DJIA:  33,044

Rock ‘n’ roll is here to stay… and Tech will never die.  Don’t tell that to Digital Equipment, Sun Microsystems, Burroughs, Control Data or Sperry Rand.  Tech may never die, but the names do change.  There are very few durable technology franchises.  Years ago Bernstein did a study which showed over a 40-year period, there was 1 chance in 7 that a “recognized” high growth tech stock could sustain that status for five years, and a 1 in 14 chance for 10 years.  Tech may be forever, but the players shift.  As it happens, this is a very positive seven months for Tech, at least as measured by the NAZ 100, the NDX or Q‘s.  Since its inception the NAZ has rallied all nine years between January 1 and July 31 in pre-election years, showing an average gain of 24%, according to SentimenTrader.com.  We suspect, however, RCA will not be among those Techs, though RCA really did change the world.

It’s not how you start the race, rather it’s how you finish.  After a fairly dismal December, it’s nice to see January start well, particularly as January has some forecasting value.  Last week’s pair of days with close to 4-to-1 A/Ds is what you like to see, and Friday’s upside reversal was impressive.  Perhaps most important in the overall pattern has been the increase in stocks above their 200-day to a recent peak of 57%.  As we noted, readings around 60% are indicative of good markets, 70% are associated with bull markets.  For now it seems a credible turn, but as Wednesday made clear, it won’t be easy.  When you think of market turning points it’s tempting to think straight up.  That’s rarely the case, and even less likely here.  This wasn’t a climax, washout low – that was back in May-June.  Any low here will be work.

Market strategists and stock analysts both basically analyze earnings.  The analysts nickel and dime you with their estimates – pretty much raising and lowering them to follow the price of any stock.  They are almost more “trend followers” than technical analysts.  Strategists are more big picture.  The analysts have trouble figuring out what one company will earn, strategists think they can figure out what 500 companies will earn, and then know what those earnings are worth.  Granted that in the long run companies that grow earnings do well, but that can be a long run.  Academic studies have found the stocks that outperform each year are those that beat analyst’s estimates, and vice versa.  So the best and worst performers are pretty much stocks where analysts are wrong.

Strategists assign multiples to overall earnings to determine valuations, and therefore the likely trend in the overall market.  The problem here is not in the use of earnings, but in the dependency on earnings.  Assuming that earnings are knowable, they’re only but one of the factors affecting stock prices.  Studies show as much as 70% of a stock’s price is determined by the overall market trend.  Throw in the importance of group rotation – think of Energy last year – and there’s not a whole lot left for the importance of earnings.  One of our favorite examples here is McDonald’s (264) back in the 70s and early 80s.  MCD in 1973 peaked around 75, fell to 22 in 1974, and recovered to 66 in 1976.  It then did nothing for the next five years, though earnings continued to grow at a compounded rate of 25%.  All the time, the company never missed a quarter.  Despite that by its 1980 low MCD was selling at 10x trailing 12 months compared with selling at 75x in 1973.

It’s Groundhog Day – again.  It’s surprising and disappointing the market keeps reacting to the same news.  Rates are going higher – who knew?  At some point bad news gets discounted.  Then, too, after a good run the market may have been due for a little reality check.  In any event, a couple of bad days don’t negate a surge in the ADs, stocks above their 200-day and the pickup in 12-month new highs.  This wasn’t a washout low.  If a viable low it would be the kind you have to work for.  We still favor Commodity-related stocks like Freeport (44) and Caterpillar (246) – China re-opening.  The pre-election year seasonal pattern for the NAZ is hard to ignore, but the winners of last cycle, the FANG+, seem unlikely to win again.  We’ve highlighted a few that we favor.

Frank D. Gretz

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DJIA:  34,189

They didn’t see it coming … and they won’t see it going.  The Fed isn’t very good at forecasting inflation, or recessions for that matter.  It’s joked the stock market has predicted nine of the last five recessions, yet that’s still better than the Fed.  Naturally, we’ll take our chances with the market.  The idea, “don’t fight the Fed” is real enough, but so too is “the trend is your friend.”  With some 50% of stocks now above their 200-day moving average, the trend is moving higher.  So how is it the market keeps ignoring the Fed’s jawboning and serial rate hikes?  Could it be the market is doing its own forecasting?

