It’s not easy … but it doesn’t have to be complicated

DJIA:  34,060

It’s not easy … but it doesn’t have to be complicated.  From the lows this year the most important technical tool may well have been a ruler.  All you had to do was draw a line under the S&P lows, and follow the bouncing ball.  Another simple approach to trend analysis might have been to watch the number of advancing and declining stocks.  The market is about supply and demand.  As supply begins to outstrip demand, fewer and fewer stocks advance.  The large-cap stocks that drive the averages continue up, the ranks of the average stock begin to diminish.  It may continue a bull market in the averages, but not so in most stocks.  Rather than think of the Advance-Decline index as just some technical indicator, think of it in terms of supply and demand.  When there are 2000-2500 advancing stocks most days, that takes money.  When there’s still that kind of money out there, the uptrend should continue.

It’s only human nature to worry about a market up this much, and to look for problems.  We are as guilty as anyone, including a recent concern about the defensive parts of the market suddenly taking the lead.  How often do you hear “overbought” or “extended,” a 10% correction would be healthy?  We get the point here, but losing 10% has never made us feel particularly healthy.  It has been the kind of market where the simple stuff has worked so well, most of the complicated technical stuff has not.  Out of 22 technical trading strategies followed by Bloomberg, only seven have shown a profit in 2021, among the lowest in 25 years.  Bloomberg notes, “It’s testament to the straight up trajectory of stocks that virtually all signals that told investors to do anything but buy have done them a disservice this year.”  So there, you technical so and so‘s.  Every sunken ship had a chart room.  Then, too, that could’ve been about the guy reading those charts.

All of this, of course, misses what might be the most salient feature of the market this year, the rotation.  It wasn’t hard to just buy and hold the market this year, but it was hard to just buy and hold almost any group.  The FANG stocks have outperformed recently, for example, but this after a few months where they pretty much just yawned.  Solar was one of the best groups early in the year, but has suffered since February.  The same might be said of the software stocks, at least until recently.  It may not have been complicated, but it hasn’t been easy.  Easy has been buying the S&P.  Recently there were 85% of S&P components above their 50 day, while only 50% of the NASDAQ and Russell 2000 components were above their 50 day.  That makes it hard to beat the S&P without owning it.

All this having been said, there’s little question that where you’re in the market can be as important as whether you’re in.  To speak generally, we still favor the re-open stocks, the commodities and industrials.  Copper had a great week and got all the attention, but Steel was just as good and there are many of them.  Relevant ETFs here are COPX (41), SLX (61), XLI (103), XLB (84) and PAVE (26).  They don’t have the volatility of Tech but, hey, they’re in uptrends.  Fans of low price stocks that we are, Wednesday’s pickup in the energy sector caught our attention.  There are many of these which might help explain Wednesday’s unusual configuration – the Dow down 165 with 700 net advancing issues.  Of course, Microsoft (253) didn’t help the Dow.  The stock market has its own logic and oil can have many influences. Still, oil seems an obvious re-open play.  We would also note the improvement in precious metals.

Last Thursday afternoon the Dow dropped some 300 points and there were almost 900 net declining issues.  The tax news was hardly a surprise, but the announcement timing was.  Weakness isn’t a problem, it happens.  The problem is when weak rallies follow.  The next day saw the Dow rally 200 points, with a net of some 2200 advancing issues.  That’s not the weak rally about which we worry.  Meanwhile, we confess to a knee-jerk negative reaction to the market’s poor response to some seemingly good earnings numbers.  If, as we strongly believe, it’s the market that makes the news, in a good market good news should be treated as such.  The answer may be simple – the numbers we’re seeing are why the stocks are where they are.  The numbers, in a sense, are just catching up to price.  These poor responses, by the way, pretty much are confined to Tech, which no longer seems the real leadership. They’re selling on the news to move to the cyclicals/commodities?

