DJIA:  37,440

Wring out the old … ring in the new?   Quite a change to start this or any new year.  Profit-taking in last year’s winners and dip buying in last year’s losers.  It also saw some interesting numbers on that first day of trading – the Dow modestly higher, a very weak NAZ and 1700 advancing issues.  All things being equal, not a bad configuration. Those A/D numbers were pretty much the same for the NASDAQ, surprising given the weakness there.  Clearly Tech was the most prominent part of the weakness, but it was almost anything that has done well recently.  Meanwhile, just when you thought a stock like Hershey (191) might never lift it, other food and pharma stocks did quite well.  The question, of course, for how long.  With the overall background favorable, ideally this dichotomy will meet in the middle.

Despite this week’s setback, history and its probabilities still seem on the market’s side. The upside momentum we’ve seen carries with it some impressive outcomes.  If we look at the broader S&P 1500, 90% of the components there are above their 50-day average, a number with a 90% probability of higher prices six months later, according to SentimenTrader.com.  The Equal Weight version of the S&P (RSP-155) has cycled from a 52-week low to a 52-week high near record time, also suggesting higher prices over the next six months.  Of course, probabilities are not certainties, but they should put the odds in your favor.  If God told us to buy 1000 S&P call options, we would first say thanks, and then ask where to put our stop.  For the S&P, the Index is teetering on its exponential 21-day weighted averages, one utilized by IBD.  Granted it’s a trader’s measure, but the S&P has been above it since November 2, making any break somewhat noteworthy.

The worry we have about Tech is that everyone treats the stocks like they are the companies.  They’re not – they are pieces of paper and pieces of paper can become over owned, or just go out of favor.  One of our favorite charts is a long-term chart of McDonald’s (292) from the 70s and early 80s.  McDonald’s in 1973 peaked approximately at 75, went down to 22 in 1974, rebounded to 66 in early 1976 and then went sideways for the next five years.  Interestingly, the earnings continued growing throughout the decade at a compounded rate of 25% a year and the company never missed a quarter.  Despite all that, by its 1980 low McDonald’s was selling at 10 times trailing 12-months earnings, compared with selling at 75 times trailing 12-months earnings in 1973.  Even good stocks can become over owned and/or fall out of favor.   

With the leadership dust more than a little unsettled, a stock like McDonald’s might make sense.  It didn’t have a great year last year, thanks to a 20% drawdown in August – September, but has a more than decent uptrend going for it now.  Also going for it, it could easily be among our Other Mag Seven stocks in that it has a great long-term pattern.   As things sort themselves out, you might also look to Oil which also didn’t have a great year in 2023, and it has failed to respond to threats in the Gulf.  Still, if not quite ready for prime time, the stocks are shaping up, and are among the laggards that are a recent market focus.  Among the better charts are Diamondback (156) and Phillips 66 (135).

Tech isn’t going away, but it could go dormant.  Not dormant like MCD in the 70s, but dormant relative to last year.  Clearly it’s too soon to say, weakness there is what the old westerns used to call a flesh wound.  The stocks of course have had runs that deserve a break, and now there seem options.  If Hershey is not on your diet, there are many healthcare stocks with good short and long-term patterns – even most of Biotech has a turn.  With all the recent cross currents, the best guide to overall market health isn’t the NAZ, S&P, or even the RSP, it’s the average stock.  Because the large caps dominate the Averages, the Averages for now can be almost misleading.  Dare we say, look to the A/Ds as a better guide to market health.  When most days most stocks, go up, whatever they may be, markets don’t get into trouble.

Frank D. Gretz

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DJIA:  37,248

It’s the most wonderful time of the year… thank you J. Powell.  In reality, it’s the market’s momentum off of the October low that should be thanked.  We have alluded to the 6-to-1 up day a couple of weeks ago and the 10- to-1 up day of 11/14, and now Wednesday’s 7-to-1 up day.  It’s important to remember these occurred within a cluster of positive days, recently five, rather than standalone events.  Stocks above their 200-day have more than doubled from the October low, and more than half of the S&P reached a 21-day high last week.  This also happened a year ago when the market began an 8% rally.  Perhaps most important in any discussion of momentum is the idea of its durability – it doesn’t turn on a dime, rather it takes time to unwind. The other part of the analytical equation is investor psychology, or sentiment, always difficult to interpret this time of year.  The VIX has dropped to 12 from the low 20s, not a worry in December.