The market’s other big worry is the likely downturn in earnings this year.  Yet if everyone shares that fear, the chances are good it’s already discounted.  And, after all, there’s a reason the market was down 20% or more last year.  Earnings always are a bit tricky.  They matter in the long run, but that run can indeed be long.  Market trend and group rotation often play a bigger role.  And there’s the matter of timing.  In market downtrends like this one, prices typically bottom some 10 months ahead of a bottom in earnings.  In other words, wait for the trough in earnings, and you’re some 10 months late to a new bull market.  An emphasis on earnings at the late stages of a bear market seems a misdirected exercise.  Earnings and the rest of the news will always be bad at market lows.

If you look at Freeport McMoran (45), the Fed isn’t going to change that chart, and it’s not about earnings.  It’s about China.  China bottomed back in October and pretty much has not looked back.  The Hang Seng (HSCI-HK 3224) has rallied some 30% from its low back then, a move that has taken it above its 200-day average.  More importantly, some 70% of the component stocks are above their own 200-day.  The rule, so to speak, is 60% is a good market, 70% a bull market.  The previous two bear market rallies here ended with fewer than half the stocks above the 200-day.  The EEM Fund of Emerging Market stocks has rallied more than 20% off of the latest two year low, also suggesting a new bull market.  You can’t help but think this will be a positive for our markets.

In the last 12 months the market has closely tracked the pattern of 1962.  Most striking in the resemblance is the relentless decline into a June low.  In both cases a subsequent rally was followed by an October test, a lower low last year but not in 1962.   A recovery followed into December and a new uptrend in 1963.  This, of course, seems more than a little intriguing, but we don’t believe market patterns necessarily repeat.  What does repeat, however, is patterns within markets.  Markets peak a few stocks at a time, which is why the Advance-Decline Index is an important guide to market deterioration.  In this case the peak was late 2021.  Stocks eventually washed out in May-June when on a weekly basis close to half the issues trading on the New York and NAZ reached 12-month lows.  While the average stock peaks before the stock averages, market downtrends eventually get to everything, including shares of former holdouts like Apple (133), Microsoft (239) and Tesla (124), as happened recently.  When it comes to stock behavior, we’ve seen play out a typical bear market pattern.

Bull market, bear market rally, for now what matters is it’s a credible rally.  Most stocks made their lows last May, for the averages it’s all about the momentum from here.  If like the Hang Seng S&P stocks above their 200-day make it to 70%, that would argue bull market.  Tech of course will rebound, but for most these seem the stocks of the last rodeo.  We favor Oil, despite last year‘s success.  Obviously, it had some news at its back but it also had the advantage of being under-owned.  That’s always something to consider and why we recently singled out under-owned names like Boeing (214) and GE (79).  Looking at a stock like Caterpillar (255), it’s hard to see a recession, and much the same for Deere (436).  Those Advance-Decline numbers offered an important clue to this rally, being sometimes positive against losses in the averages.  They are likely to offer a similar clue to the rally’s end.

