DJIA:  39,753

Show us market breadth …and we’ll show you the money. Liquidity and the lack thereof drives markets.  When you say to yourself you wish you had more money to invest but you don’t, if that’s true for everyone that’s the top. When all the money is in – that’s it. How do you measure liquidity, sideline cash? Back in the dark ages we used to watch mutual fund cash levels, thinking that cash on the sidelines was a good thing. It wasn’t. When the market wanted to go higher the money always seemed to come from somewhere – foreign buying, whatever. The best measure of liquidity is market breadth, the Advance/Decline Index. It takes a lot of money to push up 3000 stocks a day and earlier in the year that happened with regularity. Now 2000 at best is more the norm. The numbers are not a disaster but they have deteriorated, meaning so too has liquidity and the health of the bull market.

The market should be in sync, the A/Ds should keep pace with the Averages even day to day. Down days in the Averages likely will see negative ADs. Bad days happen. It’s the up days with negative A/Ds, what we call bad up days, that cause problems. Again, it’s about enough money to push up the Averages, but not most stocks. Divergences are an important insight, but it’s easy to lose focus. The Averages are the last to give it up, which means there has been money to be made in the FANGs, Semis, LLYs and so on.  And if you’re in the rest and not making money, you have hope your turn will come – hope being a wonderful part of life, but a terrible part of the stock market. When the Averages continue to act well, it’s hard to sell even if it’s time to do so.

Tesla (241) could be a case study in contrary thinking.  EV sales are in decline, the company is being outsold in China, yet the stock rallied on what had to be considered dubious news – the old not as bad as expected.  In this case, it’s not the “news” that was important, it was the “expected” that mattered.  When it comes to the stock market, what is expected, what we all know, isn’t important. It’s priced-in discounted, whatever.  Not every contrary opinion works this well, of course, and in this case the chart was a big help.  The day of the news the stock was down pre-market, suggesting someone had gotten it wrong. It wasn’t the chart.

Summers are great, but not so much for stocks. The history of June, July and August is pretty much that of a trading range, especially when the seasonal pattern of particularly strong days ends this Friday. The world will not end, but it has been a good run recently leaving the market a bit stretched to the upside. And there’s a peculiarity in bonds, wherein the spread between the AAA and BBBs recently was at a 35-day high. This is more typical of weak markets rather than one at new highs. It suggests bonds don’t see the same rosy scenario that stocks are seeing, and historically bonds typically have won out. The Transports generally and stocks like Parker Hannifin (528) and PACCAR (103) also pose some economic concern.

Wednesday finally saw a 3-to-1 up day, the first since mid-May. Then came Thursday, which might have been called revenge of the nerds – Tech hammered, everything else up. The Russell was up more than 3% and the A/Ds were better than 4-to-1. Not exactly the look we were expecting, but some change can’t be a complete surprise.  If Thursday is any guide, a reset could be a healthy one – any broadening of the market can’t be bad. One day is just that, but admittedly we had expected the market to just continue to narrow in a trading range summer. And while one day is just that, there are many stocks outside of Tech that have more than good one-day patterns. We’re thinking here of stocks like Ingersoll Rand (96), Eaton (329), Cintas (716), Intuitive Surgical (444), Trane (345) and others.

Frank D. Gretz

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DJIA:  38,647

Sometimes a low is just a low … and not a shiny new uptrend.  The semi washout low in late May, a 5-to-1 down day and a couple of decent up days, seemed to turn things for now. What turned, however, were the Averages and not so much the average stock.  If you can’t hurry love you certainly can’t hurry markets.  We all tend to think of it as trending but that’s only true if you include sideways as a trend.  Markets spend a lot of time going nowhere, consolidating gains or losses.  In this case consolidating the 10% gain in the first five months this year.  The good news is that 10% in the first five months augurs well for the next seven months. Historically there’s a better than 80% win rate after even 5% gains, with the caveat there can be some nasty drawdowns.