It may be a wonderful time of year, but December isn’t always easy.  Recently, IBM (163) has outperformed Microsoft (366) and Intel (45) has beaten Nvidia (484).   As measured by the Roundhill Magnificent Seven ETF (MAGS-33), those leaders have been stalled for a month now.  We suspect this might simply be called December.  Meanwhile, Monday saw six of our Other Magnificent Seven reach 12-month highs, and Parker Hannifin (455) had done so a few days earlier.   Either we are better than we thought or there’s more to this market than just Tech.  Then, too, it could be an early indicator of a shift away from over priced/over loved Tech, but it seems a bit premature to go there.  Certainly the charts are intact, and for now pause seems more the correct take.  When it comes to our Other Mag Seven, the added appeal seems their long-term uptrends – see the monthly charts.

Of our Other Mag Seven, many have an economic leaning. We’re thinking here of names like Cintas (563) and Fastenal (64) among others.  Grainger (829) has a segment called “endless assortment,” Cintas deals in uniforms and other workplace supplies, while Fastenal does nuts and bolts – not very techy techy, as Penny might say. That these companies act as well as they do helps assuage our worries about the economy.  Nonetheless, and you can quote us here, you never know.  While the tightening may be done the lag effects of that tightening may not be completely clear.  On the positive side, the world did change in October.  Yields peaked, the Banks and every other rate-sensitive area began strong rallies.  Rates remain high enough to impact the economy, but the market has taken a decidedly optimistic view here.

Natural gas has been under pressure to the point that the worst may well be over.  However, there is a seasonal pattern which started November 4 and will persist until February 15.  During this period Nat Gas has been lower 25 of 32 years.  If not lower, odds are for continued underperformance. Since Nat Gas is typically in Contango, a Spanish dance we presume, there is a downward bias to the UNG ETF (5), according to SentimenTrader.com. Also of note is an apparent washout in Consumer Staples.  Back in October half of the stocks in the XLP (71) reached a 52-week low, capitulation sort of numbers.  Stocks there above the 50-day were only 5% and since have moved above 80%.  This sort of extreme momentum shift has led to higher prices in almost every case. The real impact starts around now, typically some two months after the washout.

Good news out of Powell?  Who would’ve guessed.  We had expected his usual “lean against” performance, which the market then ignores.  The Fed it seems now sees what the market has been seeing for a while. Meanwhile, of course, it’s the market that makes the news, and it’s a market that has acted well since the October low.  Someone once said the secret to forecasting is to keep forecasting.  Forecasting is hard – we prefer to stick with observing.  It’s a strong market.  When that changes we will follow the advice of Keynes and change our mind. The change, of course, will typically show up in the average stock rather than the stock averages.  Through all this, there have been bad days, but no bad up days – days up in the Averages with negative A/Ds.

Frank D. Gretz

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DJIA:  36,117

They say November borrowed from December.  Momentum isn’t something that’s borrowed, it’s something that unwinds of its own accord.  Last Friday’s 6-to-1 up day and the 10-to-1 up day of 11/14 speak to momentum which will take time to unwind.  December’s early problems might best be blamed on December – it’s a good month but one rife with crosscurrents.  Will they continue to sell the winners, the Mag 7 and the rest of the Tech, and buy the losers, the Financials and the rest?  Or will they revert to the winners – Apple (194) did break out on Tuesday.  Regardless of the outcome there, the sold out seem just that – sold out and unlikely to go lower.

All Bitcoin wants for Christmas is its ETF.  It may not be for Christmas, but it’s said to be in early January.  What is seen as inevitable rate cuts also has been a driver for Bitcoin, and the usual suspect short covering.  We are not quite sure of the logic here, but we are sure of those lines on a piece of paper called a chart.   It’s an impressive break out and uptrend.  Bitcoin, of course, isn’t for everyone.  And it may well be another case of buy the rumor, sell the news.  Still, it seems another case of momentum not likely to go away in a hurry.  The existing ETF, BITO (21) seems a reasonable way to participate.