Frank D. Gretz

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Give us a lot of money… and we’ll buy you something nice

 DJIA:  33,815

Give us a lot of money… and we’ll buy you something nice.  We’ll buy you something nice but we can’t tell you what it is.  We can’t tell you what it is because we don’t know what it is, yet. Doesn’t that sound like a good deal?  Deals like this are called SPACs.   And they laugh at the dot.coms.  There may be a difference between the SPACs and the dot.coms but they are similar in an important way – speculation.  Speculation is the dark side of this market.  The level of speculation now is what you would expect to see at the terminal stage of a multi-year bull market.  The saving grace is the market’s other side, the momentum side.  Measures like Advance-Declines and the percent of stocks above their 200 day average are those of a new bull market.  Since momentum typically trumps sentiment, and has done so to date, we don’t see any big risk to the uptrend.  More choppiness and rotation, however, does seem likely.

In yet another seeming leadership change, last week‘s best performing group was the utilities.  Or, shall we say, the utilities?  Add to that the staples, see the XLP ETF (70), and big Pharma, see the XLV ETF (123).  Why did the market suddenly go so defensive?  What does the market know the rest of us don’t know?  We can’t exactly point to any numbers here – utilities outperform and the market goes down, or anything like that.  When the market turns defensive it makes us want to be cautious.  It also wasn’t the best of signs last week when most of the banks reported generally better than expected numbers, and yet went nowhere or down.  If it’s the market that makes the news, when good news isn’t good, that isn’t good.  Economically speaking, we all know the second half is supposed to produce blow out numbers.  In the stock market, what we all know isn’t worth knowing – it’s discounted.

Suppose the economy isn’t as good as it looks?  That makes for interesting contrary thinking, but, the price action doesn’t really back that up.  As measured by the various ETF‘s, the Metals and Mining ETF, XME (40), Materials, XLB (82) and Infrastructure, PAVE (26) still act well.  An exception to the strength in commodities has been oil where we are still hopeful.  A little strength here would go a long way.  Meanwhile, gold finally has come to life, ironically as Bitcoin has come to struggle.  Everyone loves Coinbase (295), including Cathie, but the float here we understand is some 56 million shares while there are some 149 million shares outstanding.  We doubt staples are a new leadership just when for most their costs have begun to rise.  Still, you can’t argue with the charts here, or those of the utilities.

Last time we spoke of Tesla (720) as agnostic when it comes to most background noise – vaccines, war and peace, that sort of thing.  This week it appeared agnostic even when it comes to itself – the fatal crash and the China auto show protest.  Then there’s that overriding sort of negative.  Superior though it may be, it’s no longer the only EV game in town.  Ah, but can they send a rocket to space and land it on a dime in the Pacific Ocean?  Success always creates competition, though until this quarter it never seemed to bother Netflix (509).  If it’s not the competition, which is somewhat formidable, maybe it’s the going away of staying at home.  We see Zoom Video (328) as the poster child here, and it has basically been cut in half from his peak last October.  Netflix isn’t nearly as bad, as Wednesday’s weakness only knocked the stock to the lower end of the nine month trading range.  While you don’t want to see it slip below 460 – 480, the lower end of the range, we would rather not sit through the slog back to the upper end either.  We’d rather Tesla there.

Following the Monday and Tuesday weakness, the market came storming back on Wednesday.  The storming part was in terms of those Advance-Declines – 4-to-1 up and close to 2600 net advancing issues.  It’s not weakness that is the worry, it’s the weak rallies that follow, and that was anything but a weak rally.  Wednesday, however, did have a surprisingly negative characteristic.  For the S&P 500, 85% of the components ended above their 50 day average, while for the NASDAQ and Russell there were less than 50%, a historically large divergence.  Things may be changing, but we’re far from anything serious.  Pretty much most days most stocks go up, and that means no big problems.  Thursday afternoon happens when too many are on the complacent side of the boat, and there’s a negative surprise.  There was always going to be a tradeoff between stimulus/infrastructure and taxes.  The market knew that and the market quickly will figure out it knew that, and can live with it.  Thursday just seems more of the recent choppiness.

