Over-bought, Over-loved, Over-valued … but not Over.

DJIA: 29,999

Overbought in a trading range is one thing, overbought in an uptrend is something else. In an uptrend, more is better. The percent of stocks above their 200 day average is a good proxy for a medium term trend. It can also serve as a good proxy for a market overbought – 80% or more, and oversold – 20% or less. On the New York Stock Exchange the number now is above 90%, clearly an overbought extreme. As it happens, when above 90% market outcomes are better than when the levels are 70 – 80%. We certainly can argue in many ways sentiment is a bit extreme, and that stocks are overvalued. As for valuations, don’t get us started. Suffice it to say, stocks sell at fair value twice, once on their way to more overvalued and once on their way to more undervalued. Sentiment and valuations may matter in terms of risk when the trend changes, but they have nothing to do with the change itself. Momentum trumps the rest.

Monday saw the Dow drop 150 points, nothing these days, but still. Meanwhile, Monday saw more than 1700 stocks advance. To us, Monday was not even a down day, let alone an important one. Were the sort of opposite the case, the market up a couple hundred points with only 1700 advances – more declines then advances in an up market – that’s a problem. We all watch the market averages, but more important is how the advancing and declining issues relate to the averages. It’s never weakness that causes the problems, it’s the weak rallies that follow the weakness. We always remember early October 2018 when the Dow made a new high for three consecutive days while each of those days saw Advance/Decline numbers that were negative. Sometimes it doesn’t take much – a 20% decline followed, even into the seasonally favorable year end.

Last Friday saw what we consider a surprisingly positive Advance/Decline number of 3.4-to-1. It was surprising in that this far along in the uptrend you expect markets to start losing participation. What seems to have happened Friday was the rotation to banks and energy, where the sheer numbers have a big influence. The lift in these re-open stocks seems similar to the lift in old-economy stocks back in 2000. It’s what happens when there’s no one left to sell. It’s almost the opposite of the FANG stocks where lately there seems no one left to buy. The “January effect” is the tendency for beaten down stocks to rally in January, when the December tax loss selling is out of the way. The energy stocks particularly, have the look of a January effect here in December. We expect the stocks to continue to rally but these are stocks to rent, not own. We don’t see them as investments we see them as stocks you buy to sell. Together with the regional banks, they are also giving a nice boost to the Russell 2000.

Turnaround Tuesday turned into turnaround, again, Wednesday. A downgrade of some prominent Tech names certainly abetted the selling, and one has to wonder if the week’s IPO’s didn’t drain some funds. One also might wonder if the markup in those IPO’s didn’t make all of us wonder if things had, indeed, gone a bit over the top. Yet for the loss in the Dow of some hundred points, there were 1900 stocks up. The selling included most of Tech, even Tesla. That’s interesting as 12/21 looms, the day when it will be added to the S&P. When it comes to large additions, and Tesla (627) will be the largest, the stocks tend to rise into the addition date and underperform thereafter. It also was a tough day for Biotechs, but you have to say they deserved it – they have had a good run. We still think of these stocks as a solution to the re-open/stay-at-home rotation.

All the money that is anywhere must go somewhere, the adage goes. Forget the averages, it takes money to push most stocks up most days. When that changes, you want to change with it. Meanwhile, aside from the nasty day in Tech, Wednesday was an outside day down for the S&P – a higher high and lower close than the previous day. This is said to be a sign of buyer exhaustion. December is a good month, but can be sloppy in the middle. A date to keep in mind is January 5, the Georgia election. A democratic win will see the market sell off, even if temporarily. A hedge of sorts might be the solar or infrastructure stocks, stocks you probably want to own anyway. Regardless of the market, there’s still the issue of where you’re in as well as whether you’re in. This jockeying between stay-at-home and re-open seems likely to continue.

Frank D. Gretz

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We Zoom… we used to Xerox.

DJIA: 28,364

Different products, we know, but same concept – things change. There are few durable technologies and still fewer that don’t beget their own competition. Change, of course, takes time and it seems a bit premature to take action here. Indeed, it would be the inverse of catching that falling knife. In the case of Xerox (20), new and sometimes better copiers came along, new ways to Xerox, so to speak. In the case of video conferencing, already there are other ways to Zoom, so to speak. There’s a product out there called Teams, backed by a little company called Microsoft (215). Teams may not be reason to buy Microsoft, but it may be reason to be careful of Zoom (520). The numbers for Zoom, we are told, are over the top both in terms of growth and valuation. The latter, of course, doesn’t matter until it matters, but we do miss our Razr.

While Zoom seems the poster child for the so-called COVID or stay at home stocks, there are many. Time will tell, to coin a phrase, but most agree life has changed, the need for these companies will continue even when re-open becomes a reality. Sure we will fly again, but now we’ve learned there is an option. Even the FANGs have come to be thought of as COVID beneficiaries, if only because their businesses have not been impacted. This seems a bit of a stretch. These obviously are successful companies, but their success in the market seems a function of momentum chase. This could change and as a group they remain below their September 2 peak. A stock like Netflix (485) has gone nowhere since its little blowoff move in mid-July. It has been right to buy disappointments here, and there seems another opportunity? In a bit of irony, Google (1615) rallied on the anti-trust announcement, and it was good numbers by Snap (39) that dragged Facebook (278) higher on Wednesday. Go figure.