Frank D. Gretz

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DJIA:  35,950

Sufficient unto the day… is the evil thereof.  Less biblically, it’s good enough for government work.  Of course, we’re talking about the rally off the 10/27 low – it’s good, but yet to be great.  While we don’t find instant coffee fast enough, we are told these things sometimes take time.  Meanwhile, there’s enough to at least muddle us through year-end.  The enough in this case is momentum, and it goes back to 11/14 if we were to single out just one day.  That day saw advancing issues 10 times greater than those declining, and it was a 90% up day.  Also, more than a quarter of all stocks rose by 4% or more, according to SentimenTrader.com, a real rarity.  Stocks follow through to this kind of momentum pretty much across all time frames, the only problem being the small sample size.

While Nvidia (468) garners all the attention, of all things Intel (45) recently has outperformed. Together with almost daily new highs in IBM (159) and Dell (76), it’s enough to make you think PCs are here to stay. These may not be as much fun as the Mag 7, but that’s only true if you define fun as volatility rather than making money.  In any event, the real point here is that it is encouraging to see stocks like these acting well, in addition to the Nvidia’s of the world.  Meanwhile, the Cyber stocks make so much sense it’s a wonder they haven’t done better, but they did have a great week.  Perhaps most interesting was the price action in Zscaler (198).  The stock gapped down eight points or 4% at the open Tuesday yet managed to close modestly higher on the day.  Of course, opening gaps don’t really matter if they’re filled during the day.  And gaps typically don’t matter unless they change the price trend, which in the case of ZS was unlikely.

Obviously, there has been more to the upside than just one good day.  For what seems a good rally, however, it holds some concerns. The percent of stocks about their 200-day, for example, remains below 50%. While up from its low around 30%, the S&P is up some 12% from its low.  There’s no magic number here, and while the A/Ds have been positive throughout the recovery, we are surprised more stocks haven’t been pushed into uptrends, that is, above their 200-day. Meanwhile, on the NASDAQ 12-month lows numbered more than 300 issues, also a surprise given the 10% recovery there. None of this is rally killing, and for now we are happy to buy into the progress not perfection argument. However, these numbers need to improve.

Had you invested 10% of your portfolio in Homestake Mining back in 1929, it would’ve hedged the rest. What is surprising is that was a period of deflation, not the inflationary backdrop against which Gold typically is associated. Perhaps the recent better price action in Gold is suggesting at least a period of disinflation. Meanwhile, whatever the driver Gold is acting better, though Gold and “false dawn” have become almost synonymous.  Gold is in one of its historical four year down cycles which should last through next year. However, after the always difficult October, Gold tends to rally through the following February.  Also, the Dollar is now a tailwind.

While the market looks higher through year-end, we doubt it will prove as easy as it looks.  December may be one of the most positive months of the year, but typically there’s a downdraft someplace along the line. If not actual weakness, there’s the jockeying which comes with year-end – buy the winners or is it sell the winners, it’s never quite clear. If anything usually proves true, it’s don’t sell the losers, which by now are usually sold out. We may have seen a little of these cross currents Wednesday and Thursday when Tech sold off despite for the most part good news.  If worry you must, the market did sell off when Nvidia reported last July. Through what could be a lot of noise in the coming month, it’s even more important to watch the average stock, the A/Ds to gauge the market’s health.

Frank D. Gretz

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The OTHER Magnificent 7

The Magnificent 7 have lived up to their billing.  We would contend, however, there is an “OTHER” Magnificent 7 with as good or even better charts both medium-term and, especially long-term.  Smaller in market-cap they don’t drive the market averages, and therefore don’t seem to get the attention they deserve.  While we’ve chosen seven, we easily could’ve chosen another seven that fit this criteria.

Frank Gretz

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DJIA:  34,945

So who are you going to believe … Powell or the market?  Just last Thursday afternoon Powell cautioned the Fed may not be through.  The new media spokespeople, Ken and Jamie, echoed the same admonition.  Meanwhile, stocks were up 10–to-1 on Tuesday.  One day is always just that, but it hasn’t been just one day.  Two weeks ago saw five consecutive days of 2-to-1 numbers, and a couple better than five to one.  Those numbers are hard to ignore, impossible to ignore if you know technical history.  Certainly Powell believes they may not be through, and they may not be.  The market believes he’s through, that rates have peaked and inflation as well. Could the market be wrong – it happens.  When it happens, it shows up in price action, unlike what we’re saying now.