The contradiction about this market is that it has been in a momentum correction for almost 3 weeks, though the S&P and NASDAQ made new highs to start the week. The Averages are outperforming the average stock, and that to an even greater extreme on the NAZ.  Last week there were more 12-month new lows than new highs there, and the A/D Index made a new low.  There always has seemed a bias to the downside in these numbers, so we’re not overly concerned.  This is, however, the classic pattern of a market top — the Averages remaining strong while most stocks falter.  Eventually, there isn’t enough liquidity for even the stocks that dominate the Averages.  Fortunately, problems like this evolve over time, enough time you will have stopped worrying about them before they matter.

It’s Nvidia’s (130) world, and the rest are just trying to find a way to play in it.  In this case, the rest of them might well be the FANG stocks, the Nvidia’s of their day.  It’s not that they have fared so badly, it’s just Nvidia has sucked all the air out of the room.  And, of course, there had been that Debbie Downer called Apple (214), which suddenly has come to life. The four names of FANG all are good charts, at or near breakout points. The IYW (150) seems a relevant ETF here, among others.  While it’s easy to think of these as volatile and therefore risky, over the years they almost seem to have taken on some defensive characteristics, especially in market weakness.

Back in 2014 Blackstone bought 1740 Broadway for 605 million, of which they borrowed 300 million against the 26-story building near Columbus Circle – not exactly a bad neighborhood. The building was recently acquired for less than 200 million, according to the New York Times.  Real estate isn’t easy, but these guys are supposed to be the experts – and yet. Stick to trading stocks?  Like any down and out market there have been a few false dawns here, with more likely to come.  A more recent NYT article pointed to the revival in shopping centers where, apparently, pickleball might save the day.  While we have little interest in real estate per se, we do follow the regional banks, especially when they act poorly.  That said, they did have a good day Wednesday on what wasn’t friendly news.

Progress not perfection seemed Powell’s message Wednesday, a message seemingly taken by the market as good enough.  To look at Parker Hannifin (525), a stock Greenspan used as an economic indicator, or even the Transportation Average, the economy more than rates seems worth a worry.  Meanwhile, one day is just that, but a 3-to-1 up day in the A/Ds tells a story more important than the Averages – but no follow through on Thursday.  Speaking of the Averages, clearly the NAZ is where it’s at.  While that’s no great insight, the driver from here could expand from AI makers, Nvidia and other Semis, to AI takers, the FANG stocks.  Also, we shouldn’t forget about Bitcoin, though most days it’s tempting.  Probably the best investment these days – volume.  If these thousand-dollar stocks continue to split 10 for 1, think what it will do for overall volume.  Are commissions still based on shares?

Frank D. Gretz

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DJIA:  39,065

You wish you had more money to invest but you don’t … that’s the top.  Well, if that were true for all of us, that is, when all the money is in, by definition that’s it.  It’s money, that is, liquidity that drives markets.  The question, of course is how do you know when the money is in?  There are a few macro measures but best are those Advance-Decline numbers.  In the short run they are important because the average stock typically leads the stock Averages.  In doing so, however, they also offer an insight into liquidity.  Over the last few weeks there have been only seven or eight days with fewer than 2000 advancing issues, and seven days with more than 3000 advancing issues.  It takes a lot of money to push 2000-3000 stocks higher every day, meaning the liquidity for now is still there.  As it diminishes, so too will the number of advancing issues.

Dow 40,000 is quite a run from Dow 5000, but somehow 5000 seemed more exciting.  In reality, none of these so-called milestone numbers have mattered a whole heck of a lot, except perhaps to the media.  Bloomberg’s John Authers makes the point with which most agree, it’s a strange measure.  Security selection always seems with an eye to the past, like adding Cisco (47) well past its prime.  And, of course, there was the untimely removal of an original Dow stock, GE (165).  Meanwhile, Intel (30) is there with its 133 billion market cap but not Nvidia (1038) with its 2.3 trillion market cap.  To be fair, over the last seven years Apple (187) contributed some 3000 points.  Two other Mag 7 stocks are there, Amazon (181) and Microsoft (427), but underrepresented compared to Goldman Sachs (458) and United Healthcare (517).  If denominated in Gold, the Dow has been flat since it hit 20,000, making its performance more like that of the Equal Weight S&P.