In recent weeks, there have been two points of note in indicatorland. Both involve the much overused term overbought, where there are as many measures as there are technical analysts, plus the media where measures are not required. By our measures an overbought extreme was reached on 9/2, and a very similar reading again on Monday 10/12. The former ushered in a near 10% correction into late September, the more recent a relatively modest consolidation. The bad news is Monday’s was a less than modest down day – 2.72 to 1 in terms of the Advance-Declines – and any weakness on Monday is itself unusual. The good news, and it is good news, the market has unwound the upside extreme, the overbought condition, without any follow-through to Monday’s weakness. The problem now is that back to a neutral position, the market seems just to be riding the stimulus roller coaster.

The S&P stood at 3307 on August 3, and as of Thursday was some 4.4% above that level. The August date marks three months before the election, and since 1928 the market’s performance during this period has an 87% accuracy rate when it comes to predicting the election’s outcome – an up market means an incumbent win, and vice versa. Doubt that’s of much help, but interesting nonetheless. Another date of some interest is September 30, when the S&P closed at 3363. The S&P lost 3.9% in September, marking its first down month since its loss of 12.6% in March. In turn, an up market in April led to a 15.6% gain through September. The trading system here is almost too simple to work, but it does. Go long the market when the market rose the previous month.

Gold remains in an overall uptrend and up some 20% from the March low. Since its August peak, however, it has been consolidating and as yet doesn’t quite look ready for prime time – a GDX move above 41 would suggest otherwise. Meanwhile, the ratio of Gold to Copper has dropped to a six month low, suggesting traders are seeking economic growth rather than the safety of Gold. Another positive economic sign could be the recent action in Parker Hannifin (225), not exactly a household name, but one which some see as another barometer of the economy. To get to that growth, of course, we need to get through the election. Two weeks ago the market saw stimulus in the color blue, but since then seems generally to have timed out. The possibility of a contested election, history suggests, is ample reason to do so. Since the surge and overbought reading of 10/12, it seems worth noting the NASDAQ 100 has seen only one up day, and modest at that. Anticipatory profit taking anyone?

Frank D. Gretz

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This time is different… really.

 DJIA: 27,739

It’s easy, even tempting, to compare this market to the bubble that was 1999 – 2000. Like then, the market is dominated by a few stocks, actually fewer than back then. Back then you learned that if you added dot.com to your company’s name it boosted your multiple almost regardless of your actual business. Multiples now may be rich, but at least there are multiples – back then earnings were rare. Enthusiasm/speculation is similar, with Call buying at levels that are comparable. The market averages themselves show similar divergences. Back then the NAZ dominated as it has done so now. At present there is a disparity even within the S&P. The Index itself is at a new high but the equal weight version – counting each stock the same – remains some 8% below its high and even below its June peak. This kind of disparity has happened only four other times in 30 years, all in 1999 – 2000.

Most of the above makes this time seem the same as 1999 – 2000, rather than different. That’s especially so when it comes to a dominant group of stocks. It’s the overall background that makes this time different. Back then it was “new economy” and “old economy.” The old economy stocks were not just lagging, they were going down. These days most stocks go up – the Advance Decline Index just made another new high. That wasn’t the case back then when there was a protracted divergence. If you think of Staples as old economy, as measured by the ETF XLP (64) the stocks are up some 14% since the end of June and 35% from the March low. For all the worries about the economy, as measured by the ETF XLI (76), Industrials are up some 60%. Certainly Tech dominates, but it’s not alone in going up. That makes this time very different.

This is not to say all have shared the wealth equally. It has been a far better recovery for the Mega-Caps of the Russell Top 50 then for the smaller companies of the Russell 2000. Winners and losers have had everything to do with the pandemic. Internet retailers are up big while hotels, resorts and cruise lines are down big. FANG stocks are now regarded as defensive plays – go figure. Meanwhile, The S&P may have gone nowhere for six months but contrarian plays like Gold and Treasuries have done very nicely. The 10-year real Treasury yield remains at almost exactly -1%, a level never reached before this year. Real yields have a relationship with Gold, which had more than a little hiccup last week. Lower real yields make Gold that much more attractive so the correction in yields helps explain the correction in Gold. The push above $2000 and news of the Buffett buy added to what might have proved too much of a good thing. All this seems likely to temper the uptrend for now, but above the 50 day – around 39 for GDX – there seems no real worry.

