent backdrop of course is hospitable to Gold, but we would argue the uptrends here have been well-established.  And we would further argue news often comes along to explain what the charts already were seeing.  Meanwhile, the dollar seems about to break, which would only reinforce Gold’s longevity.

Frank D. Gretz

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Sometimes It’s Not Whether You’re in … It’s Where You’re in

DJIA: 33,826

Sometimes it’s not whether you’re in … it’s where you’re in. A former colleague liked to say he always knew he was a good trader, all he needed was a bull market. Studies have shown as much as 80% of the movement in individual stocks can be a function of the market’s overall trend. It does indeed help to have that market wind at your back. If you look at this market, however, there is no wind, fair, ill or otherwise. Here around 4100 in the S&P is pretty much where we were a year ago. There’s always stock picking, but that’s hard. Similar but less difficult is identifying the group or sectors in favor. Being in the right place often is as important as simply being in, and that’s particularly so in a market like this. If there is always a bull market somewhere, you also have to keep up when it changes.

As the year began Tech was all the rage. It was so much so that many complained there were only five or ten stocks driving the market. By some measures this did seem the case, yet in February 74% of NYSE stocks were above their 200-day average, that is, in uptrends. The market wasn’t as narrow as it looked. By mid-March the number was in the upper 40s, a significant drop and the stocks driving even that number had begun to change. Even with the recent action in Microsoft (305) and Meta (239), the relevant ETFs show Tech has stalled. And since mid-March areas like Consumer Staples and Healthcare have come on to lead. In regard to the former you’re likely thinking Procter & Gamble (156) which gapped higher last week. However, Retail is also a significant part of the XLP (77), as stocks like Walmart (151) and Costco (501) also have outperformed. In XLV (132), it’s Pharma like Eli Lilly (390) and Merck (115) driving performance, with United Healthcare (490) being its usual erratic self. The Medical Device ETF (IHI-56) is a group of companies whose products we find ourselves using more and more.

Who knew First Republic (6) was so important. In retrospect, seems those big banks knew when out of the goodness of their heart they doled out that $30B lifeline. Then, too, it’s a matter of pay now or pay later – the cost of that FDIC insurance certainly would rise in a failure. When you lose 40% of your deposits, your options have dwindled. A rescue would be nice but if the first one didn’t work, would you trust the next one? The risk of course is contagion, but that takes a couple of forms. There’s the mechanics of the industry, which is above our paygrade, but we can say the charts all look the same. It is hard to believe FRC is the only Regional with a problem. The other contagion risk is what was evident in Tuesday’s selloff, the bank problem takes the market lower. The bears have worried all year about disappointing earnings dragging down prices. It’s more than a little ironic earnings like those of Microsoft seem to be holding the market together.

There are many reasons to like Gold except for the obvious, it’s Gold. When it comes to false starts, were it a runner or a swimmer, it would have long been disqualified. At this point the uptrend is well established and the stocks are in a needed consolidation. Conceptually, when money is being pulled out of banks, could there be a better backdrop? Of course, the same might be said of Bitcoin. A bit of an outlier among areas acting well are the Gaming stocks, BJK (46) being one of the ETFs there. Las Vegas Sands (62) is among the best individual charts, which despite its name has little or no presence in Vegas. Without wanting to read too much into this, seems someone might be benefiting from China’s reopening – it’s certainly not the Chinese stocks.
We dislike the idea of mechanical buy and sell signals as the market rarely lends itself to rigid determinations. That said, mechanical guides are useful versus just letting your wishful thinking, hope and fear run amok. So we have a sell signal, so to speak, as of yesterday’s close. By way of perspective the last such signal was back on 2/14, S&P 4136, with a subsequent buy on March 30, S&P 4151. While not much of a money maker, it did get you on the right side of what little trend there was. And unlike many “signals,” it didn’t whip you around every other day. So there’s this mechanical trend change as well as deterioration in indicators relating to New Highs/New Lows. And stocks above their 200-day now are back to 42%. There’s no magic number here, but clearly the number of stocks in uptrends has deteriorated, and to the point it’s time for a little more caution.