Frank D. Gretz

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DJIA: 32,930

Last year was so tough …even the liars didn’t make money. It wasn’t a good year to chase rallies – the S&P lost 0.24% on the day following a big up day. On top of that, buying the dips didn’t work. The S&P saw 63 sessions that had a 1% loss, but went on to lose 0.29% the following day, according to SentimenTrader.com. Don’t follow strength but don’t buy weakness – that makes for a tough year. The good news, stocks tended to rebound after similar years. The price action has had a positive impact on investor psychology. The Citi Panic/Euphoria Model published in Barron’s shows some of its lowest readings in years. The higher the model, readings of euphoria, lower returns are to be expected. The lower the model, readings of panic, positive returns are expected. When the model is below zero, as it is now, since 1993 the S&P’s annualized return was more than 15%. As for the market averages, they’re in downtrends, which is to say below their various moving averages. And some of the indicators we look to such as new highs and Advance-Decline numbers turned negative in early December and remain so. These, by the way, had turned positive in mid-October and are not so prone to quick reversals as are others. That said, like the market these measures have stabilized recently. Going into January the market has had its share of bad days but almost surprisingly, its share of good days. When the averages are down you can expect the A/Ds to be negative. When the averages are up, the A/Ds should be correspondingly up, though in weak markets that’s not always the case. So far there has not been what we call bad up days – up days in the averages with flat or worse A/Ds. Last year’s market pattern fits in with our complaint about the charts – there are good charts but few good charts that are working. When you can’t buy the dips the way you used to, that’s a tough market. When you can’t buy strength, that’s a really tough market. The latest here was Tuesday’s disappointing action in energy, particularly the oil equipment stocks. There were few better charts. Semis are a bit all over the place but not that long ago the equipment makers seemed to be acting much better. That was of some interest in that the semis bottomed in late 2008, well ahead of the market bottom in March 2009. However, using ASML (565) as an example, its seemingly impressive break out around 620 back in mid-December failed, resulting in a move back below its 50-day. This could be a good year for gold – where have you heard that before. Finally the dollar is going the right way, which for gold and most commodities is lower. And while the stock ETF, GDX (31), is dancing around its 200- day, the commodity ETF, GLD (171), is well above that level. Both, of course, are above their 50- day averages and those look about to cross above the 200-day, the “golden cross,” if you believe in such things. The better patterns reflect what has been a dramatic momentum shift. Back in October most gold shares were below their 200-day while now at least half are above that level. This kind of change can be important, but here too follow-through seems the key. Gold over time has had more than its fair share of false starts, but when it works it often works big. Could Boeing (205) be stock of the year? Certainly both the stock and the business have been through the wringer. Still, it’s hard to give up on a company with something like a 40% share of a worldwide market, especially since the chart has turned positive. Joined at the hip in its way is GE (71), which seems to be doing better in its own right. Following bad years like this last one you have to be careful following stocks that worked in those years. That said, the oil service stocks like Halliburton (39) still look positive. Layoffs mean business is bad, yet Salesforce (136) rallied on the news. We get the logic, but had it been down we get that logic as well. Then there is the conundrum of the housing market. Rates have had their impact on home sales, but not on home builders? Earnings will be bad this year, even technical analysts know that. We also know stocks bottom some 10 months ahead of earnings. If it happens, this would be the most anticipated recession ever. Then, too, if contrary opinion always worked, this would be postmarked The South of France.

Frank D. Gretz

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DJIA:  33,027

Here comes Santa … with his Santa Claus rally?  Santa Claus rally, oversold rally, for now it’s all the same.  Since there usually isn’t much weakness in December, markets usually don’t get oversold in December.  A reflection of the recent weakness, at least by our measure, this market was more oversold than any time since September.  This may well have prompted the recent rally, but it is itself not a wonderful sign – good markets don’t become too oversold.  And just last week, the market did become a not so good market as the Advance-Decline numbers and new Highs /Lows turned negative.  Last week also saw outside down weeks in the averages – a higher high and lower low than the prior week.  And the S&P and NAZ slipped below their 50-day averages.  Not an auspicious start to any rally, but sufficient until the day. 

If it’s unusual to see a deeply oversold market in December, it is similarly unusual to see investor bearishness in this historically positive month.  Yet option traders have placed record bets against stocks.  A couple of months ago there was a surge in option bets against stocks greater than anything since the financial crisis.  This preceded an S&P rally of some 13%.  According to SentimenTrader.com, large traders have bought to open the fewest equity Call options relative to Put options since 2009.  Some $1.1 billion Call options were bought while $19 billion Put options were bought.  It is among the largest net bet against stocks, and this in December.  Put-Call ratios among stocks in the NASDAQ 100, S&P Technology sector and Financials all hit records last week. 

Suddenly everyone is a monetary expert.  Investors dislike the current monetary policy thinking it’s a mistake.  The consensus of fund managers and certainly commentators, is fixed on lower inflation and a recession next year.  Higher rates in the short term will only make things worse, or so the view goes.  As the mistake grows clear, central banks will be forced to pivot.  A monthly Bank of America Fund Manager Survey found that investors expect government bonds to be next year’s best performing asset.  Meanwhile, equity bearishness is no mystery.  It’s understood by most that a profits recession is at hand.  According to the survey, bearishness among fund managers when it comes to earnings is the highest on record, even higher than 2009.  Hence the Fund Manager Survey showing them the most overweight bonds compared to stocks since 2009.  What followed back then, of course, was the great rally in equities.

It’s that time of year when it’s nice to have your Deere (436) ones around you – even the Caterpillars (238).  These would be among our choices for next year as well, together with names like Home Depot (316), McDonald’s (266) and General Mills (85).  A bit less familiar would be names like AXON Enterprise (168), the former Taser, ETSY (127), and Sarepta (132).  We’re trying to be bullish on Oil, but most are still correcting.  As it happens, some of the equipment names like Halliburton (38) and Transocean (4) seem to be acting better than the rest.  Pharma is more than holding its own, particularly those middlemen like McKesson (382), Amerisource (169), and Cardinal Health (81).  Finally, there’s Gold, where hope springs eternal.  All the miners were below their 200-day in October.  Half are now above that level, an important momentum shift.  If they’re able to hold together into the New Year, it may finally be a good one.