Everyday low prices is one thing, “priced in” is quite another. Walmart (130) had the look of the latter Tuesday morning, after what seemed a respectable report. Of course, it’s not what have you done for me lately, it’s what will you do for me now. There the news was a little less optimistic, though not exactly horrible. As it happens the stock had broken out just Monday after a month long consolidation. The top of that consolidation is around 132 which could prove support. The trading rule of thumb is sell half on any pullback below that. Looking at a long term chart, the investment rule of thumb is buy any pullback. Despite all the attention given Walmart and Amazon (3297), there are plenty of good charts in retail. There are the dollar guys, Dollar Tree (98) and Dollar General (197), and perhaps our favorite, Costco (340). It’s another story for Department stores like Kohl’s (19) and Nordstrom (14) where bad news continues to be discounted.

Glad that bear market is over – at least by the arbitrary definition of a 20% decline and retracement. Ironically, it wasn’t the best week, technically speaking. After eight consecutive days of positive Advance Declines, five of the last six have been down. Tuesday saw the NASDAQ rise 100 points while more than 60% of the issues traded there fell. Much the same was true on Thursday. For the Nasdaq Composite it was the fourth time in 15 days it had a decent gain while breadth was negative – either in terms of issues or volume. Thursday saw the Composite at a new high, the third time in 15 days it has done so with negative breadth. Thursday also saw negative breadth on the NYSE though the averages were all higher. This may not be 2000 but it doesn’t mean stocks can’t correct. And if by correct you mean stall, most already have done that. Most days most stocks go up has been the mantra of this uptrend. If that is changing it won’t be long before the trend does as well.

Frank D. Gretz

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Live and let live… said the market to the virus.

DJIA: 25,745

At least that had seemed the case when the market’s negative reaction to the Apple store closings lasted all of two hours. Wednesday’s reaction to the virus surge was a little less muted – a 7 to 1 down day. As usual, these declines don’t come out of the blue, technically speaking. A poor close when the market is testing previous highs, that’s something else. That was the case Tuesday, both for the S&P and the NASDAQ. If they can push through those highs it would clear the air. We don’t typically pay so much attention to the price movement in the averages, but we do when there is the risk of leaving double tops, as now seems the case. And there’s the sentiment backdrop. We look back and smile at the dot.com bubble. Will we look back and smile at companies trying to sell stock when they’re already bankrupt?

Growth stocks in the Russell 1000 Index of large US companies hit a new all-time high Tuesday. Meanwhile, value stocks, those thought to be cheap relative to earnings, again are underperforming. To put this into even greater perspective, growth is doing better relative to value than it did even in 2000, arguably the greatest ever growth bull market, according to Bloomberg‘s John Authers. Investor’s preference for tech has pushed those shares to a near record high weight of the S&P relative to other sectors, exceeded only by 1999-2000. It could always go higher, as no doubt they said back then. Rather than just in terms of supply and demand, you have to think of this, too, in terms of investor psychology – over loved and over owned? Tech of today, of course, isn’t the bubble tech of 2000. Most dot-com companies, for example, never achieved inclusion in the S&P. The FANGs these days are genuinely profitable and have every prospect of remaining so. Still, with financials barely 10% of the S&P, the lowest since 1992, and Industrials only 8%, the smallest in 30 years, there’s quite a divergence. Most divergences simply don’t end well.

Another divergence is that in terms of time frames. We mentioned last time virtually everything has rallied above its 50 day average, but for all New York Stock Exchange stocks barely more than 40% have been able to rally above their 200 day. You might say all stocks have lifted, but the majority haven’t lifted enough to be in medium- term uptrends, even three months off the low. The S&P 500 has rallied more than 3% above its own 200 day average. The NASDAQ had rallied 7 days in a row to its own new high. Yet, fewer than 45% of stocks in the S&P are above their own 200 day, a pattern that has not happened since the year 2000. It’s curious this should be happening against the backdrop of the recent all-time high in the Advance Decline index, what we consider another measure of the average stock. The rationale, again, seems to lie in the distinction between stocks bouncing and stocks in uptrends. The laggards could always catch up, but the recent reading is actually down to 21%. Again, there are no good divergences.

Back on November 1, 2016, there were two things we all knew. We knew Hillary would win the election, and we knew if Trump won the market would collapse. With that in mind, any comment about the upcoming election requires more than a little humility. That said, Trump is faltering. And, we do know when an incumbent Republican is at risk, the market is uncomfortable. We also know the market reaction doesn’t wait for September-October but, rather, starts in July-August. There’s no prediction here or political opinion, it’s just the history. Meanwhile, we are winding down what has been among the market’s best quarters in history. Since 1928, it ranks in the top 10 of all quarters according to SentimenTrader.com. Rather than the window dressing often thought to occur at a quarter’s end, there is a negative correlation in the last week when it comes to good quarters. Especially in June, this could be a function of rebalancing.

The momentum surge off the 3/23 low says higher prices 3 to 6 months out. Some of the issues we’ve alluded to above, however, argue for a flat to down summer. The advance decline numbers have flattened recently but there is no divergence – a higher high in the averages and a lower high in the advance declines. That comes about in a weak rally. It’s not the bad down days that cause trouble, it’s the bad up days – averages up, Advance Declines flat or down.