Rallies like this often are explained, demeaningly, as short covering.  Who really knows, but by the look of some recent outsized moves in beaten down stocks, this certainly appears to be the case.  Then, too, what decent rally didn’t start with short covering?  And who really is to say? What we think of as short covering may more simply be “sold out” stocks lifting.  Often confused is just why these beaten down stocks lift.  It’s not about some sudden massive new buying interest, it’s because the sellers are done.  It doesn’t take all that much buying to lift prices when sellers are out of the way.  And we’re talking about stocks where there are plenty of losses, which already may have seen their tax loss selling.  In any event, why prices lift is not our concern, it’s the fact they do that matters.

In a market like this, who needs some stinkin’ Utility?  With the Mag 7 all the rage, any discussion of Utility stocks seems out of place.  Perhaps therein lies reason enough for a discussion and, in fact, the stocks have performed well of late.  At the start of October about 60% of Uts hit a 12-month low.  The stocks remain in long-term downtrends but have recovered somewhat.  It has been more than two months since 20% of the stocks have been above their 200-day average – the longest period since 2008.  Over the last 70 years, 17 times the sector went as many sessions with so few stocks in uptrends.  Most preceded medium-term gains, only two lost more than 5% in the next two months according to SentimenTrader.com.  In early October more than 60% of the stocks rose above their 50-day, an encouraging sign.  Also encouraging, Utilities are just one of the rate-sensitive areas benefiting from the apparent peak in rates.

What kind of Middle East war is it that can’t rally oil? Then, too, we’ve often cautioned the stock market is no place for simple logic.  That said, Defense stocks are holding their own or better, to the point of making the relevant ETFs, XAR (124) & ITA (116) look attractive.  General Dynamics (245) still seems one of the best of the household names.  Pharma has had a tough go of it for some time, and this week even Eli Lilly (589) gave way to Tech and the down and outs.  It and Novo Nordisk (100) still look attractive.  Thursday was a disappointing day for a number of stocks, especially Walmart (156) which dragged down most of retail – Macy’s (13) unable to save the day.  There was no better chart Wednesday night than WMT.  It’s enough to make us wonder if we should go back to our old job in the steel mills.  As you know we think price gaps are important, but they are so when they change the prevailing trend.  Certainly Thursday broke Walmart’s short-term trend but it remains more or less in a trading range going back to June.  Long-term the break is a flesh wound.

What’s to become of Tech?  As we sit here in full Y1K compliance, holding our rotary cell phone, it’s a bit beyond us.  Then, too, it’s not Tech, but the Tech stocks we ponder.  Tech is unto itself what the great meteor was to the dinosaur – as we speak, there’s a guy in a garage in California with a better whatever.  The stocks are fine for now, we just wonder who is left to buy.  They go up until they don’t, and that’s when they’re over- loved and over-owned – usually around the time they start giving them names like Nifty-50, dot-coms, maybe even Magnificent Seven?  Meanwhile there is a group of stocks we’ve called the Other Magnificent Seven. Most lack the market-cap to drive the Averages, and therefore live more quiet lives.  With long-term uptrends and good medium-term patterns, they are every bit if not more attractive than the Mag 7.  Names include Cintas (553), Parker Hannifin (426), Visa (249) and some lesser knowns like Motorola Solutions (317).