Frank D. Gretz

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Gap and go, or … gap and go nowhere

DJIA:  33,502

Gap and go, or … gap and go nowhere.  Monday’s low in the S&P futures was 0.5% above the prior day’s close. It then rallied another 0.5%, seemingly a set up to gap-and-go. Like most such patterns, the follow-through has been mediocre at least so far.  Another seeming anomaly was the Monday action of a week ago, which saw the Dow rise about 100 points while only 35% of stocks rose.  When this close to an all-time high, this was the worst configuration in more than 60 years, according to  The market subsequently was lower both one and two months later.  Recently, the Russell 2000 dropped below its 50 day average for the first time in three months.  When after a five-year high it typically leads to a prolonged period of underperformance, though in this case the index continues to dance around that 50 day.  Then came Thursday a week ago, which saw a 4-to-1 up day in Advance-Declines, numbers we just can’t fight.

While the bull market is the ongoing market story, as much a narrative has been the jockeying for leadership.  Whether it’s correlation or causality time will tell, to coin a phrase, but the stabilization in rates seems to have stopped the bleeding in Tech.  At the quarter’s end, Tech ranked last among the 11 industry sectors.  At some 26%, Tech is the S&P’s biggest weight, making it very unusual for the S&P to rise when Tech trails, let alone runs last.  So, for the market’s sake, stabilization here seems important.  And, of course, not all Tech is equal.  Semi’s trade like they’re re-open stocks, what we’ve called retro Tech, the Cisco’s (52), Intel’s (67) and Oracle’s (75) are having their renaissance.  Oracle lost a legal battle with Google (2251), and both rallied, which pretty much says it all.

Tesla (684) delivered, and then some.  In the first quarter, so the headline read, the company produced just over 180,000 vehicles and delivered nearly 185,000 vehicles.  That’s a pretty good trick.  If they continue to double charge some customers, they could really have a good year.  Rest assured, we’re not here to knock Tesla.  After more than a good run, the stock simply seems to be taking a needed rest.  As it happens, the rest is taking place right on the October uptrend line – funny how that happens.  After some five weeks, the stock seems to be trying to come out of its respite, something close to 750 should do the trick.  That’s the look of the weekly chart – each bar one week.  The daily chart shows a declining 50 day around 730, which could be a bit of resistance.  The daily also shows little volume expansion, and that should change to confirm any breakout

The key to making money in the stock market is to not lose a lot.  You can lose often and, indeed, it’s part of the business.  You just can’t absorb big losses.  Cutting your losses, of course, is something we all talk to talk about, but stocks have their way of doing a Paul Simon, slip sliding away.  You can use a rigid 8–10% rule, but that needs to be adjusted for volatility.  For one of the Bitcoin stocks 8% could be an hour or two.  Moving averages are our preferred stop method, but often they’re not close enough in uptrending stocks to prevent more damage than you might like.  A more esoteric stop is what we call a time stop.  You buy a stock because you think it’s going up.  If it doesn’t go up, at some point you have to say you’re wrong, and sell.  The stock itself may do nothing wrong, but given enough time it probably will.  As much as we like Disney (187), we’ve given it just about enough time.  Here at the 50 day, it is also running out of room.

As suggested above, it’s hard to fight markets that still can generate Advance-Declines of 4-to-1.  The other insight here is that it takes money to generate those days of 2500 net advancing issues.  There’s still money out there – the bull market remains intact.  Still there is some conflict in the technical backdrop. The measures related to momentum and breadth are those seen in the early phases of a bull market.  Measures of sentiment, particularly measures of speculation, are those seen near the end of a multi-year bull market.  As we have suggested many times, momentum trumps sentiment, and so far it has done so.  Then, too, there has been quite a bit of under the surface rotation, and that seems the biggest challenge in the weeks ahead.  Tech won’t go away, but it can underperform. To generalize about the stocks we like, we think of them as the under-owned.