Sadly, for me personally, and for all of us at Wellington Shields, Linda Pietronigro passed away last week. Believe me when I tell you, the world’s cumulative IQ has taken a big hit. More than that, Linda was a friend and colleague to us all, always willing to share her seemingly endless expertise. With a dry sense of humor, her only unkind words were directed at me – I miss that.

Frank D. Gretz

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The virus … that’s so yesterday’s news.

DJIA: 23,515

Well, maybe not for you and me, but for the market. The virus had its bear market—down some 34% worth. Then diminished fear of the virus, the “plateauing,” had its bull market—some 28% worth. It’s time to give something else a chance and unfortunately, that could be the economy. As Matthew Klein of Barron’s put it, the U.S. Economy has likely shrunk more in the past six weeks than it did in the entire Great Depression. Back then people were living in Central Park, now there’s a hospital there. Back then there were soup lines, now there are food banks, the unemployed back then numbered 20 million, now it’s 27 million—only 12% of the workforce versus more than 30% back then. We don’t see a great depression, but what we do see we doubt is discounted. Back then the Fed actually raised rates. More important, back then we were on the Gold Standard—the Fed couldn’t print money. They can now, which seems a compelling reason to own Gold.

A credible low seems in place. History favors some sort of retracement from these washout lows and the sheer magnitude of that retracement rally—some 50%—would itself suggest some period of retracement. If the market now focuses on the economic repercussions of the pandemic, this could take a while. A paper written by Oscar Jorda of the Federal Reserve Bank of San Francisco looked at 15 major pandemics and armed conflicts since the 14th century. He found wars had little lasting effect while the fallout from pandemics lasted about 40 years. That’s not good news for Airlines, while it also suggests Zoom (177) and the other stay-at-homes are more than a flash in the pan. It also suggests for the market as a whole it will be a slog, with enough volatility to make you doubt your opinion more than a few times, regardless of what that opinion might be. History isn’t much help when it comes to these retracements—they’ve varied from 25% to 75%.

Riddle this: what rallies $47.64 to close at $10.01? That would be the May WTI futures contract where, for a time, they were paying you to take the stuff. Tango, fandango, contango, someone got stepped on. Surprisingly, oil stocks didn’t seem to care. Last Friday crude fell sharply and the stocks rallied sharply. Typically there’s a very high correlation here. So much so a day like Friday has come around only six times in the last 30 years, according to SentimenTrader.com. Five of those times oil shares continued higher in the short term. The decline in oil demand has exceeded the decline in production, so it’s hard to see much upside. As it happens, much the same seems true of the economy as a whole. The saving grace for oil stocks and stocks generally might simply be both are pretty much sold out. And there are those special situations like Cabot Oil & Gas (20)–less drilling means less gas, a plus for COG.

The stay-at-home stocks, you might say, seem here to stay, whether we’re at home or back in the office. Whether it’s Zoom or Microsoft’s Team and the others, now that we’ve used them, they’re not going away. That’s not the best long-term news for Airlines. If you think about where people will go when we come out of this, we all probably will have enough left to buy a cup of coffee, even at Starbuck’s (75) prices. And they do have their China experience in terms of coming out of this. Technically it’s a correction in a five-year uptrend, and much the same can be said of McDonald’s (182). Then there’s Shopify (618), which may not be as well-known as Amazon (2408) and Netflix (426), but the picture is the same—a little stretched, but definitely leadership. Our favorite “investment” and we’re not bugs, is Gold. They’re printing money—that’s inflationary and good for Gold. Look at Oil—that’s deflationary and good for Gold. A 10% position in Homestake Mining back in the deflationary Depression offset the losses in the rest of your portfolio.

We’ve seen a credible low, a buying surge that left the low even more credible, and now a market that is stretched to the upside of all things. Following these “washout lows” typically there is a retracement of varying degrees. They call it a “test of the lows,” which here seems a misnomer. The test we see is that of your patience. A low is one thing, a new uptrend another. The test we see is one of time more than price and, time takes time. Monday the Dow was down 600, Tuesday down 600, Wednesday up 450. What you’re seeing likely is what you’re going to be seeing. As Will Rogers sagely advised, buy good stocks and hold them until they go up. If they don’t go up, don’t buy them. We would advise, buy stocks you consider an “investment,” like a Microsoft (171). Don’t chase it, don’t be afraid of buying weakness and don’t be afraid to take a trading profit on some.

Frank D. Gretz

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Never let emotions cloud your judgement … sound advice to Sonny from Don Vito Corleone.

DJIA: 21,201

Sound advice for markets like this as well, at least on an individual basis. When it comes to investors en masse, that’s different. There you want emotion, fear, even a little panic. Selling makes market lows, not buying. Stocks go up with relative ease once you get the sellers out of the way. And that usually takes bad news—news bad enough to turn complacent, ride-it-out holders to scared sellers. Certainly Monday, and then Thursday, had that look. It’s relatively rare to see 50% of stocks in an S&P sector all reach a 12-month new low. When it does happen, it’s typically a sign the sellers are exhausted. Monday saw 50% of the S&P make a 12-month low. Fewer than 2% of the S&P stocks were up on Monday and they accounted for only 3% of the total volume—another sign of exhaustion selling. That said, the only way to be reasonably sure the selling is exhausted is by the way they go up. They should go up almost as though a vacuum had been left on the upside.