The average investor is said to be wrong at the extremes, but right in between.  Contrary opinion is always useful, provided you pick the right time and place to be contrary.  Certainly poor earnings and/or the looming recession are among the things to consider here.  They might already be discounted by this year’s bear market.  With a recession looming it’s surprising the number of industrial stocks that have been acting better than you might have expected.  As always, it’s best to let the market tell the story.  It is after all, the market where we are investing, not the economy.  And the market should not be confused with the market averages.  Rather, the market is the average stock, where the averages eventually follow.  Strength in the averages needs participation, that is, comparable strength in the Advance-Decline numbers.

Frank D. Gretz

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DJIA:  33,202

Sell the news …especially good news.  That proved true to an extreme on Tuesday, but in this market follow-through has been hard to come by any old time.  There are plenty of good charts, but good charts not doing much of anything.  Then, too, it’s a positive time of year, but a time of year when you don’t typically expect the dramatic.  Tuesday’s reversal was rather dramatic.  We had our 500-point rally on Monday, so some of the good news arguably was already in.  And a somewhat overlooked part of the Tuesday drama was that Advance-Declines were close to 3-to-1 up.  The previous month’s CPI held onto an 800-point Dow gain, but with A/Ds only a little better than 2-to-1.  We’ll take the better A/D numbers anytime.

As it happens, NYSE Advance-Decline numbers have been disappointing of late, having peaked three weeks ago.  An adjusted measure of A/Ds turned negative just a few days ago, worrisome in that this measure pretty much nailed the low in mid-October.  A cumulative measure of new highs/lows also called the October low pretty well and now is teetering on a sell signal.  So some technical concerns have arisen, against the always to be respected December seasonal pattern.  The second half of the month, and certainly that last week of the year, tends to be particularly positive.  Even here, however, it’s important to keep an eye on those A/D numbers, especially on up days.  You don’t want to see poor participation when the market is up.

If not one thing it’s another for Cathie Wood.  She just spent a couple of years suffering with an array of stay-at-home stocks whose time has passed, but her portfolios were somewhat held together by Tesla (158).  Now most of the losers at least have stopped going down, but it has been Tesla’s turn.  And it’s not just that it’s down in some sort of normal correction, a look at the monthly charge is worrisome.  Meta (116) of course is another name seemingly passed its glory days market-wise, although a banning of TikTok, if it comes to pass, should help there.  Another over-owned stock not acting so well is Apple (137), which as yet has no serious break.  It’s hard to stay on top, just ask Cisco Systems (48) or GE (79), both once the largest stocks by market cap.  Meanwhile, we have touted McDonald’s (272) versus Microsoft (249).  We still like McDonald’s, but have come around to Microsoft.  Like the S&P, it too may have difficulty with its 200-day, as it did in August.

Bad news from Wall Street often isn’t bad news at all.  Bloomberg recently pointed out that Wall Street strategists are the most pessimistic in 22 years, calling for a decline in the S&P next year.  Most have turned progressively more negative in this worst year since the financial crisis.  Strategists take a top down view while analysts do pretty much the opposite, focusing on individual company earnings prospects.  Despite the different approach, their analysis has been just as negative.  A few weeks ago there were a net 150 downgrades in a single day, the third most in 12 years.  Other times of record downgrades coincided with important lows, according to SentimenTrader.com.  There is a small sample size here, but Wall Street pessimism often has been a good sign for the market.

It’s a tough time of the year to be bearish.  Unfortunately, that’s not to say it’s wrong to be bearish.  The technical backdrop has shown deterioration and the market didn’t exactly ignore Powell’s revisit of Jackson Hole.  As always, it’s not the news, it’s what the market does with it.  Wednesday’s reaction wasn’t terrible, in fact it looked more undecided.  As often happens after these events, the real reaction comes the day after, and that did look terrible.  We were a bit surprised at the market’s surprise, as we have come to think more hikes were priced in and recession is the worry, a worry made clear by oil’s failure to respond to the China reopening.  We all know year-end is favorable and the New Year likely weak.  When it comes to the stock market, however, what we all know isn’t worth knowing.  There’s a catch here somewhere.  The way they’re acting, it could be here at year-end.