Frank D. Gretz

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Spring break … or compound fracture

DJIA:  32,620

Spring break … or compound fracture.  Little question there has been a break in the uptrend, but not one compounded by a poor overall technical backdrop.  The Dow and S&P are only a few days from their highs, far more importantly, the Advance-Decline index is only a few days from its high. This is not how important weakness begins.  Different this time, however, is the divergence between markets, the S&P, Dow and the NASDAQ 100 – the divergence between stay-at-home and re-open.  That the Dow was down three points and the NAZ 200 Wednesday may say it all.  The problem there, and it was true Wednesday, the bad begin to drag down the good – the idea you had better sell before someone else does. Tech may be washed out, or close, and that’s needed.  Meanwhile, we’re still all in on re-open/reflation.

The dramatic weakness in bonds against the dramatic strength in equities was expected to cause some rebalancing at the end of the quarter.  While we don’t typically place much emphasis on such things, the disparity this time is such that it could well be responsible for some of the equity weakness.  If it is, we’ve noticed it hasn’t had an effect on McDonald’s (224), let alone a dramatic one.  Rather than stay at home, McDonald’s is stay in your car, a new category?  The point is it’s still about the right stocks, and a number of defensive names have been improving – the PG‘s (134) and Colgate’s (78).  Rather than knee-jerk reaction to the recent weakness, the charts really aren’t bad, for example, see the SPDR Consumer Staples ETF (XLP – 67).  We are as tired of it as anyone, but welcome to a little more rotation.  Still, it’s preferable to all in on the downside.

As re-opening has come to dominate as a theme, Growth and Tech has suffered.  That’s not true of all Tech, however, as might be seen in the musketeers of yore – Cisco (51), Intel (62) and Oracle (69). It’s enough to make you miss 2000.  These all have remarkably good charts, especially in light of those Tech charts generally.  Just what’s behind the renaissance is hard to say, at Intel it would seem the new management and at Oracle we suppose it’s just that Larry Ellison never goes away.  That they should be outperforming the rest of Tech also seems about the theme we have stressed for a while now – how much of any of these do you own?  Much like the re-open versus stay at home stocks, these retro – Techs are under owned.

Cathie, as we all have come to know her, has her themes.  Certainly one is genomics, biotech to most of us, as per her ARK Genomics Revolution ETF (ARKG – 85).  It’s hard not to like biotech in terms of its life enhancing potential and as an area immune, so to speak, to the vagaries of stay-at-home/re-open.  That said, over the years we have seen the stocks cycle, and for now the cycle seems down.  Her ETF, the NAZ Biotech ETF and the SPDR Bio ETF look surprisingly the same, even more surprising given the XBI is equal weight.  Great stock picker that she may be, this would seem to suggest the trend is a bit all encompassing.  As we said, we’ve seen these cycles, and would harken to add the long-term trend here is excellent.  To flip the medium term trend, however, will take a move above the respective 50 day moving averages, something like 100 for ARKG.

The 12 months just ended were the best in the history of the S&P.  Since the index hit bottom after the onset of the Covid-19 pandemic, it has gained more than 70%.  Jim Reid of Deutsche Bank puts the return in perspective, having back calculated the index to 1929.  Other than the rebounds following the great crashes there has never been a 12 month period like this.  Strategists at LPL Financial cited the S&P’s performance other years after falling more than 30%.  It was the first year ever the S&P was down 30+ percent and ended in the green.  They identified five other instances since World War II and found that the S&P rose every time in the second year.  Gains for that year averaged 17%, according to Bloomberg.  That said, no one said straight up.