Price gaps refer to the empty space on a bar chart, left when the low price one day is well above the high price of the previous day, and vice versa.  Most stocks trade actively enough we can say it takes a lot of buying or selling to cause gaps, making them important.  Indeed, we find prices subsequently tend to follow in the direction of gaps.  Nothing is perfect and there are some recognizable exceptions, one being this week’s downside gap in Palo Alto (311).  The stock had a downside gap that was quite extreme last February that quickly reversed only to die at the 50-day.  The gap this week is what you might call the good kind, it didn’t break the 50-day.  Gaps that don’t change an uptrend, as is the case here, typically are just normal corrections, and likely a buying opportunity.

The 200-day moving average seems a good definition of a medium-term trend.  For the market as a whole, 73% of stocks are above this average, 70% is thought to indicate a bull market.  When it comes to stock selection, clearly there’s a lot to choose from.  Indeed, we can’t quite recall a time when Tech and Commodities were both performing well, let alone together with Utilities.  So it’s not just AI, and even when it comes to AI it’s the many associated stocks that have also performed well.  These include the Electric providers, like Constellation (221) and Vistra (96), as well as names, like Quanta (277) and Eaton (338). Meanwhile, despite what seems a fixation on Tech, even Staples like Colgate (94) act well.

The earnings heard around the world.  Earnings for Nvidia were the easy part.  They were good and everyone and their brother knew they would be.  With a good chart, there is no reason to expect a poor reaction.  Still, it’s never about the news, rather how the market reacts to the news.  The stock has been consolidating for 2 ½ months, and if anything should be ready for another run.  Meanwhile, after all the praise we heaped on those A/D numbers, the last few days have turned a little sloppy.  Weak down days are not the problem, worry about the weak up days.  The S&P has seen more than 20 new highs in the first hundred days of trading.  A feat often followed by weakness in a very short term, but strength always over the next six months.

Frank D. Gretz

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DJIA:  39,869

Be careful what you wish for … the troops have been leading the generals.  Everyone complained about the narrow market, but it had its advantages.  When it was just the FANG stocks, and just Nvidia (943) and friends, at least you knew what you wanted to buy.  FANG and the Semis seem to be coming out of their stall, but there has been almost a surfeit of riches, and hence the good A/D numbers. This has included Staples and Utilities, making some uncomfortable.  The belief there is that when staid sectors lead, the rally is not to be trusted.  This narrative doesn’t hold up historically, especially when like now many areas are participating.  And as we’ve noted, Utilities have become pretty techy of late.

In tennis, when you get your racket back early good things happen.  In the stock market, when the average stock leads the stock Averages good things happen.  The A/D Index has been sitting at a new high for a while, now the Averages are there as well.  Since April 18 there have been only six days on the NYSE with more declining than advancing issues. Most dramatic were the three consecutive days at the start of May which saw advances 3-to-1versus declines. Typically you see numbers like that coming off of a washout sort of low, when stocks are stretched to the downside.  That was not the case this time, and all the better. When the S&P has been above its 200-day and there were three consecutive 3-to-1 up days, markets were higher in every case three and six months later, according to SentimenTrader.com.

So, when someone tells you they’re very bearish, you in turn might say so you don’t own any stocks. They in turn would likely retort, well I am in this or that and so on. That’s when you say – so you’re not really bearish, if you were, you would not own any or many stocks.  If this little discourse were quantifiable, it would be called a passive sentiment indicator.  Typically surveys measure people’s opinions, not their actions.  These have their value, but also suffer from the problem of knowing when to be contrary.  In good markets, investors do become bullish, it’s normal.  It’s the extremes that matter.  Meanwhile, we find transactional measures more helpful.  There is one called the ROBO P/C Ratio, or retail options to buy, to open indicator. In the little 5% correction, this measure showed bottom equivalent bearishness.

Biotechs have had a tough go of it for some time.  Hope springs eternal, as most of us remember all of the good times.  With some 500 names even in our database, we know once started a run can be a bit contagious. Recently Amgen (315) has turned into an interesting chart, with its own gap a week or so ago.  It also has one of those orderly, consistent long-term uptrends, surprising for a Biotech.  From early May through the end of July Biotechs also are in a seasonally favorable period.  Meanwhile, of course, AI remains the market’s focus. Even here, however, interest has spread to supporting names like Quanta Services (264), Vertiv (97), Eaton (330) and even Copper companies like Freeport (52).  For what it’s worth, we don’t think the MEME revival is the worst thing.  Speculation in moderation is part of good markets.