Frank Gretz

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Don’t Fight the Fed … But That Fight Might be Over

DJIA:  33,786

Don’t fight the Fed … but that fight might be over.  They won’t ring a bell when the Fed is through, but it seems pretty clear May should do it.  Sure they won’t be lowering rates anytime soon, but at least the fighting part seems done.  If you think by data dependent the Fed means inflation dependent, there’s good news there as well.  To even the casual observer it seems inflation at least has peaked, but an article in Barron’s took this idea a step further.  If rather than a 12-month trailing measure of inflation, use numbers from the summer when hikes began to take effect.  The Fed-watched PCE rose at a 3.3% annualized rate in the eight months July through February, a lot closer to the Fed’s target than the 12-month 5% number.  Here again, the fight seems well along its way to having ended.

So there seems a case for a new bull market and a strong case the bear market has ended.  After all, last May almost 50% of the stocks that traded that week reached 12-month lows, a real washout unlikely to be revisited.  Then, too, at S&P 4100-4200 you can go back to last May and see the averages have gone nowhere – though there is an uptrend from the October low.  Everyone likes to complain it’s a market led by four stocks.  It’s true the four have accounted for half of the gains in the NASDAQ 100 this year.  However, only 25% of the NAZ is down 20% from their 52-week highs versus 80% a year ago.  It’s not as narrow as you might think.  If it doesn’t feel like a bull market it might be because of the somewhat incessant rotation.  For now you can find four Pharma stocks that look as good or better than those four NAZ stocks.

One place we don’t find the rotation so healthy is the late February/early March peak in economically sensitive stocks like Parker Hannifin (319), though by no means is the chart a disaster – look at the weekly.  The Fed may be through or close and inflation may be peaking, but there’s the concern about the economy in terms of the lagged effects of the Fed’s moves.  We would be a bit more comfortable with a fundamental back up from the charts.  And we would feel a bit better if those regional banks would find a pulse.  It’s not the banks themselves that worry us, it’s the implications for small business, especially commercial real estate.  In that regard, the news from Western Alliance Bank (40) on Wednesday was encouraging.  There is, too, a rather dramatic irony in this economic debate.  Where most layoffs have occurred is in Tech, and the stocks have rallied on the news.

They like to call the first hour of trading amateur hour.  That may be a bit unkind, but we tend to agree it has more than its fair share of reversals.  By contrast, the last hour is said to be when the pros play, whoever they may be.  The last hour is thought to have predictive capability to the point that an indicator was developed to capture this – cleverly called, “the last hour indicator.”  It simply calculates the gain or loss in that last hour of trading.  Positive readings typically mean it’s a good market, the logic of sorts is that traders want to be in before the next day’s likely up opening.  Whatever the logic, like the rest it has its moments, this seemingly one.  It has been positive for more than seven consecutive days.  In the past this has led to higher prices a month later some 80% of the time, according to SentimenTrader.com.

Say what you will about narrow markets, they have their virtues.  Back in the day when it was FANG and FANG only, at least you knew where to put your money.  The best Dow stock this week was probably Travelers (180) – can’t wait to get some of that good stuff.  Tesla (163) seems to cut prices every other day, yet margin contraction was a surprise?  While not a particularly good chart recently the market often gives Musk a pass, but not this time.  Big still seems best, and when it comes to Tech none are bigger than Apple (167) and Microsoft (286).  With its near 40% position in the two, the SPDR Tech ETF (XLK-148) would break out again around 152.  The overall market generated enough momentum off of the October low and again in late March to strongly argue for higher prices into year-end.  We’ve long noticed, however, the market is on its own schedule.

Frank D. Gretz

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If the Past is Any Guide, Things are Looking Up

DJIA:  34,029

If the past is any guide … things are looking up.  In the stock market history tends to repeat because human behavior tends to repeat.  And, too, sometimes it’s just a mystery.  Fund flows at the start of any year tend to boost prices for a time.  Just why that should carry forward throughout the year is hard to say, though it makes some sense that a good and usually predictive first quarter could set the tone for the year.  And, indeed, when the first quarter doesn’t take out the lows of December it has led to higher prices April through December some 93% of the time.  It makes some sense that following a bad year like 2022, a good start would follow through April to December.  In a bad year it makes sense that Tech might suffer most, so when the S&P Tech sector cycles from only 25% positive to 75%, it makes sense that it and the S&P would have a good April to December.  So maybe it’s not so much of a mystery.