Frank D. Gretz

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DJIA: 33,891

One is nothing but five…that’s something. There are plenty of good one-day rallies. In fact, because of the compression in prices, many of the best one-day rallies come along in bear markets. Putting together five consecutive good days as we did last week, that’s something else. For us, good days are always about the Advance/Declines, not the Averages. A/Ds last week were at least 2-to-1, and two were 5 and 6-to-1. The consistency matters here, but so too does the degree, matching some historically significant levels. This week has been a bit more inconsistent, but this kind of momentum doesn’t turn in a hurry. Rallying bonds of course seems more than coincidence, and there’s the tail wind of November and December. Never something to be relied on, seasonality works best this time of year. Rates have peaked! Don’t believe us, believe those who should know, the rate sensitive stocks – the Financial ETF (XLF-34), the Regional Bank, ETF (KRE-41), and the Homebuilders ETF (XHB-76) have rallied sharply. These measures now are above their 50-day averages, no guarantee but clearly an important change. While a healthy financial sector may be important to the economy, their sheer number makes them important to the technical background. You might say for the market that’s one less worry. There remains, of course, the little problem of war, the problem being it doesn’t remain little. Then, too, it’s hard to worry when Oil seems oblivious. Defense stocks act well enough on their own and seem more than a hedge. Aerovironment (120) and L3Harris (181) are among the many that look attractive. Meet the twins – Adobe (578) and Broadcom (911). What they may have in common funnymentally is above our paygrade and,more importantly, not our interest. The charts we know by the look are Tech, and similar in a couple respects. Since they are twins or so we say, we’ve only displayed ADBE. The recent little breakout aside, the charts here are pretty much that of the monitor in a hospital room – alive, but not ready for release. Another perspective, again equal for both, is the look of a weekly chart. Still trading ranges, but of note here is what happened when they came out of similar patterns in mid-May. The breakouts in those patterns were the starting point for significant moves higher. Rather than the Rorschach test that are the daily charts, the weeklies show the ingredients for a significant moves higher. Remember Peter Lynch? He once upon a time ran Magellan Fund, and so well he became a bit of a pop rock star. For a manager of a mutual fund that size, that was quite a feat. His philosophy/advice was to buy what you know. Of course, he made most of his money in Fannie Mae which you may recall was an obtuse hedge fund no one really knew – and eventually self-destructed. Meanwhile, we were introduced recently to a company called Toast (14). If you’ve dined out at all, in apparently any part of the country, you will be familiar with this point-of-sale product. Doing in-depth fundamental research as is our way, we’ve asked countless waiters about this product. It gets rave reviews. That said, good to remember stocks are not their companies – the stock has been a poor performer. After last week’s rather spectacular numbers, this week’s A/Ds have turned a bit sloppy relative to the Averages, which is always how they should be judged. All things being equal this would be a concern, but all things are not exactly equal, such were the numbers last week. In part the numbers reflect the ongoing weakness in Oil shares, of which there are many and therefore have their impact. And CathieWood’s collection of the down and out can’t be up 18% every week. Still, we don’t make excuses for the numbers. More than the Averages the A/Ds hold the key to the market’s health. Powell said nothing new Thursday, in fact his comments were pretty much those of last week that led to a sharp rally. The weakness seemed a function of the week’s sloppy numbers and should prove temporary.

Frank D. Gretz

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DJIA:  33,839

A bad market … or just another bad October.  Actually, it has been a bad consecutive three months.  Despite that the S&P closed October sporting a gain near 10%.  When this first 10 months are that strong odds are some 70% November will be higher.  Then, too, “sell in May” should’ve been buy in May and sell in August. Probabilities are not certainties.  However, clearly there is a change for the better, and it started with Monday’s rally.  We never trust up openings in down markets, and every up opening last week saw the rally fade. Monday’s rally did not do so, a simple thing but change is important.  The rally has its flaws like the weak Semis and mediocre A/Ds, but lacking a real washout that’s not a surprise.  Then, too, the updraft during the Powell speech was impressive.  The key now is follow through, so far so good.

What we have seen is by no means a washout low.  What looked to be give-up sort of declines in many stocks, certainly was not evident in something like the VIX – at a peak of 23 well short of the 30-35 you might have expected in a washout.  Stocks above their 200-day did fall to the mid-20s, a level that has been reached only 17% of the time since 1928.  Certainly good enough for a low, but not the 17 of the low last October.  What did get pretty washed out was Tech other than the so called Magnificent 7, the Semis especially. The Technology ETF (XLK-170) saw only 3% of its components above their 10-day average.  To that you might say they pretty much got to everything, typical at a low.  The Mag 7 came through this pretty well, particularly Microsoft (348) and in a bit of a surprise, Amazon (138).

When it comes to wars, defense stocks are tricky.  Ukraine was a long time in the offing, and the stocks saw little reaction.  The 9/11 attack was sudden, as was October 7, and therefore a big reaction.  Stocks discount, but they’re not psychic.  They didn’t see coming 9/11 or 10/7.  After 9/11 defense stocks rallied, but then faded.  Then, too, 9/11 was more an event than a war, the war came later.  Here we have an event turned into war, but for stocks still more event than war.  Defense stocks had their initial surge and so far are holding up and more. Technically speaking, most of these stocks gapped higher, which should hold if they are indeed going higher.  These are good charts but we look at them not so much in terms of the current situation but what might be forthcoming.