Tuesday’s PPI could have taken the market lower; Wednesday’s CPI need not have taken the market much higher.  The rationale seems simple – the market makes the news, and in this case the market wanted to go higher.  So what do we expect from here?  To go by the history of three consecutive 3-to-1up days, or the five consecutive months higher in the Averages, we should see another six months of on balance higher prices. Important, of course, is that we continue with what got us here, respectable action in the average stock.  Stocks peak before the Averages.  Meanwhile, we wouldn’t lose track of Bitcoin here.

Frank D. Gretz

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DJIA:  39,387

Utilities … they’re not your father’s Oldsmobile. We should know, we have a Jetstar 88, one of those things you don’t so much park, you dock.  We also took heed of fundamental colleagues and sold some Constellation Energy (216). The thinking there was a lack of earnings growth, similar in retrospect to the thinking about Amazon (190) a few years back.  Perhaps therein lies the tale of big winners – it’s not the growth you see it’s the concept that will lead to the growth.  The earnings come later.  The concept here, of course, is that Electricity is a growth business.  Then there is the technical side, at the heart of which is supply and demand. How many Utilities do you own?

Admittedly, it’s a bit concerning when the market starts to find stocks because they fit a story or theme.  Amazon is doing well, let’s buy the Containerboard stocks – that sort of thing.  In this case, of course, it’s about AI.  What isn’t?  Did you know GPUs use twice the power of CPUs?  Even if you don’t know what GPUs or CPUs are, it could be reason enough to buy Utilities.  Just imagine the power demand when we get to KPUs.  The Utility ETF (XLU – 71) is almost a little stretched, but what big uptrend didn’t start that way?  And not all of XLU is Techy.  There’s plenty of granny stuff there.  The stocks that stand out are Constellation Energy and Vistra (93).  The latter on a monthly chart looks more Techy than Tech.

There is a negative out there that only we may be aware of, suggesting ours is a Keener insight than we realized, or more likely it’s not all that important.  As you likely know we pay considerable attention to price gaps, and loosely track them on a daily basis.  A gap occurs when the opening price one day is well above or below the price of the previous day.  In our less than scientific analysis we’ve noticed considerably more downside gaps lately than those to the upside.  Given price tends to follow in the direction of gaps, this could be a problem.  However, the bigger problem in this might be the reason for the gaps.  Of course, it’s always news of some sort – often an analyst call.  For the most part, however, they follow earnings reports.  The overall numbers say most companies aren’t missing their estimates, price gaps suggest otherwise.  Meanwhile, no harm no foul.  The overall market backdrop seems fine.

In a reasonable confirmation of the uptrend’s resumption, the major stock averages now are all back above their 50-day average.  It seems worth noting, however, the Software ETF (IGV – 81) is not.  And it’s not just Microsoft (412) or Salesforce (275).  The FANG names have been better, but they’re not exactly running even a few weeks off the low.  Meanwhile, with their respective gaps, 3M (97) and DuPont (79) – when was the last time you thought about buying that name – are acting quite well.  If we wanted to, and we don’t, it’s too soon to be negative on Tech.  We don’t even think of this so much as rotation as we do expansion. Advance/Decline numbers remain a positive aspect of the overall background.  In the selloff we saw some bad down days – it happens.  In the rebound we’ve seen three consecutive days of 3-to-1 up – good, not bad up days.

A good rally, or a great rally, time will tell to coin a phrase.  Certainly, this lift from a 5% correction has its credentials.  There were those washout numbers on the downside, followed by impressive numbers on the upside – not classic, but likely close enough.  Perspective also seems important here.  Following five consecutive months of higher prices, history shows a better than 80% chance of being higher six months from now.  Seems there’s something about having that five months of momentum at your back.  As always, it’s about the average stock, the A/Ds more than the Averages.

Frank D. Gretz

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DJIA:  38,085

We have 5% … do we hear 10%?  It had looked like a 5% correction might do it, then the bottom fell out of the Metaverse.  We’re not quite sure how much this might change things, but we expect not much.  Over the years there have been plenty of 5% corrections that have led to little more.  A couple of things come into play here, including the six straight months without even a 2% correction.  Big momentum is hard to kill.  The length of the 5% correction at less than 15 days also argues for little more – quick is better.  Finally, odds are for less when above the 200-day.  And while brief, we did see some real selling in the three days of 90% down volume.  It’s complicated, but we don’t see that Meta (441) will change things dramatically.