Frank D. Gretz

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Woodstock is a fond memory …

DJIA:  30,924

Woodstock is a fond memory … will the same be true of Wood’s stocks?  Cathie Wood has garnered quite a bit of fame, and deservedly so.  Those ARK Funds which she founded were up a gazillion percent last year, but who’s counting.  Nonetheless, we always find it a bit risky when everyone knows your name, so to speak.  It certainly proved so for Gerry Tsai when, after his success at Fidelity, he founded the Manhattan Fund in 1965.  By 1969 the funds collapsed, losing 90% of their value.  While his was an aggressive style of growth stock investing, that of Bill Miller’s was a value style of investing.  His fame resided in his record of beating the S&P for 15 years in a row.  When the market turned against value in 2006, a run of underperformance left him lagging the S&P by 50%.  Changing fortunes in both cases were not a matter of intelligence, it was a matter of changing investment styles.  For now it’s about reopen/reflate, if that can be called a style.  Cathie Wood isn’t exactly covered in that look.

They say rising rates don’t matter if they’re rising because the economy is improving.  For Tech investors, that turned out to be a big fat lie, as last Thursday and most days since then have made clear.  You pay-up for Tech when Tech is the only growth in town, but in an improving economy there’s plenty of growth to be found – commodities, industrials and so on.  And, of course, most if not all Tech has had a good run.  Unless it’s their mandate, Tech investors likely are waking up to the idea they’re in the wrong stocks.  It’s always a bit of a mystery as to what triggers market moves.  After all, the bond hit last Thursday, 2/25, was an attention getter, but the real break began back on 2/12.  In any event, as often happens, it’s not whether you’re in the market it’s where you’re in.  The Tech bashing has left only around 10% of the NAZ stocks above their 10 day average, obviously pretty extreme and likely time for some reprieve.

The 50 day moving average isn’t exactly the riddle of existence, that would be those other numbers, the 1+1 = 2, 2 +1 = 3, and so on – those numbers.  While many Italians were about the serious work of discovering pizza, a guy named Fibonacci really was about discovering the riddle of existence, at least as it applies to nature’s code.  Each number of his sequence is the sum of the two numbers that precede it, and it is said to govern the dimensions of everything from the great pyramid of Giza to the iconic seashell.  The ratio of the numbers in the sequence, as the sequence goes to infinity, approaches the golden ratio, the most pleasing angle in nature.  Naturally technical analysis has glommed onto this to explain movements in the stock market, the so-called “Fib Retracements” of roughly one-third and two-thirds.  Far less esoteric is the everyman’s 50 day moving average, yet it has managed to hold in check the recent declines in both the Dow and the S&P.  Again under threat, it would be best to see it continue to hold.

It’s not surprising that consumer staples are lagging.  First it was a market all about tech, and now it seems all about the reflation trades of commodities and industrials.  There hasn’t been much need for, or room for staples.  And to look at a stock like Clorox (178), you can believe every closet runneth over.  Still, lagging is one thing, of late they’ve turned outright weak.  Typically the stocks offer a bit of a counter market trade – down in good markets but up in weakness.  Last week that changed, with notable breaks in stocks like Procter & Gamble (122) and the SPDR Staples ETF (XLP – 63).  The explanation, we suppose, is there is still money out there but it’s not infinite.  The money going into the reflation trades has come from Tech, but likely from these dormant staple stocks as well.  By the look of the charts, this doesn’t seem about to change.  Despite their numbers, the good news is the poor action here hasn’t had a dramatic effect on market breadth.

It’s a good time to be a technical analyst rather than one of those funny mental types.  Looking at price-to- sales, the S&P is the most expensive ever and information technology is almost as expensive as 2000.  How in good conscience can those guys be bullish?  We technicians can be bullish because we understand it’s liquidity that drives markets, and there is still plenty around.  We always refer to the Advance-Decline Index as a guide to whether the average stock is keeping pace with the stock averages, an important measure of the market’s health.  These simple numbers, stocks up and stocks down, tell you something about liquidity as well.  There were more than 3000 NYSE stocks up on Monday – that takes money.  What seems important now is where the money is going, and that would be to the reflation/re-opening stocks.  Tech isn’t going away, but it likely will underperform.  The stay-at- home stocks, like Zoom Video (343) and Peloton (105), they could go away.