So what does this “vacuum,” this absence of sellers, look like? After a “washout,” 18-to-1 down day in the A/Ds on Monday, it looks like a 5-to-1 upside A/D day at the minimum. That’s the simple rule, less simple is 90% volume days to the downside, of which we’ve had a few, followed by 80-90% volume days on the upside, where at 89% Tuesday, obviously seemed positive. We’re a bit dubious, however, that Tuesday’s up-volume number wasn’t somehow distorted. It seems very strange up stocks numbered only 2,900 versus 1,090 declining stocks, not even a 3-to-1 up ratio, and yet volume was so one-sided. In any event, the up-day you should be looking for is at least 5-to-1 in terms of the A/Ds, and 80-90% up in terms of volume. The other catch is that violent declines like this one more often than not require several such days.

We’ve all had drummed into us, the trend is your friend. What they really mean, of course, is an uptrend is your friend. Those downtrends are friends to few. In a market like this, the question naturally arises as to whether the trend remains up, in this case the long-term or overall trend. We have our proprietary, very sophisticated method of determining the overall trend, one involving very complex equipment—a pencil and a ruler. The long-term trend remains up. A slightly more sophisticated trend analysis was offered by Ned Davis several years ago. The study involved the 50-day moving average of the DJIA compared to the 200-day moving average. We haven’t seen an update of the study in a number of years, but for some 113 years, all the net gains in stock prices have come when the 50-day smoothing was above the 200-day smoothing. The DJIA 50-day (28,044) remains well above the DJIA 200-day (27,208). As you can see on the other side, that’s also the case for the S&P and NASDAQ 100.

There are 28% declines and there are three-week declines—there are not many 28%, three-week declines. Precedents are hard to come by, especially when it comes to Monday’s halt in trading. The only other time circuit breakers had been triggered was October 27, 1997. Once trading resumed on October 28, futures dove about 3% and then recovered. Obviously a sample size of one isn’t much help. SentimenTrader.com looked at other times the S&P fell the most in the shortest amount of time, from at least a multi-year high, and even here the current plunge stands out. Others fell this much, but not as quickly. The closest comparison in time and magnitude was 1990, when the S&P fell 18% within 52 days of hitting a new high. Looking at returns going forward, by the time the S&P fell at least 18% within three weeks of a multi-year high, returns were good—the exception 1929

It’s like ’87 meets 9/11. Thursday markets suffered one of their worst declines ever. On the NYSE, 77% of issues traded hit a 52-week low. Everytime that figure has been above 60%, the S&P was higher one-to-two months later, according to SentimenTrader.com. On the NYSE, 95% of volume was in declining issues for the second consecutive day. That’s only happened three other times, each in the midst of a selling climax. Stocks look sold out, but you could have said that last week. Before the ’87 crash, we remember there being a high level of Put buying, making it unclear how so much was lost. The story told is that Put buyers turned to Call buyers half way down. Prices have become so compelling, it’s difficult to keep your fingers out of the cookie jar. When stocks finally are sold out, there will be a sharp rally. Just when you think you missed the low, there will be another move down—a “test of the low.” That’s the safest time to buy, unless you happen to enjoy those knife wounds.

Frank D. Gretz

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From black to white … in the world of swans.

DJIA: 28,957

One can only hope it’s back to business, literally. Business doesn’t seem so bad if the stock market is the guide it’s supposed to be. While last year we had to wake up to the threat of new tariffs most days, it would be pleasant if this year we don’t have to wake up to new attacks somewhere. No doubt plenty of trouble may still come from the Middle East, but the Tuesday-Wednesday events seem to mark Phase I of a peace deal. Now the stock market can go along its merry way seemingly toward some euphoric binge. Already in a bubble for more than a year, the NASDAQ managed to further surge 76% from October 7, 1999, until its March 10 peak in 2000. As it happens, back then the Federal Reserve flooded the market to prevent any disruption from the “Y2K” bug. The moves it has made in the last few months following the September seizure of the repo market are proportionately just as big, according to Bloomberg’s John Authers.

Speaking of 2000, some measures of sentiment are back to those happy days. Options are one thing, leveraged options quite another. Speculative activity in leveraged instruments has risen dramatically in the last month, with one of the biggest spikes since 2000. Meanwhile, those ETFs protecting against a fall are losing assets. During dynamic uptrends, traders tend to pile into leveraged funds faster than they have the inverse funds, according to SentimenTrader.com. Over the past month, the long funds have gained more than 15%, while the short funds have lost more than 10%. Every time since 2010 spreads were this wide, returns weren’t all that bad—after all, the trend was up. Short term, however, the next 1-to-3 months, the S&P’s median was below a random return. We could look at call buying alone and get pretty much the same picture. These sentiment measures are simply telling us what we already know—things have gotten frothy. Sentiment gives you an insight into risk, but it’s not a timing tool. When those A/D numbers change, then worry, and maybe a lot.