After last week, of course, it’s less about the S&P and more about the NASDAQ.  AI’s poster child Nvidia (826) took quite a hit, as did Super Micro (787).  We’ve noted the suspect volume pattern in the latter, more than the former, but the patterns are similar.  Both have bounced, but now comes the hard part.  The outlook for Tech is now more difficult too because of what is happening with yields.  Treasury yields across-the-board are at three-month highs, a change from which they tend to move higher still.  This is a good backdrop for defensive shares for growth not so much – as you will recall from just a couple of years ago.  Another non-winner here is Homebuilding, where the stocks show signs of peaking.  There are two important measures of housing, Permits and Starts.  When one is positive, either one, that’s good for the stocks.  When like now both are negative, it’s not good for the stocks.

When it comes to the stock market, we strongly believe what we all know isn’t worth knowing.  Call it discounted, priced-in, whatever.  Of course, there are no objective measures here.  In the case of Tesla (170), certainly the problems were well advertised, and the price down significantly.  Still, you never know.  It’s more instinct than anything.  Having the wind at your back certainly helps.  Wednesday’s market didn’t hurt.  For Tesla, the rally may be a start, but it’s just that. The stock faces the problem similar to Nvidia and Super Micro, a falling 50-day around 175.  For Tesla that should prove formidable resistance, as it did in February.  Meanwhile, GM’s (46) little correction held its 50-day and the stock actually gapped higher a few days ago.

Texas Instruments (175) gapped higher Wednesday, does anyone care?  It’s all about Nvidia and its pal Super Micro.  Both had tough weeks last week, damaging to their charts.  After sharp breaks, in this case below their respective 50-day averages, those averages turn to resistance.  A saying among those technical types is that the stocks then typically rally to kiss the 50-day goodbye – that is they stop at resistance and resume the downtrends. Then, too, it’s always possible they blow right through resistance, but certainly it’s something to consider.  If you liken the break in these stocks to that of Cisco (48) in 2000, it’s possible.  However, Cisco’s initial break was followed by a several month trading range – then the real break. These big uptrends don’t die in a hurry.

Some things are hard to explain.  Meta cuts costs the stock goes up.  Meta invests in its future the stock goes down.  And what does all that have to do with Microsoft (399) – sympathetic weakness, psychological common ground.  Of course, there is the practical common ground of being in the same ETFs.  Buy or sell one you get them all.  We see these as a big part of Tech’s success, and on days like Thursday it’s vice versa.  We suspect one day these passive ETFs will become a big problem but, of course, what day?  Meanwhile, we think we saw Superman and Clark Kent together.  At least that’s an image we conjure up whenever we see both Gold and Bitcoin rally together.  After a little setback Gold is back to acting well.  Bitcoin didn’t rally going into last weekend’s halving, but the ETFs are acting reasonably well.