The S&P peaked the first week of February and more importantly, most stocks peaked around that time as well.  The extent of the decline has been a bit surprising, not in terms of the S&P but in terms of the damage to most stocks.  NYSE stocks above their 200-day peaked at 74%, dropped all the way to 36%, and is only around 43% at present.  When fewer than half of the NYSE stocks are up in uptrends, that is, above their 200-day, we are still in a correction.  It has, however, affected stocks and even markets differently.  Until last week, Tech had been pretty much immune.  And while they haven’t exactly fallen apart, Tech has corrected as likely was their due.  This correction, however, was more rotation than correction as a number of Healthcare shares came to life for the first time since mid-December.

Given how long Healthcare had remained dormant, this change seems an important development for those stocks.  And it seems important development for the market as well.  It’s one thing to just have a group like Tech consolidate for time, but in this case there has been something, and a not a so insignificant something, come along to take its place.  That has kept NYSE Advance-Decline numbers reasonably healthy, something we obviously consider important.  Indeed, the A/Ds were even flat in Wednesday’s confused market, and have been positive 11 of the last 14 days, something we think keeps recovery prospects intact.  Those numbers are not bad, especially considering the still lagging Financials, of which there are many.  And, of course, be wary of any bad up-days.

While the bank crisis might be over for now, try telling that to the bank stocks.  The banking crisis is one thing, the crisis in banking seems another.  There almost seems an excitement that a bank like First Republic (14) will survive, missing the point will it ever thrive.  To look at the charts, it’s rare to see such uniformity and unanimity in any group.  And it suggests the problems besetting the banks are affecting them all.  The charts for now suggest exactly that – survival.   Even that, however, is tentative in that the stocks merely have stopped going down, consolidating in their downtrends.  With barely a pulse, there’s the risk of new breakdowns.

We have been waiting for a pullback to buy Gold, and you know how that works.  We should have done what we usually do, try a little, more if it works, if it doesn’t – kick it.  So that’s our intention and our advice now.  Meanwhile, we have noticed the breakout in Bitcoin stocks like Riot (14), Grayscale (18), Marathon (12) and BITO (18).  Aside from the charts, and recognizing Bitcoin is pretty much synonymous with controversy, we can’t help but be impressed by how well it has acted in light of the collapse of FTX and Silvergate, and the regulatory problems for Coinbase (69).  BITO is an ETF which holds futures contracts while GBTC is a trust which would like to become an ETF, so far without success.  The kicker here, so to speak, is a successful switch would likely narrow the spread between the current price and NAV closer to 25.

Frank D. Gretz

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Forget Bifurcated…This Market is Trifurcated.  

DJIA:  32,859

Forget bifurcated…this market is trifurcated.  When someone says what’s the market doing, even in terms of the Averages you almost have to ask, which one?  There’s the NASDAQ 100, not to be confused with the NASDAQ Composite, which is in its own bull market of sorts. The NAZ 100, also known as the Triple- Qs, is home to Tech to the tune of some 80%.  For now at least, Tech is seen as a safe haven of all things, immune to the news in banking.  The S&P 500, in turn, seems held together by its own heavy weighting in Tech, names like Microsoft (284), Apple (162) and the like. The problem for the S&P is its own more than fair share of Financials, and Industrials that have suffered recently in the wake of the banking mess. Finally, there’s the Russell 2000, where Regional Banks are some 17% of market cap.  Throw in ancillary financials like REITs and Insurance, and you can see why the chart looks as it does.

Bank shares, whether large or small, have been crushed.  The unanimity of the decline doesn’t happen very often, and it usually means bad things for those all around.  When banks fall relative to everything else, as they have recently, everything else tends to follow.  It seems banks do matter to the economy.  When they’re in trouble most of the economy has trouble as well.  The counterpart here is that this will lead to lower rates and hence the overall market’s somewhat indifference.  There is, however, a fine line here.  If troubled banks damage the economy, it will only be because of that rates fall.  We would like to think that last year’s 20% decline and multiple contraction may have discounted declining profits, but only time will tell.

In the long run earnings of course matter, but the long run is just that, and many things come into play in the interim.  An obvious example is last year when earnings were up and the market was down, that because of the Fed’s tightening.  Suppose this year the Fed is close to being done?  Or, suppose the “E” In P/E is not for earnings but is instead for efficiency.  Look what efficiency did for Meta (208).  Or suppose like Baba (103) more companies decide to divide.  It was worth more than 10% to Baba’s stock on Tuesday.  Sure this is all more than a little far-fetched, but earnings are not alone in driving stock prices.  When the market wants to go higher it always seems to find a way.  Maybe prices will drive higher when we all give money to someone to buy something about which we know nothing.  Come to think of it, we’ve already done that.