Frank D. Gretz

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DJIA:  33,781

Now there’s a pivot… but it’s in China.  It’s not the much vaunted Fed pivot most are hoping for, but it suddenly made China not non-investable again.  You might recall just a couple of weeks ago protests there jolted our market some 500 Dow points.  Markets there, however, not only didn’t flinch, until Wednesday they never looked back.  Nearly all Chinese technology stocks have moved above their 50-day averages, and more than half are above their 200-day averages.  As we’ve seen in other areas like Materials, for example, surges to all up from all down have medium and even longer term implications.  Stocks like JD.com (60) and BABA (94) are up 60 to 70% just since their October low.  Of course you have to wonder what happens when Covid numbers start increasing.

As you would imagine, better news out of China is better news for most of the commodities complex.  Nonetheless, the better action in steel stocks is a bit of a surprise.  As it happens, there’s an ETF here which pretty much captures the spirit of the move, though many of the top 10 holdings are not exactly household names.  We would point to Steel Dynamics (110) as an interesting chart, though Nucor (151) seems everyone’s go-to steel, and is also technically positive.  Conspicuous in not responding has been oil.  The stocks not only have not rallied, in some cases they’ve turned weak enough to test their 50-day averages.  That’s now likely to require some rebuilding before any resumption of the overall uptrends.  Meanwhile, more to do with dollar weakness, gold shares have acted well.

We haven’t favored Tech, and so far rightly so.  Of course, not all Tech is the same and to that point, not all semiconductors are the same.  While the AMDs (70) and Microns (55) struggle, the guys that make the stuff that make the stuff, the equipment manufacturers, have acted quite well.  We’re thinking here of stocks like AMAT (109), ASML (607) and KLA Corp. (396).  On the other end of the product spectrum, soup seems good food, at least to judge by Campbell’s (57) recent numbers and its stock performance.  Our pick might be General Mills (88) based on the overall chart, but once again it’s the concept that seems important here.  These defensive/slow growth names have performed quite well.  It’s sort of that MCD (273) versus MSFT (247) idea.

Pity the poor DJIA.  It’s outperforming and still it’s maligned.  Could it just be Shakespeare’s green-eyed monster?  After all, the S&P is down some 17%, the NASDAQ 30% and the Dow only about 5%.  Meanwhile, Wall Street benchmarks to the S&P, for them in this case a good thing.  In reality, of course, they might benchmark to the S&P but they own the NASDAQ.  It’s those Tech stocks that are stinking up the place.  The Dow now has its Salesforce (130), down close to 50% this year, while even Microsoft is off close to 30%.  We often wondered if the nice people at Dow Jones are just bad stock pickers.  Then it was explained they simply try to choose stocks representative of the market or economy at the time.  The problem is things change, and when it comes to Tech nothing changes faster.

Year end is all you can imagine, literally.  There are, as they like to say, cross currents and as you’ve noticed, a tendency for weakness early on.  The S&P still struggles with its 200-day average, but unlike August when that recovery died, this time far more S&P components are above their own 200-day averages, an important difference.  Meanwhile, stocks above their 50-day average have cycled from 3% to 90%, a momentum change with positive 6-to-12 implications.  If you simply look at volume on days when the market rallies, it tends to expand and contract into weakness.  That’s not the most sophisticated insight you’ll find, but sometimes the simple things work.  Probably the most positive week of the year is that between Christmas and New Year’s, but with one of our favorite cautionary notes.  If Santa Claus should fail to call, bears will come to Broad and Wall.

Frank D. Gretz

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DJIA:  34,395

Toto … I have a feeling we’re not in Jackson Hole anymore.  Though brief, Powell’s comments back then sent the market reeling some 1000 Dow points just that day, and another 1300 points into the October low.  So what got the market up 700 points on Wednesday?  Granted the speech had a conciliatory tone, but the rally may not have been about the speech at all.  The market, simply put, was loaded for bear.  The Dow had fallen 500 points on Monday, was down most of Tuesday, and was even down 300 points before Powell’s comments.  It’s not exactly a stretch to say expectations were low.  To give the market its due, the overall technical background had seemed sound coming into the week.  And the good news about the speech – it’s over.