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DJIA: 37,775

The stealth correction… stealthy no more. Three better than 4-to-1 down volume days make this clear. Of course, we might have continued to skate by had it not been for a war or two. Technically strong markets often can get away with a surprising amount of bad news, technically weak markets, not so much. Just how weakened the market had become under the surface showed up in several ways, particularly those numbers on the NASDAQ. Fifty-two-week lows there jumped to 365 from 230 the previous week. That’s a pretty big number given the market is down just a few percent. Clearly the Averages were masking some considerable underlying weakness, not unusual even at temporary peaks. The picture on the NYSE isn’t quite so dramatic. New highs there contracted but remain comfortably above the level of new lows. A problem here, however, is within the S&P 500 Index itself where more components reached a 52-week low versus those reaching a 52-week high. It has been a stretch of some six months since that has happened and of course, is another sign of deterioration masked by the S&P itself. SentimenTrader.com points out some interesting numbers here – when new highs in the S&P outnumber new lows, the annualized return is 12%, and when vice versa it’s -1%. It comes down to a very simple principle in technical analysis, healthy markets are in sync, stocks move together. Fortunately, the A/D Index recently made a new high, no divergence there. An unusual aspect of the recent weakness has been the volume pattern. We have seen three days with heavy down volume without an intervening day of heavy up volume. On the surface this might seem terrible, rising, volume and poor A/Ds – real selling. However, you need to keep in mind that it’s selling and not buying that makes lows. Prices rise when the selling is out of the way. What is surprising is that this sort of washout selling should come just a few percent down from the recent peak. We suppose Middle East concerns have played some role here, but the numbers are surprising. Somewhat backing up this sort of panic selling is the VIX, which has jumped from less than 13 to more than 19 – the October low saw 22-23, by way of perspective. So, we’re seeing numbers more often seen near the end of a decline, surprising but encouraging? When markets correct and even the good go down, it’s an opportunity to look at charts with a little different perspective. Celsius (70) seems a candidate here, one admittedly not so interesting from a daily perspective. Meanwhile, even a weekly perspective is quite different – a selloff down to a substantial base or support. The real story here, however, comes from a monthly chart, which needs little explanation. A big winner turned a bit ragged of late is Super Micro (928), trying to hold onto the 50-day. More worrisome than the price action is the volume pattern, one showing declining volume along each of the price peaks. The 800 area clearly seems important. Here too, however, a different perspective is more optimistic. To look at a weekly chart, the overall action seems no more than a consolidation in the uptrend. Perspective seems important here in terms of the overall market. It has been a remarkable six months, including a number of unusual streaks. In this first little drawdown of the year a number of those streaks have ended, but their implications remain intact. Protracted momentum rarely leads to important price declines. This period should prove important for Tech earnings – the market rise owes much to the Mag Seven, where reporting has begun. Even these stocks have slipped a bit from their recent holding patterns, so earnings could prove important or, as Barron’s John Authers puts it, they have taken on the aura of a macro event. Meanwhile, a number of replacements have come to the rescue – pretty much anything in the ground. We know, of course, it’s hard to replace Tech.

Frank D. Gretz

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DJIA:  38,596

April showers … bring May flowers.  That loosely also works as a market forecast.  Given the technical background, we admit to surprise at almost any weakness.  And, of course, we don’t get the logic they should go down because they’re up a lot.  Uptrends differ, but to look at the S&P and its 21-day average, few have been more orderly.  Where there are excesses they have calmed of late, while several dormant sectors have picked up, Gold, Copper, Uranium, Oil, “things” generally – see XME (61), the Metals and Mining ETF.  The strong economy seems the excuse for the recent weakness, but excuse seems the operative term.  The overall momentum says weakness should prove temporary.

Following five consecutive monthly gains simple logic suggests some give back should be expected.  Of course, you might have said that after three or four months, maybe even two.  More importantly, best to keep in mind the stock market is a place where simple logic rarely works.  In this case, that seems true again.  Following five consecutive months of gains in the S&P, a buy-and-hold strategy over the next nine months saw a 90% win rate, according to SentimenTrader.com.  Momentum, especially big momentum, is a wonderful thing.  A slightly different take here is the gain of 20% or more from a 100-day low with 10 or more days of 80% volume in advancing stocks.  Again, returns were exceptional. 

It’s an AI World, but there are many guests that live in it.  We wondered what was behind the move in Copper – China of course always comes to mind, but seemed unlikely this time around.  Turns out, there is somehow a lot of Copper in AI.  To look at the chart of Lincoln Electric (247), we used to joke there was a lot of welding involved.  An area that does make sense is Electric Power, especially unregulated nuclear power provided by Constellation Energy (183).  Bitcoin also uses a bit we understand.  Nuclear in turn helps explain why those frustrating Uranium stocks have picked up again.  And then there’s Dell (127), now touted as an AI Infrastructure play.  Meanwhile, for now Nvidia (859) is on break.

Fool us once, fool us twice, fool us three times and you must be United Healthcare (455). If you’re there, you know what we mean.  United Healthcare, with the possible exception of Molina (375), and the rest of the insurers have been disappointing.  Hospitals are too crowded, not crowded enough.  There always seems something.  Now we find out this is a regulated industry, why don’t we just buy a Utility.  The stock’s redeeming quality is its still reasonably intact long-term chart, but here we prefer something with an even better long-term chart like McKesson (535). The Healthcare ETF (XLV-142) has close to an 9% position in UNH, making it problematic. Then too, you also get an 11% dose of Eli Lilly (768).