Momentum numbers like the advance/declines still have the market’s back. Another measure we favor is stocks above their 200-day moving average, that is, stocks in medium-term uptrends. For the S&P, this measure nudged above 80% a few days ago, its highest level in a year. So much for the “unwind” in momentum characteristic of bull market tops. As is often the case, when it comes to all stocks on the NYSE, they’re lagging a bit at a recent peak of only 68%. We take this to mean the large-cap stocks of the S&P simply are outperforming NYSE stocks taken as a whole—not unusual. As long as those A/D numbers hold together, we don’t see this as an important divergence, and hopefully one soon corrected. When coming from an oversold level as it did last year, a move above 60% of NYSE stocks above their 200- day has been followed by above-average returns in the S&P. Spikes to 70% marked new bull markets in 1995, 2003, 2009, 2013 and 2016.

One technician’s top is another’s consolidation. We’ve worried for some time just what those FANG stocks were up to, especially Facebook (218) and Amazon (1901). Just two weeks ago Amazon looked particularly risky, but managed to dramatically move higher on 12/16. This kind of surge of itself often means higher prices, moving the stock, as it did, above some four months of trading. The stock, like Netflix (336), has gone nowhere since the end of 2018, so the consolidation/top issue remains unresolved. It is, however, much easier to give the stocks the benefit of the doubt. Meanwhile, both Facebook and Google (1420) have made it pretty clear their respite since 2018 was just a consolidation. On the whole, we can see all four on their way back to the good old days, even if not quite the FANG of old. If the volatility here seems a bit too much, we would note that over 40% of the Communications Services ETF (XLC-55) is Facebook and Alphabet.

The war hedges—Gold, Oil, Defense stocks—came undone on Wednesday. Gold and the Defense stocks have particularly good charts and may have to settle-in, so to speak, but should be fine. Energy is trying, and trying in more ways than one. As for the hedge aspect, clearly fears eased Wednesday, but when isn’t the devil dancing in the Middle East? To assassinate the second most powerful person in Iran seems to have taken things to a new level. For now, the market agrees with Trump—all is well. Wednesday was the first time in the history of the S&P futures that they fell to a multi-week low and rallied to a 52-week high in the same session—Tuesday night and Wednesday. Lesser reversals generally led to higher prices. The positive seasonality will begin to fade, some prices are becoming stretched and sentiment is over the top. The Advance/Decline Index, however, just hit a new high—not how markets get into trouble.

Frank D. Gretz

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Turtle Dove … or Black Swan?

DJIA:  28,377

The trade war, impeachment, Brexit, all have had their moments, but none have proven the market’s undoing.  And so it goes.  The “knowns” rarely prove the problem, it’s those nasty unknowns.  The obvious catch is how to know the unknowns.  In some cases, the overall market sniffs out trouble and it shows up in breadth divergences and the like.  There is, however, a specific indicator designed to detect Black Swans called the SKEW.  What the SKEW measures, and what it is telling us now, is that traders are paying up for out-of-the-money Put options.  They’re buying insurance on what who knows, and they’re paying up for it.  Like the “Titanic Syndrome” and other esoteric measures, the SKEW has had its moments, but fortunately not that many.  Ironically, the Volatility Index, or VIX, a short-term measure of fear, is only around 12-13, well below the average of around 19 since 1990.

A Black Swan is a significant and market moving event.  Most important, it’s unforeseen.  That makes any prediction little more than a guess, other than it’s not where you’re looking.  And, indeed, that would describe most of the market’s problems, they’re never where you’re looking.  The impeachment, rather than a Black Swan, has proven a non-event.  Then, too, a conviction in the Senate might well qualify.  We’re thinking, however, a little further from home, specifically China.  It’s not our trouble with China, it’s trouble in China.  China’s financial system is struggling under the weight of an enormous borrowing spree.  Companies piled up plenty of debt as they expanded, as the world’s investors rushed to lend even more money.  Now defaults are rising, a sign the world’s No. 2 economy is feeling the stress from its worst slowdown in nearly three decades.  Fortunately for the rest of the world, that’s yet to show up in the China charts, so no worries for now.  That said, we’ll keep bird watching.

It has been a great year despite the lack of true believers, or maybe because of it.  Investors have fled funds this year despite the market’s performance.  That is among the reasons for optimism about next year—good years typically follow years with outflows.  Then there are the Wall Street strategists who are looking for only a 4% gain next year, their smallest projected gain in 20 years.  Historically they’ve proven a modestly good contrary indicator, much like fund outflows.  Following double-digit up years, the odds of being up the next are 85%, it’s as simple as that.  Earlier this week 7% of NYSE and NAZ stocks reached 12-month New Highs.  Last year at this time, 40% were at 12-month New Lows.  The Advance/Decline Index is at an all-time high—peaks here typically lead peaks in the market averages by 4-to-6 months.  It’s reasonable to worry that we may be borrowing something from next year, and at the start it could be true.  The end and start of years can be tricky, but there’s no reason to think next year won’t be another good one.