What kind of war is it that can’t rally Oil?  The US Oil Fund is some 5% below its 9/27 peak.  While that’s the commodity, stocks have more or less followed, in some cases for their own reasons.  Among those reasons were the mega deals announced by Exxon (109) and Chevron (149), weakening the stocks and the ETFs that hold them.  We rarely buy weakness and don’t recommend it, and we don’t like to buy stocks under their 50-day average.  All that aside, Chevron at its recent low was some 12% below its 50-day, which for Chevron is about a lifetime.  Different stocks relate differently to moving averages like the 50-day, so 12% here is nothing relative to stocks more volatile.  Keep in mind too, the 50-day often acts as support and resistance for stocks, some more than others.

The Fed meeting was the nothing burger everyone had expected, and Powell’s little diatribe the same.  Typically, the market waits until the speech is done before doing whatever it is going to do.  Wednesday saw the rally start before that, when it seemed satisfied he wasn’t going to get in the way.  The backdrop here was more impressive than the rally itself, but Thursday’s better than 7-to-1 up day was impressive all around.   Obviously just about everything lifted, rate sensitive shares on the hope bonds have peaked.  The downtrodden, so to speak, were particularly big winners, hinting of short covering.  Then, too, what good rally didn’t start with short covering?  If you found last week’s mention of Verizon (36) a little too staid, kick it up a notch with IBM (147) – the patterns are the same.

Frank D. Gretz

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DJIA:  32,784

War is Hell … the bond market not much better. It’s hard to talk about markets considering the suffering in the Middle East, but both have had their impact on stocks.  We just don’t recall a time when for bonds it has been so much so.  The week started with the 10-Year teetering around 5% for the first time since the summer of 2007.   Just when all seemed lost, stepping up to save the day was not the Fed but Bill Ackman – well, covering a short position.  Credit where credit is due, but this hardly seems the rationale.  Consider Ackman’s Pershing Square has some $18 billion under management versus the $24 trillion value of the Treasury market.  Such is the rate concern these days that the relief rally in bonds briefly lifted stocks.  Of course, as Bloomberg’s John Authers points out, the risk is that rates will keep rising until they break something, which only then will cause them to fall.

If not breaking, Financials certainly are bending.  And not just the Regional Banks, which look more broken than bended.  Weak too have been the credit card guys like Capital One (90) and Discover (81), and the same day lenders – what could go wrong there?  Or look at Blackstone (92), not exactly in the above category, but with its own recent downside gap.  In this market there’s pretty much no place to hide, for Financials it seems particularly so.  In terms of making a low this isn’t such a bad thing.  If you’re reading this, you have been through this kind of market before and know the feeling – pretty much one of the nausea.  This sort of feeling probably tells you as much as the VIX which so far is only around 20, while a number closer to 30 seems more likely for a low.

Price gaps as you know are one of our favorite chart patterns.  The textbook says these come in different varieties with somewhat different implications.  For now suffice it to say stocks tend to follow through in the direction of a gap be it up or down.  There have been several gaps recently, perhaps none more noteworthy than last week’s gap in Netflix (404), one which historically at least makes our point.  A gap occurs when the low in a stock is some two or more percent above the previous day’s high.  Last Thursday NFLX opened 17% higher, the 15th time it had done so by 15% or more. After a few days of consolidation, the stock moved higher over the next 15 sessions, at a win rate of some 80% or more, according to SentimenTrader.com.  Of course, Russian roulette has the same win rate, but with considerably more risk.

Investor psychology is tricky, and sometimes almost amusing.  Take Nvidia (403).  Back at the end of August it was a must own, have to have it stock, with everyone just hoping for the elusive pullback.  Now that the pullback looks more like a bottomless decline, it’s hard to buy.  Granted it’s a different market than back then, the war, rates, and so on, but still.  Meanwhile, Verizon (34) is a hard stock to buy mainly because it’s Verizon.  It’s one thing to lose money in a cool stock like NVDA but sort of embarrassing to lose money in a stock like Verizon.  And even if you make money, are you going to belly-up to the bar and brag about it?  What’s cool is making money however you do it.  Verizon has been kicked around long enough you might think whoever wanted to sell it has done so.  The stock has a turn, including a gap higher the other day.