Frank D. Gretz

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The January effect … in February

DJIA:  31,430

The January effect … in February.  The “January effect” is the tendency for beaten up stocks, many of them low price, to rally when December’s tax loss selling is over.  Somewhat ironically, we’ve found even the January effect to have become discounted, that is, of late it has started in November.  Yet here we are in February looking at the January effect of a lifetime.  A colleague recently pointed out every low price stock is up, something we had noticed as well.  We screen for stocks with a change in volume – not an increase in volume, an increase in a stock’s own volume.  We realized of the 250 stocks in the screen this particular day, half or more were $5 or less.  Volume in these lottery tickets, the so-called penny stocks, has been the highest in a decade, according to  Similarly, NASDAQ versus New York Stock Exchange volume is at a record high, perhaps a proxy for speculating versus investing.

With the lift in so many low price stocks, it should come as little surprise that the Advance-Decline numbers have been better than good.  There’s the catch 22 that the numbers, abetted by these low price stocks, reflects the speculation binge, but the numbers are the numbers.  The Advance-Decline numbers, of course, just reflect direction – stocks up or down.  That more than 90% of stocks are above their 200 day average would seem to confirm the breadth of the rally.  On a longer term basis, it seems important to recognize the durability of the strength here.  More than 80% of the S&P stocks have been above their 200 day for three months.  That’s the longest streak in seven years and among the longest since 1928.  When dealing with mediocre momentum numbers, overbought means risk.  When dealing with momentum numbers like those above, overbought is a good thing, the strength tends to persist.

Momentum typically trumps sentiment and it has recently.  Still, the over the top Call buying does pose a risk.  Two weeks ago in the midst of the GameStop (51) speculation we saw a risk similar to that of last August, prior to the September 9% selloff.  A couple of days of heavy selling and a near historical spike in the VIX made a correction seem likely.  The market, however, was able to right itself, perhaps coincident with the peak in GME.  Last week saw 2-to-1 up days four of the five days, while the VIX collapsed, meaning the panic was over.  Monday this week saw better than 3-to-1 Advance-Decline’s, while on the NASDAQ 700 stocks hit 12 month new highs, the highest since the late 1980s.  Tuesday saw positive Advance-Declines despite minor weakness in the averages.  That’s the opposite of strength in the averages against weakness in the Advance-Declines – the pattern we refer to as a weak rally.  It’s that pattern that causes problems.

As we suggested last time we’ve grown a bit weary of typing re-open/stay-at-home trades, in many cases a difference without a distinction.  We have opted instead to just go with good versus evil, in terms of the charts.  That’s said, we find many of the good charts in the relatively unexploited area of commodities, which, of course, is pretty much a reopen trade.  They are also, we suppose, a China trade for those of us who would rather not actually buy China.  Last time we picked up on a commodities article in Barron’s, and mentioned the copper stocks like Freeport (31), and ETFs like DBA (17) and DBC (16).  This past week there was a Barron’s article on Platinum, suggesting its importance as a component of hydrogen fuel cells is likely to grow. Among the ETF‘s mentioned the GraniteShares Platinum Trust (12), is an excellent chart.  We continue to like Lithium, and names like Lithium America (22) and Piedmont (53).  Finally, we still expect another leg up in Energy.

The market in 2021 clearly is about re-opening.  The commodity stocks as much as anything make that clear, as do the semiconductors.  Even the better action in Disney (191) versus Netflix (560) seems to tell that story – it’s about the parks, the re-opening. As for the market, speculation is simply over the top, or is a market led by crypto and pot stocks a good thing?  Some of this will prove self-correcting – there’s a reason they called it the January effect and not the January/February/March effect.  If you’re one of those looking for trouble, there’s something called the Smart Money Index.  It measures market performance in the last hour where it is thought more informed investors trade.  It’s currently near its lows while the S&P is near its highs.  We prefer instead to stick with our own brand of in-depth analysis – most days most stocks go up.  The Advance-Decline numbers have been positive eight consecutive days through Wednesday, come what may in the averages.