It’s hard to understand the market’s fixation on when the Fed will ease. It’s not as though the economy and corporate earnings are not going well, the economy perhaps too well.  And there’s actually some history to suggest you sell on rate cut news.  In any event, Powell recently stuck to the script, rate cuts are on their way.  Gold seems to believe it, but there are many scripts Gold has failed to follow.  Similarly, best not to overthink or think at all about the strength in Oil – lest you ponder whether World War III has already begun.  Let’s opt for the more mundane explanation of supply and demand – under-loved and under-owned.  Meanwhile, after a couple of weak down days, Thursday’s downside reversal caused some damage, dropping the S&P below its 21-day average.  Now that the market is somewhat stretched to the downside, it will be important to see if the market can respond.

Frank D. Gretz

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DJIA:  39,781

Just buy the S&P… sage advice in recent years.  The 500 stocks there sounds like the diversification everyone preaches, and its performance has been hard to beat.  So-called passive ETFs have made it easy, though these ETFs have created some distortions.   Of every dollar that goes into the SPYs, the SPDR ETF for the S&P, 24% goes to the top five stocks in the S&P index.  That doesn’t exactly sound like diversification and, no surprise, they’re all Tech.  All is well that ends well – it’s working for now and will for the foreseeable future, at least based on a still healthy technical backdrop.  And tech has gotten where it is for good reason. Its profit margin of some 23% is pretty much double the rest of the S&P.  Then, too, Tech is no fun in a downturn – Tech led the fall when rates rose in 2022.  And this time there will be those passive ETFs that will work the other way.

While Wednesday’s rally may have resolved things, stalled seems a reasonable description of the market recently.  A look at the Averages bears that out, a look at something like the FANG+ ETF suggests even the Tech leaders fall under this description.  However, it’s not a euphemism for weakness, most days most stocks go up – ten of the last 12 days.  And despite complaints of narrowness, the Equal Weight S&P (168) is bumping along its highs.  There’s also some indication of expansion in participation, certainly in terms of Oil, Gold, and Copper.  General Mills (69) and Colgate (89) also seem examples of good charts outside of Tech.  That also remains true of most of the Econ- sensitive stocks we have alluded to from time to time, Eaton (316), Ingersoll Rand (95), Trane (304) so on.

Many years ago we saw a study showing the best and worst performers each year were a function of earnings. However, it was not about earnings per se, but the surprise in earnings. The best performers each year were the companies whose earnings were well above analysts ‘estimates and vice versa.  While nothing to do with earnings, this comes to mind when we think of the announcement of Nvidia’s newest, bestest GPU.  Where’s the surprise?  Perhaps more to the point, while the S&P is up 8% this year Nvidia is up 80%. Short of that GPU curing cancer, how does it surprise?  And, of course, the announcement itself wasn’t exactly a surprise, leaving a real sell on the news opportunity.  It’s hard to be negative on dramatic uptrends like Nvidia’s and we’re not – they don’t turn on a dime.  Stall on a dime, that’s possible.

While the Nvidia show wasn’t about earnings, eventually it will become so.  In a recent piece for CNBC, Karen Firestone looked at a company’s subsequent performance following a good year.  The work looked at performance January to December only, but still offers a good guide.  It looked at stocks up 200% and 400% and found not a great deal of difference.  Perhaps more surprisingly, results were pretty much 50–50 in terms of up or down in the subsequent year.  It seems the determining factor here was earnings, more specifically earnings that beat.  Again, it’s about the surprise rather than earnings per se.  Performance was about the ability to out-earn or out-surprise estimates.  So while estimates for Nvidia’s earnings are to double this year, earnings need to be surprising next year as well.

After spending most of the year trying to talk the market down, Powell finally talked the market up – no doubt inadvertently. If we’re finally out of what we’ve called the market’s stall, give credit where credit is due – to the market.  As always the market makes the news, and now we know what the average stock, the A/Ds, have been saying all along. Most days most stocks have gone up regardless of Nvidia’s volatility or Apple’s (171) weakness. This will change when the market finally narrows as it tires of going up. Meanwhile, ever notice stocks rarely split anymore.  In the old days stock splits were used as an indicator of sorts, peaking as they did along with the market. Of course it was no more than a gravity call – when stocks are up a lot they split, and when up a lot they’re likely near a peak. Chipotle (2905) announced a 50-for-1 split recently. We have often thought what it would do for volume if every $200 stock split even 2 for 1.