Many so-called long-term investors didn’t start that way.  They were poor short-term investors who didn’t sell.  The obvious key to long-term investing is to find stocks in long-term uptrends.  Even when it comes to short-term investing or trading, life is that much easier when you have the wind of that long-term uptrend at your back.  Still everyone likes to buy low, who doesn’t like a bargain?  They do come around, and in the context of long-term uptrends.  We’re thinking here of Home Depot (220) and McDonald’s (197).  Both have had a 30-point, or 10%-15% corrections, with barely a dent to their long-term uptrends.  Both also have patterns that have stabilized, MCD is even about to cross back above its 50-day moving average.  Even good companies have their problems, or their stocks simply fall out of favor.  More than a specific business, long-term uptrends more often than not are a reflection on management.

Seeing the light?  For most of the year we’ve seen how pessimistic individual investors have been, and how persistently so.  Given the myriad of reasons—trade war, impeachment, economic malaise—they were expecting the market to drop.  Historically, the market rarely does so when so many are expecting it.  It has taken a while, a historic high, but those investors finally may be beginning to believe.  The latest AAII survey shows bulls to bears above 67% for the first time in nine months.  While this may seem worrisome, it’s hardly so.  When it comes to individual investor or public sentiment, they are wrong at the extremes, but right in between.  We are, at worst, at the start of in between.  Meanwhile, if momentum trumps sentiment, the number of daily advancing issues has been 2000 or more each of the last 7 days, and 10 of the last 12.  It takes a lot of money to push up that many stocks.  When it’s finally all in, the numbers will change.

Frank D. Gretz

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The most wonderful time of the year… if often a little confusing.

DJIA:  28,132

Hedge funds don’t seem confused.  After being under-exposed for much of the year, in the past week there has been an abrupt change—equity funds are now carrying their highest exposure since the beginning of the year.  There must be something about “group-think,” because the record here isn’t altogether better than the general public.  It’s not a perfect indicator, but high levels of hedge fund exposure have tended to lead to below average future returns in the S&P, and vice versa.  In the meantime, the new-found religion here could be help to a name like Google (1350), and should help names like Microsoft (153) and Apple (271), which don’t really need much help.  Meanwhile, the confusing part of this time of year is the tendency for the downtrodden to rise again.  And pretty much synonymous with downtrodden is Energy, which is acting better.

Rotation is nothing new to this market, and the past week was no exception.  We’ve touted Health Care as a leadership group, which didn’t have its best week, though there were a couple of doubles in small Biotechs.  While the group covers an array of very different companies, taken as a whole more than 90% of Health Care stocks are above their 50-day moving average, the most of any sector.  A number like this says “overbought,” but as we’ve pointed out, overbought isn’t a bad thing.  As it happens, modestly overbought can be a bad thing in that it indicates only modest momentum.  Health Care has the kind of momentum consistent with trends that persist.  We are also impressed with this group considering what seems a difficult political backdrop.  On the good side of the rotation go-around, the recently dormant Semis, based on the Vaneck Vectors ETF (SMH-140), seem in the process of reasserting themselves.

At a basic level, technical analysis can be divided into two parts, momentum and sentiment, or investor psychology.  As has been the case for much of the year, momentum trumps sentiment.  Overbought doesn’t mean over, the trend is your friend, we’ll spare you the rest.  Meanwhile, sentiment has remained rather subdued and rightly so—trade war, impeachment, dubious economic numbers, and how about that Uber (29) and the other IPOs?  That said, momentum by some measures has itself been a bit dubious.  Despite the market’s stellar performance in 2019, for more than a year and a half, fewer than 60% of NYSE stocks have managed to move above their 200-day moving average.  This could be taken negatively and it has been a concern for us.  It’s not just the fewer than 60% above the 200-day versus new highs in the S&P, even 60% is below the 70% in 2016-2018.  That’s the picture of momentum unwinding—unwinding momentum is the picture of bull market tops.

We’ve learned not to make excuses for the indicators.  In the case of stocks above their 200-day, an excuse is hard to come by.  After all, the Advance/Decline Index is at a new all-time.  It’s a similar case as well if we adjust for price by using the QCHA, a measure of the percentage price change in stocks up versus down.  A possible explanation could be the rotation that we often mention.  Stocks don’t go down, but there are these rolling corrections in groups like the Semis.  The good side of that is it has kept most stocks from becoming too extended, and in that sense it has kept the market healthy.  You may miss the days when it was FANG and only FANG, but the balance now likely will prove more durable.  In an overall sense, moving to 60% of stocks above their 200-day is good.  Getting to 70% is the Holy Grail for durable uptrends.