Frank D. Gretz

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If you hear T-A-P, start selling … just in case an E-R follows.

 DJIA:  30,603

If you hear T-A-P, start selling … just in case an E-R follows.  Powell’s comments didn’t suggest taper is coming.  Then, too, you just can’t have it both ways – recovery and a Fed stoked market.  The havoc of the latter is clear in a word, GameStop (194).  A few years ago we had dinner with the man who put together Activision (91), and asked what he thought of GameStop.  His answer – think Blockbuster.  In the one or two years we’ve been doing this, we’ve always found short sellers better than most analysts.  We’ve also always found that when people talk about running the shorts, they miss the point. You don’t run the shorts when the stocks are going their way.  As GME has made clear, that’s the key.  Whether it’s the short-sellers, the cryptos, or whatever, the real point is that speculation is over the top.

All Gaul is divided into three parts, we seem to recall from our high school Latin class.  Our style of technical analysis basically has only two parts.  The most important is momentum, or the strength of a move.  There are many measures here – stocks above their 10 day moving average for the short term, stocks above the 200 day moving average for the medium to long term. The latter should be the focus here, and around 90% it says strong market.  It’s overbought, but it’s that good overbought.  Think of momentum as a physics term, and in that construct any object with this kind of momentum is hard to stop.  And, perhaps there we should.  The other part of our style of analysis is investor psychology, what we like to call sentiment.  Here GameStop and its cohorts pretty much say it all.

We like to say momentum trumps sentiment, and it has.  Still, the excesses we are seeing now are extreme.  Investing is a matchup of greed and fear.  Bubbles happen when greed becomes excessive, and when fear ceases to exist.  Bubbles are not so much about valuations as they are the Greater Fool Theory.  In the case of GME, there really is no narrative, making it a bubble in the purest form.  It’s that condition where investor behavior is dominated solely by an attempt to sell to someone else something for a higher price.  There is no rational assessment of value.  The entire market doesn’t seem a bubble, the rally remains too broadly based.  The bubble stocks, however, have affected sentiment enough to leave the overall market at risk.  Over the last three weeks small traders have bought 60 million Calls.  That’s 20% greater than the bubble-like environment last summer.

We’re sure you’ve noticed we place little emphasis on valuations, believing stocks sell at fair value once on the way up and once on the way down. The trick is figuring out whether they will become more overvalued or more undervalued, in other words, the trend.  That said, we have come across a couple of things to suggest here, too, things may be a bit over the top.  One is a creation by the Bespoke Investment Group called the Ludicrous indicator.  It looks at US companies with a market cap of $500 million or more, that trade at a multiple of 10 or more times last year’s sales, and that have doubled in the last three months.  There are 600 companies on the list, dwarfing anything in the last decade.  You’ll be glad to know, however, the number still is half that of the era.  Another take on excess is by Goldman.  They have an index of unprofitable Tech companies which shows a fivefold gain since last March.  By way of perspective, that is more than five times the gain in the S&P Tech index

All good things must end someday, the not so good ones as well.  GameStop, of course, is a bit of both.  What we’ve seen this week is an extreme, but a natural extension of the speculation that has been going on for some time.  Powell is as much behind this as the traders.  He wasn’t close to saying taper, but had he, you could kiss GameStop goodbye.  All this, of course, is more than a little disruptive, including Wednesday’s 600 points down day, with losers close to 5-to-1.  Speculation is not new, what we’re seeing now is new, but still just speculation.  Monday saw a new high in the S&P, with only 45% of its components above their own 10 day average – a first little crack in momentum. The recent new high in the A.D. index says no big problem for now.  Still, this seems similar to last August which was followed by a 10% decline in September.  Keep in mind it’s not weakness that’s the worry, it’s any weak rally which may follow.   