The problem for now is not earnings, it’s the technical background.  We’ve been in this correction since early February, exacerbated by the banking mess.  You might say all things considered the market has held together reasonably well, and to a degree that’s true.  Still, holding up isn’t going up, and many stocks haven’t been holding.  Our measure here is not so much the Averages but what most stocks are doing.  During this correction NYSE stocks above their 200-day average have gone from 74% in early February to last week’s low of 36%.  If this is a decent proxy for stocks in uptrends, it means almost 2/3 of stocks are in downtrends.  And that means it’s hard to make money.  There’s no magic number here, it simply has to turn back up again.

The recent action has been more encouraging.  While we make light of it, we always take note when the market has its chance to do something but does not, in this case, go down.  And the Advance-Decline numbers recently have held together pretty well.  We especially like days like Tuesday when the Dow and the S&P showed modest losses, but the A/Ds were positive.  This should be a prelude to improvement in stocks above their 200-day and, therefore, a better market.  While Tech clearly leads, the Econ sensitive stocks seem to be regrouping.  To look at a stock like Cintas (468), which should have its finger on the pulse of the economy, you might ask what recession.  While history says the banks drag down the rest, maybe this time Tech drags up the rest.

Frank D. Gretz

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Funny, We Were All Good Traders Back in January… But Not So Much Now

DJIA:  32105

Funny, we were all good traders back in January… but not so much now.  It’s hard to overstate the importance of the market’s overall trend.  Academic studies long have held as much as three quarters of a stock’s movement is a function of market trend.  With the growing importance of ETFs we suspect it’s even more – buy one thing, move 10.  Back in January 74% of stocks were above their 200-day, that is, in uptrends.  Now it’s only 47%.  Your odds of having the market at your back are less than 50-50.  When we hear it’s a stock picker’s market we cringe.  Stock picking is hard.  Give us January when most stocks went up, when “stock picking” was easy.  We are still in this correction that began in early February, though considering the news it could be worse.  At least 3840 on the S&P has held, and that seems important.

Going through the bank charts – what’s March Madness for – it comes as little surprise how poor they are.  The surprise, and there are almost 400 of them, is how uniform those charts have become.  And by the way, that includes the money center banks who would seem had something to gain here.  The stocks for now have stabilized and that’s important for the market’s sake.  We don’t see them storming back but that’s fine, stable will do.  What is of concern is the ancillary fallout.  In terms of markets. Regional Banks are a big part of the Russell so that wouldn’t seem to bode well for that Index.  And Regional Banks are behind some 80% of lending to commercial real estate, another place you might want to avoid.  Seems it’s a tangled web they weave.

The banking mess and its attendant implications for growth, has put a dent in most of those stocks we have termed economically sensitive.  While Grainger (665) and Cintas (433) didn’t seem to notice, on the whole some dust needs to settle here.  A quick rebound would be the ideal, but that seems unlikely without some new leg up in the overall market.  Certainly it seems important the recent lows hold, both for the sake of the stocks and for implications for the economy.  GE (92), by the way, is another name that didn’t seem to notice.  Meanwhile, there continues to be a shift to Big Tech on the perception they are somehow immune, and perhaps they are.  This includes most of the Semis, Microsoft (278), Apple (159), Meta (204), and now Amazon (99) looks better.  Tesla (192) also appears to have turned up again.

If we had to choose a word for the Fed meeting – yawn comes to mind.  After the most aggressive tightening in years, does a quarter point really matter?  We can see a half a point might have mattered, though a rally on that news would’ve been really bullish.  And had they paused, would it have signaled a lack of confidence in the financial system?  Back in 1984 when Continental Illinois failed, tough guy Volcker did pause.  That was May and by July- August the market rallied sharply.  Events like the Fed meeting always seem not so much about the event but the market’s reaction to the event.  We know these meetings usually come with their share of volatility, but Wednesday we found a little over the top.  Reaction, dare we say seems more about manipulation.