Frank D. Gretz

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DJIA:  38,905

Underlying fundamentals … way under is how some would seem.  With all due respect to companies like Nvidia (879) and Super Micro (1130), underlying fundamentals don’t drive those kind of straight up moves.  Moves like that come about when at some point investing turns to trading – when stocks are bought not so much for the companies they represent, but simply because they’re going higher.  Let’s not pretend GPUs are any more important than routers back in 2000, or that either are really understood by most doing the recent buying.  And let’s not pretend there’s ever been a shortage of anything that hasn’t been met.  As for Bitcoin, it’s a position we like for exactly that reason.  After all, what do we know about Bitcoin.  We do know, or hope we know the passive ETFs seem likely to drive Bitcoin just as they have FANG/AI.  At least when you buy one of the FANG/AI ETFs you may be buying 10 stocks, with the Bitcoin ETFs you’re getting just one thing.

Meanwhile, a correction remains the proverbial watched kettle.  Last Friday one seemed more likely when Nvidia reversed and took the market with it.  Indeed, Nvidia had what those technicians call an outside day down – higher high and lower low than the previous day on a bar chart.  It’s a “reversal” pattern but not one we find terribly useful.  Nvidia’s cohort of sorts Super Micro, had an outside day down Feb 16, and was back to its highs three days later, and from there onward and upward.  Certainly there is a correction of sorts when you consider something like the MicroSectors FANG+ ETF (FNGU-311) has gone nowhere for six weeks now.  Markets and stocks also correct by going sideways rather than down.  The main consideration here is that on average this has not hurt the overall market.  And that’s what matters.

While Bitcoin gets all the attention of late, in its corner Gold is quietly making new highs.  After several failures over the past four years Gold’s new high seems promising though, after all, it is Gold we’re talking about here – and its history of false dawns.  And on a cyclical basis, Gold is in one of its four year down-cycles which persists through the end of this year.  Together with Bitcoin’s performance, it’s easy to argue there’s a real interest in investments seen as a store of value, a hedge against currencies and the establishment generally.  A look at the weekly chart of the SPDR Gold ETF (GLD-200) which holds Bullion, pretty much says it all.   While the miners have lagged, they have moved from having only 5% above their 200-day to 20%, a change that has seen higher prices since 1997, according to SentimenTrader.

Things act better, by things we mean stuff other than the esoteric stuff like AI.  It’s true of Oil but most dramatic here we’re thinking of Copper, at least as measured by the ETF (COPX-41).  When we see this, in our simplistic way we think China is rebuilding – again.  And the Chinese market does seem to have a turn.  Or perhaps more simply the world economically is a better place.  Of course stocks like Grainger (992) with their division called “endless assortment” and Fastenal (75) with their very techy nuts and bolts have been telling us that for a while.  If there’s a bubble in parts of the market, this is why it’s not a market bubble.  Bubbles occur in segments or sectors of the market and end when only they are moving higher.  Back in 2000 the dot-com’s were going up and everything else was going down.  This market is different.

Most days most stocks go up, but Thursday wasn’t one of them.  With some 3000 stocks down on the NYSE it wasn’t close.  Like most such days blame the usual suspect bonds/rates.  Bad down days happen.  It’s the bad up days – poor A/Ds and the Averages up – that are the worry.  Lacking virtually any divergences, a setback here should prove temporary.  The worry is that in any recovery the A/Ds don’t quit on us.  While Regional Banks held together almost surprisingly well in light of the NYCB (4) news, it may be premature to say all is well.  Tech seems everyone’s worry and yet most held together Thursday.  Meanwhile, abetted by Tuesday’s CPI print, the Fed’s message was that it wants to cut, but doesn’t think the data will allow it.  The market’s lack of disappointment here likely stems from the fact cuts are coming, and corporate profits in the meantime are just fine.  Of course, higher prices do much to dampen worries.

Frank D. Gretz

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