The market has had a good year, up something like 26% in the S&P.  Then, too, were it a 15-month year, it would be up only about 9%—last year’s fourth quarter was that bad.  There are no perfect indicators, but the Advance/Decline Index also had a good year, and that after a prescient warning last year.  That most days most stocks go up is pretty much all you needed to know.  That’s unlikely to change in the New Year, which history suggests could be another good one.  Wall Street strategists are looking for only a 4% gain in 2020, their most pessimistic call in 20 years.  They have proven a modestly good contrary indicator.  Also, about $200 billion has come out of funds this year, small as a percent, but surprising in light of the market’s performance.  The record of good years after outflows is also good, especially when outflows occur in an up year.  The so close and yet so far trade deal seems one that has come down to groceries.  Still, it’s clearly something the market wants, if only to get it out of the way.

Frank D. Gretz

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Little things mean a lot… even divergences.

DJIA:  27,782

A year ago last October, it took only three days of higher highs in the Dow and negative advance/declines to unleash the havoc that was last year’s fourth quarter.  The backdrop here, however, seems much different.  The Advance/Decline Index now is coming off a new high just two weeks ago, and we don’t have the divergences in the FANG stocks, which then were the leaders.  You will recall, too, monetary policy then was pretty much the opposite of now.  Still, the reality is that against the backdrop of higher highs in the market averages, the A/D numbers have been negative 6 of the last 8 days through Thursday.  Any negative consequences here would seem short term in nature, given the overall backdrop.  And, a couple of good days—2-to-1 up days—would resolve the problem.  This somewhat sudden change in the A/D numbers seems a function of the weakness in rate-sensitive shares like the Utilities and REITs, and the shift to Cyclicals versus Staples.  That said, we’ve learned not to make excuses for the numbers.

It’s out of habit and a history of some success that we measure divergences in the A/D Index against the Dow Industrials.  Over time, Dow or S&P, it doesn’t much matter.  It is, however, a little more interesting these days given Boeing’s (367) weight in the Dow and its volatility.  With the Dow down 100 points the other day, Boeing news left the Dow unchanged in a heartbeat.  Much the same happened Wednesday when Disney (147) news took it from down a point to up ten points.  While the Dow gained some 90 points on the day, the A/Ds were down all day, by about 300 issues at the close.  The distortion was such that DIS accounted for almost 75% of the Dow’s gain, while only 14 of the 30 Dow stocks were positive.  Divergences are never good, but we would rather see them come about because of some specific stock or two, versus the entire market average, in this case the Dow.  And we weren’t complaining when Boeing was having its problems, helping the A/Ds outperform most days.

The NASDAQ, as it happens, has some problems unique to itself.  To get the laughter out of the way, the problems would be what are affectionately called the Hindenburg Omen and the Titanic Syndrome.  These occurred in mid-July, preceding a pullback then.  At the time, they happened both on the NYSE and NASDAQ, so for this time it’s only the NASDAQ.  As you might imagine, there are guidelines more than rules for these indicators and beauty, or in this case ugly, can be in the eye of the beholder.  The basic tenet, as we see it, is a market at or near its high, showing a large number of both 12-month New Highs and 12-month New Lows.  The concept is that of a market showing strength in the Averages, while underlying that strength is a far less supportive picture in terms of the average stock.  Instead of A/Ds, this is another way of looking at divergences.  Because of noteworthy failures, these warnings rarely are taken seriously, but there have been some noteworthy successes.

Utilities in part are the reason for lagging A/D numbers.  They peaked at the end of September and there are a lot of them.  The stocks, of course, had had a big run and seemed vulnerable both in terms of valuations and technically.  At the end of September, 60% of the Utilities made a new high, typically as good as it gets.  At the other end of the spectrum has been Technology, as measured by the SPDR ETF (XLK-87).  Outside of some lagging Software shares, Tech has performed well.  When it comes to XLK, there’s little mystery—Apple (263) and Microsoft (148) are its two largest positions.  Looking at those charts, it’s a wonder the ETF hasn’t done better.  Then, too, we all have our problems.  When it comes to the XLK, it’s Cisco (45).  Despite a “golden cross,” the Russell 2000 remains in its overall trading range.  What is a bit surprising there, the Russell is somewhat a proxy for Regional Banks, and they still act well.

Sometimes a cigar is just a cigar, and sometimes lagging A/Ds is just rotation.  The S&P is making new highs, but what’s getting it there keeps changing.  Remarkably, there have not been back-to-back down days in the S&P since early October, but making money hasn’t been easy.  If the U.S. and China can’t agree on farm purchases, what can they agree on?  Maybe it’s trade war fatigue, but the market seems focused on other things, most likely what Industrial stocks say is a better business backdrop.  It’s certainly not focused on the public impeachment, leaving that as a possible negative surprise.  That Walmart gave up its breakout and a 4-point gain Thursday makes the market look that much more tired.  For the big deal we’re making out of the lagging A/Ds, you have to remember the Index made a new high just two weeks ago.  The worst day during this period saw 1500 stocks advance, not exactly big-time selling.  Market corrections come in two varieties, price and/or time.  All this could be just the latter.

Frank D. Gretz

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