There are lows of the garden variety, and there are lows of the washout variety.  Stocks above their 200-day average already are around the mid-20s, close to the garden variety low of March.  Washout variety lows like last October saw a number around 17%.  And even March saw a VIX around 30, October around 35.  Financials as you know are many, and therefore impact the A/D Index.  Long ago we were told that’s why the A/D Index works – Financials are important.  The A/D Index has significantly underperformed relative to the Averages themselves, opposite of a bull market.  Against this pattern It seems increasingly likely the market will see a washout sort of low. Plenty of things could provoke that, the unknowns associated with the war, another spike in rates, it’s hard to say.  Then, too, it could be the Magnificent Seven themselves that do it.

Frank D. Gretz

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DJIA:  33,414

Sure it’s the end of the world … could it be discounted?  So it might seem to look at the market’s resilience.  It’s not just the Middle East, last week’s numbers weren’t exactly market friendly.  Yet for the most part things have held together pretty well – ignoring bad news being a good sign, if you believe it’s the market that makes the news.  More quantifiable, the A/Ds have been positive 6 of the last 10 days.  And while a bit of a backhanded compliment, there have been no what we call bad up-days.  When the market goes down, bad A/Ds are to be expected, it’s those up-days with poor A/Ds that cause problems.  Meanwhile, since the end of July the market has been in what the textbook would call a correction in an uptrend – a correction that has held the 200-day in terms of the S&P.  What’s needed is a little upside momentum, a push through the 50-day around 4400.

The market may make the news, but the news these days has made for some considerable volatility, and then there’s the bond market, pretty much responsible to the minute for Tuesday’s good start and poor finish.  If war and rates were not bothersome enough, then there’s China.  Markets are always rife with cross currents of sorts, this one perhaps more so than most.  We continue to think Staples are worth a look, oversold doesn’t mean over, but in this case they are historically so.  Aerospace/Defense shares have their obvious appeal, as well as the appeal of good charts.  Oil also seems a hedge of sorts.

Is Gold the new Bitcoin?  And if so, is that a good thing?  Both have seemed a good hedge only against making money.  To be fair Gold has regained a pulse of sorts, but it’s hard not to be skeptical.  We like a market that can ignore the chance to go down, we don’t like that Gold has ignored many chances to go up.  However, it has shown a better than typical response to recent events.  And to look at the usual suspects like the ETFs, GDX (30) and GDXJ (35), they are at least back above their 50-day averages.  Bitcoin has been worse than Gold, though it did come to life on the false rumor that a cash ETF was about to be approved.  There is already an ETF based on futures, and with the backing of Blackrock, a former Bitcoin denier, approval eventually seems likely.  A clear beneficiary here is Grayscale (22).

We place a good deal of emphasis on Advance-Decline numbers, that is, what the average stock is doing.  It’s always relative, of course, relative to what the stock averages are doing. Even daily it’s not good to see the two out of sync.  Down days in the Averages the A/Ds likely will be down as well.  Up-days in the Averages the A/Ds should be positive as well.  When they’re not, when there’s what we call a bad up-day it leads to problems, often sooner than later.  While we argue down days and negative A/Ds happen, there is a caveat.  And it comes about when as this last week you see a couple of outsized negative A/D numbers relative to the Averages.  This leads to divergences that are difficult to correct, and divergences eventually lead to weakness in the Averages. The timing here is unknown, but with fewer stocks participating, it speaks to a difficult market in any event.

Biden warns don’t mess with Israel!  What about messing with Taiwan?  Who was thinking about Gaza a week ago?  We haven’t even mentioned Iran – clearly there’s a lot going on.  Contrary to the norm, this sort of news can make the market – the unknown, unknowns. Little wonder the S&P finds itself backing off of the 50-day and teetering in its recent range.  Then, too, this seems as much about the other war, the bond market war.  The 10-year Treasury Yield is now back above its level on the eve of the Hamas attacks.  What happened to the flight to quality?  The prevailing fear of many, recently articulated by Paul Tudor Jones, is that investors will grow leery of US deficits, and demand higher yields.  That’s called a buyers’ strike, and still higher yields.

Frank D. Gretz

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