Diamonds recently have been everyone’s best friend.  The “diamonds” we are referring to are the ETF for the Dow Jones Industrial Average, the symbol for which is DIA (344), hence diamonds.  It’s surprising to realize the Dow is down only about 5% this year and, therefore, your best friend.  That’s all the more true considering the S&P is off 14% and the NAZ some 30%.  The secret of the Dow’s success is pretty clear, Microsoft (255) is the only Tech among its top 10 holdings.  As you probably know, the Dow has the quirk of being price-weighted, making a $500 stock like United Healthcare (537) its largest holding.  Also among the top 10 holdings are companies like Caterpillar (236) and Honeywell (217).  Meanwhile, the Nasdaq is referred to as “tech heavy,” and Tech has made it just that.  While the S&P obviously is broader and more diversified, it is market cap-weighted making a stock like Apple (148) 7% of the Index.

A few weeks ago, courtesy of SentimenTrader.com, we pointed out that Materials had made a remarkable turnaround.  In less than two months every stock in the group had gone from below its 50-day moving average to above that average.  There is a small sample here, but all of the occurrences showed positive returns in the next 2 to 12 months.  A somewhat similar pattern now has occurred with Industrial stocks.  As of last week nearly all had climbed above their 50-day while less than two months ago only 3% had done so.  A similar pattern occurred in August with poor short-term results, but over the last 70 years the pattern preceded six-month gains every time.  Another positive here is that both XLI (102) and XLB (83) have moved above the 200-day moving average as well.

To look at the SPDR Energy ETF (XLE-91), Oil isn’t what it used to be.  And yet the ETF is simply consolidating, and doing so less than five points from its high.  That said, it is doing so while only just back to the high in June, and that after a couple of nasty drawdowns.  Meanwhile, the January to June rally had been one of the most consistent and orderly uptrends we’ve seen in sometime.  Uptrends, of course, all have their corrections.  The fact that XLE has made it back to the highs seems very positive.  Of late a concern has been the divergence between the stocks and the commodity – down 4% and 40%, respectively.  Some say this reflects a newfound religion among producers.  We say the stocks just might have it right, and the commodity will follow.

News out of China sent markets lower Monday, though we’re not sure that too wasn’t more to do with Powell phobia.  And at least for the S&P and its 200-day, reminiscences of last August could have had something to do with it as well.  There is, however, an important difference between now and last August – S &P stocks are outperforming the S&P Index.  While the Index still struggles with its 200-day, more than 60% of its components are above their 200-day.  Typically, participation is the key, and that’s why 5-to-1 Advance/Declines is important as well.  The number of S&P stocks above the 50-day also is impressive, having cycled from 3% to close to 90%, another pattern with positive 6 – 12 month results.  The shift in momentum for both the XLI and XLB also augers well for year-end results.  As Thursday once again made clear, however, nothing in this market comes easy.

Frank D. Gretz

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DJIA: 33,546

Don’t fight the Fed … but don’t tell the market. Despite the Fed’s hammering it’s not done, for the most part it seems to be falling on a market without ears. Or, is it a market that sees more than the Fed? Ironically, most are seeing it the Fed’s way, when the Fed doesn’t exactly have the best record here. Then, too, history is replete with rallies in bear markets. And the idea that most of the best one day rallies happen in bear markets has to make you wonder about last week’s 1200 point CPI gain. We get all of that, but this time there’s a bit of a difference. This is not about one day, this time stocks above their 200-day moving average have cycled from 12% to above 50%, a dramatic improvement. Historically, readings above 60% have been followed by above average forward returns, and spikes above 70% have marked new bull markets.

When it comes to stocks in general, it pretty much comes down to the haves and the have nots. More recently, it might better be said of the former, the have hads. These are the stocks that have held well through the weakness but recently have corrected. These would be names like McDonald’s (273) and PepsiCo (180), and certainly the healthcare names which have turned surprisingly weak. Meanwhile if we go through our list of potential short sales, there are virtually none left. We are told Goldman has a basket of most heavily shorted stocks which was up 10% one day last week. Another proxy for this kind of stock is Cathie Wood’s ARKK ETF (37), which recently was up more than 20% from its low a week ago. As we pointed out, often down the most turns to up the most. Meanwhile, what likely still are the leaders take a breather.