Frank D. Gretz

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If you forecast for tomorrow what happened today …

DJIA:  31,041

If you forecast for tomorrow what happened today … you’re right some 70% of the time.  And now you know all you need to know about forecasting the weather.  As for the stock market, that’s different.  Arthur Burns suggested the secret to forecasting is to keep forecasting.  Keynes seemed to agree, saying when things change he changes his mind.  The philosopher Mike Tyson perhaps sums it up best – everyone has a plan until you get hit in the mouth.  Keeping in mind you get what you pay for, our two cents is that it will be a good year, but a different one.  While there are signs of euphoria and valuations that arguably are stretched, the technical backdrop remains sound – hence, a good year.  History, however, suggests a different one.  It’s likely to be one of more muted gains and one with a different type of leadership.

The S&P was up 16% last year, and 29% in 2019.  It is rare for the market to be up 10%+ three years in a row.  Similarly, Tech stocks have had back to back 40% gains.  Against that backdrop, it is rare that any group does not underperform the following year.  We offer this not so much as a forecast, but rather an observation.  The NAZ was up 40%+ last year and more than 50% of that was Apple (131), Tesla (825), Amazon (3165) and Microsoft (218).  It’s not hard to see how any underperformance by Tech could hold back the averages.  Meanwhile, it’s easy to see how the forlorn infrastructure stocks like United Rentals (264) and the metals and mining stocks could lift the market without giving a big boost to the averages.  We’re still positive on biotech, and gold finally has shaped up – silver even more so.  And those energy stocks you’ve been meaning to sell, suddenly have come in handy.

If you saw The Graduate, surely you remember – plastics!  Our update on that is – lithium!  As measured by the Lithium ETF (LIT – 73) and the many stocks here, lithium has been on a tear.  The main driver for lithium and materials like cobalt and rare earth elements is electric vehicles.  Then, too, lithium isn’t exactly new.  Your smart phone, your laptop, your tablet are all devices that rely on lithium.  It’s electric vehicles, however, that seems behind the recent run.  Bloomberg forecasts sales of electric cars will hit 41 million by 2040, representing 35% of all global new car sales.  While EV sales in the US jumped 81% in 2019, that’s a drop in the bucket compared to China where EV sales topped 1.2 million cars.  You may not want to build your portfolio around lithium, but it should have a place.

If lithium is not to your liking, maybe we can interest you in a little Solar.  Solar and its ETFs like the Invesco Solar (TAN – 121) and the iShares Global Clean Energy (ICLN – 33) have done quite well.  Components like the Daqo Energy (DQ – 80), have done even better.  We have thought of Solar as a hedge against the Georgia election, but that seems overthinking.  Chinese President Xi Jinping, a man you can trust, has pledged to make his country carbon neutral by 2060. There’s many a slip twixt the cup and the lip, and by then we just might be old.  Still, given that China gets two-thirds of its power from coal, the implications are almost staggering.  China has created seven of the world’s top 10 Solar module manufacturers, according to Wood Mackenzie.   Like lithium, Solar may not be something you want to build a portfolio around, but something that should be part of it.

So how about the market’s reaction to the Georgia election outcome?  The NAZ, that is Tech, did selloff, but on the NYSE breadth was more than respectable, and on the NAZ it was even better.  A surprise, or validation of one of our long held beliefs – when it comes to the stock market, what we all know isn’t worth knowing.  And there is a rationale, well expressed by Nicholas Colas of Data Trek.  If you ask CEOs how they feel about a two point hike in their tax rate in return for a $2 trillion stimulus plan, they’re more than good with it.  Amidst all that is going on, best to keep in mind the basics.  For all that can be worried about both in and outside of the market, most days most stocks go up.  When that changes, then heed the Keynesian advice.  Meanwhile, as we suggested above, this year could be different.  If you look at the charts, should you own Microsoft (218) or, of all things, US Steel (20)?

Frank D. Gretz

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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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