A theoretical trade might be, long the NAZ and short the Russell.  By the NAZ we mean the NASDAQ 100 where the large-cap growth stocks live, and are for now the market’s best acting stocks.  The Russell, in turn, is 17% home to Regional Banks.  It’s not just Regional Banks that are the problem.  Over the last few weeks a ratio of small-cap to large-cap stocks has cycled from a 200-day high to a 200-day low, a change that seems more than just about the recent weakness in Regionals.  In theory this is a warning sign for the economy.  For stocks, it tended to precede some additional small-cap weakness, while the S&P tended to hold together reasonably well.  We don’t really believe in these so-called “pair trades,” being right once is hard enough. The concept, however, does seem valid.  The Regionals will take time to dig themselves out while large-cap growth, of all things, seems a safe haven.

Frank D. Gretz

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Who Loses Money in the World’s Safest Investment … Banks of Course

DJIA:  32246

Who loses money in the world’s safest investment … banks of course.  So how does this work again – rates go up, bond prices go down?  Having tired of lending money to Third World countries, trying to rig LIBOR, writing “liar loans,” the banks have found yet another way to screw up.  Still, there was a perverse predictability to SVB, no one was looking there, and that’s what usually comes back to bite you.  Scary/disappointing as it all might be, it’s an ill wind, and all that.  SVB and the rest just may have done the Fed’s job for it.  At the very least, it should help ease the Fed’s foot off the rate hike pedal.  The idea that the futures were up prior to the CPI release Tuesday morning tells you inflation is less of a worry.  Now it’s about a loss of confidence, and that takes time to resolve.

After Tuesday’s calm came Wednesday’s turmoil, thanks to those almost forgotten problems at Credit Suisse (2).  Tempting to say let those problems remain forgotten, but that didn’t turn out so well in the case of Bear Stearns or Lehman.  The latter were seen as being small enough to allow to fail, though in retrospect they were not.  It seems clear that bank profits will be hurt, which means lower share prices.  What’s not clear is that dirty word contagion – to what extent this morphs into further failures and a greater economic impact.  The latter came to the forefront Wednesday with the selling in everything sensitive to economic growth, especially Energy.  As we suggested, this banking problem is doing the Fed’s job for it, but will the Fed see it that way as well. We had thought a pause might be taken as a sign of Fed panic – they must know something.  We now think it would be taken as a sign of Fed reason.

In the midst of layoffs in the auto industry, Walter Reuther once quipped, who do they think buys these things?  Meta (205) plans to cut another 10,000 jobs and leave 5000 openings unfilled.  Investors may not have bought into the metaverse, but they have  bought into the stock.  It was up some 13 points on the news Tuesday, and another 4 points in Wednesday’s weak market.  Seems growth is out and efficiency is in.  Be lean, be mean, layoff more workers and really get that stock going.  Then, too, if this is good it’s a telling commentary on how bloated and poorly run the Company had been all this time.  In any event, we’re not here to praise or to bury Meta, we’re here to praise what has become a very good chart, and one leaving the rest of FANG behind.  And this was prior to the last few days when growth became the new defense.  It’s not just growth at any size, of course, it’s big growth –Microsoft (276), Salesforce (187), Nvidia (255) and Apple (156).

The overall technical background isn’t as bad as you might think.  The S&P had fallen below its 200-day, but you might notice it often dances around that number.  The 50-day remains above the 200 and is less prone to the dance.  Another trend following indicator we use remains up, provided there’s no weekly close below 3845.  Like most trend following indicators, it’s only right 45% of the time.  Like most trend following indicators, you make four times as much as you lose – you avoid the big losses.  The last buy signal was at the end of October.  There’s no question we have seen selling that can only be described as intense – a spate of 5 days where 3 saw 90% of the S&P components lower.  More important than the recent weakness, however, still seems the momentum surge off of the October low.  Even intense selling did not negate the positive implications of this kind of surge, at least historically.

When things change, Keynes once observed, you should change as well.  Things change but rarely as quickly as they did this week.  While we should be leaving time for the dust to settle, a couple of things seem clear. The economically sensitive stocks fell out of favor this week, on the perception the economy will suffer from the banking debacle.  While perceptions aren’t always reality, in the stock market they often can be more important. At the same time, areas perceived to be immune to such problems were the winners – growth stocks turned to defensive stocks.  And clearly, bigger was better.  The economy won’t fall apart, so stocks like Grainger (681) and Parker Hannifin (314) will recover, as the dust settles.  Gold caught a bid finally, and that “safe haven” Bitcoin did as well.

Frank D. Gretz

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