It might be time to get back to basics. You probably don’t spend too much time pondering Sherwin Williams (237), let alone Ecolab (148) and Linde (330). They are a part of the SPDR Materials ETF (XLB – 79), which has gone from no components above their 50-day, to all components above their 50-day. Over the past 70 years this shift has happened only a few times and, in this case, in less than six months. Like virtually all of these momentum shifts, positive returns were seen over the next year, according to SentimenTrader.com. Moreover, at no point was there a drawdown greater than 5%, while all showed gains of 15% or more. LIN is the largest position of XLB, and probably the best chart. Among the top 10 holdings are Freeport McMoran (36) and Nucor (142), both beneficiaries of a better China. In regard to the steel stocks, you might also look to the ETF there (SLX – 59).

We know the stock market can be more than a little perverse. When everyone is bearish that’s a good thing, but at least we know why. When everyone is bearish the selling gets done and it’s that selling that makes a low. We’re not quite sure why but consumer sentiment seems to work much the same way. The latest University of Michigan Survey showed depressed readings on present and future intentions. A six month average has now dropped to the lowest on record, exceeding the worst pessimism during the financial crisis and the S&L mess years ago. Other than being early in the financial crisis, all coincided with the end of bear markets, or were close.

They don’t let up – they being the Fed. If they’re not raising rates they’re talking about raising rates. Both have their impact on markets but so far at least, only temporarily. The Fed doesn’t want to see the market up, the wealth effect we suppose. As it happens, it’s the home builders that have been most affected by higher rates, and those stocks are all up from late October. Of course, everything is up from June when nearly 50% of all stocks made a 52-week low. We doubt we’re going back there, so you might argue the bear market is over. There’s a difference, however, between putting in a low and starting a new uptrend, a new bull market. Let’s talk about that when we get to 70% of stocks above the 200-day. In the meantime, suffice it to say they look higher and will continue to look higher until something changes, likely the A/Ds. Strength in the averages needs corresponding strength in the average stock.

Frank D. Gretz

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DJIA: 32,001

Hope springs eternal … or do we mean wishful thinking? With the apparent exception of Jay Powell, we all have learned if you have nothing nice to say, and so on. And that pretty much sums up the Fed meeting. Yet the market seems to have had in mind that it wanted to go higher. Clearly it didn’t on Wednesday, and clearly it didn’t take the opportunity to ignore bad news, as good markets sometimes do. Some dust now likely has to settle. So how can these pivot hopes be dashed so many times, and yet the market keeps coming back for more? Possibly the market just sees what it wants to see, or possibly it sees more. Possibly it sees inflation has peaked and the typically late Fed will have to pivot. Or, maybe that really is wishful thinking. To channel Mick Jagger, stay off of my cloud, and the rest of Tech. They say things change, and they have. From the M word being Microsoft (214), to the M word being McDonald’s (273). Both are in big overall uptrends, the difference is MCD is at the top of that trend. A burger and a Coke may hit the spot, but a burger and a Pepsi (178) is even better – the latter is another all-time high. According to Barron’s 27% of packaged food stocks hit 12-month highs last week. Hershey (232) looks like Microsoft in days of old. Technically speaking it’s not difficult to see these stocks continuing their outperformance. After all, it has been all about Tech for so long some change seems overdue. And that often comes about out of corrective periods. Together with the market’s somewhat more conservative leaning, and with help from those that are its namesake, the Dow Industrials are on a tear. Unlike the dot-com/new economy days, the Dow isn’t exactly old economy. Indeed the Cisco (44), Microsoft and Salesforce (146) positions are new relative to those good old days. It does seem fair to say, however, the Dow for the most part is a different economy, different for sure from the NAZ economy. To that point, over the last 30 days through Tuesday, the Dow relative to the NAZ was up more than 10%. Take that you Tech geeks. It was even up more than 5% against the obviously broader-based S&P. It’s too soon to call the revolt durable, but it is something to consider. And in the case of McDonalds and Pepsi, what’s the risk – these are NAZ looking charts anyway. The main thing going for the market has been the seemingly washed out price action. There is, however, some sign of positive momentum in terms of stocks reaching 52-week highs. In September there were a third more stocks trading at new lows versus new highs, a historical extreme. Following similar extremes the S&P’s one year return was 25%, according to SentimenTrader.com. This week the number reversed, with more stocks trading at new highs. As one would expect, returns against this backdrop are about twice that when new lows dominate. The change is a tentative one but still seems important. With the exception of some of the obvious names, even Tech is in the same position. The percentage of stocks at new highs minus lows turned positive after one of the most negative readings since the inception of the Nasdaq In 1985. We still have a ways to go, Powell said. It was another Fed to the market slap down, in this case to the. S&P’s one percent afternoon rally. Nothing new except a little misguided exuberance. And the Fed did add the phrase “cumulative tightening” to the statement, suggesting a need to judge what effect they’re having before continuing their serial tightening. It wasn’t a PIVOT, but maybe a PIV. As we say about the big up days, one day is just that. Worry less about the Fed and more about those A/D numbers. Up in the averages with lagging A/Ds is never good, regardless of the Fed. Meanwhile, oil and the like doesn’t seem to want to quit.

Frank D. Gretz

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DJIA:  32,033

Bad news …it doesn’t have to be bad.  After all, the market makes lows on bad news, not good news.  It’s bad news that induces selling, and it’s selling that makes lows.  Take that bad CPI number back on October 13, the S&P is up 10% since then.  Then there was the day of the Russian invasion back in February when the market opened down big only to recover that afternoon and pretty much never look back.  Many reasons were offered for the remarkable turnaround on the CPI number, but there’s only one that really makes sense – stocks had become sold out.  To put the day in context, the market had fallen the prior six consecutive days.  And for a little more color, consider the dollar volume of option Put buying was triple that of Call buying, by far a record.  If you were buying that many Puts, you’ve likely done a lot of selling.  It’s selling that makes a low, and leaves a vacuum of sorts for prices.

Is gold the new bitcoin?  The much hyped Bitcoin Strategy ETF (BITO-13) is down some 60% this year.  It hasn’t exactly proven a store of value, and this with inflation everywhere you look.  The best inflation hedge has been oil, and the stocks more than the commodity.  Gold has had its moments but despite the long held view to the contrary, hasn’t seemed moved by inflation.  Then, too, it’s hard to fit gold into a convenient theme.  During the great depression a 10% position in Homestake Mining would have hedged the rest of your portfolio, and that period was all about deflation.  Gold shares have stabilized and without question are improved.  Of the 40 or so gold shares we follow most are above their 50-day average, and all of the silver miners are above their 50-day.  The dollar meanwhile is below its 50-day, which should prove a tailwind for the precious metals.

Is China uninvestable?  That’s certainly the thought we had when those stocks opened on Monday, but we’ve been doing this long enough to know when even we have that thought, the worst is likely over.  That’s hard to imagine given what’s going on, but for China this isn’t the first time things have looked more than a little bleak.  Chinese stocks endured a similar bout of selling in March, after which they rallied some 60% over the next few months.  The stocks peaked in June, however, and most stocks traded to new lows.  On Monday nearly 60% of Chinese Internet stocks traded at new lows, the fourth highest in 15 years according to SentimenTrader.com.  There have been six other days when more than 55% of the stocks fell to a new low.  Some big losses follow but all showed gains over the next six months.

Three things to keep in mind here – oil, oil and oil.  Then, too, late last week much of healthcare came to life, and there is much of healthcare.  There are the big pharmaceuticals like Eli Lilly (356), the insurance guys like Humana (545), and the wholesalers like Cardinal Health (75).  Finally, there’s aerospace/defense.  When you think about McDonalds (265) and Pepsico (179) punching near all-time highs, you can’t exactly say strength is all that selective – different, but not selective.  Similarly, Deere (395) and Caterpillar (212) were among the leaders Thursday.  While no one was looking they had turned into more than respectable charts.  Meanwhile, the go-to-stocks we all new and used to love, FANG, the Semis and Tech generally, are underperforming, to be kind.  That the market has been able to ignore the action in these stocks seems an important intangible.

So how long can this keep going on?  We are always tempted to say, until you stop asking.  Sounds pretty rude, but they will stop asking when they’re back close to being fully invested.  These end of the year rallies, especially when good ones, can feed on themselves a bit in the form of job security.  If you think you’re not going to buy until the Fed pivots, you look pretty safe.  Suppose, however, the market changes the definition of pivot.  Let’s say rather than easing the pivot just becomes no more tightening.  A drop in inflation to 2% becomes just a peak in inflation.  When markets want go higher they have a way of creating their own reality.  A less esoteric answer to how far this can go is that it will go higher until it does something wrong.  Wrong typically is about those Advance-Decline numbers.  Strength in the Dow without strong participation is how markets get into trouble.

Frank D. Gretz

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