DJIA: 43,750

So far so good for Trump 2.0 … but can these knee-jerk reactions be trusted? Specifically, are knee-jerk reactions to elections to be trusted? The answer, of course, it depends. Interestingly, it’s the character of the reaction that’s important, the rally in stocks being only a part of it. Gold has been almost surprisingly weak, but based on history that has been positive – strong Gold has been associated with poor returns. Other positive elements include the strong dollar and the decent A/Ds. The rally so far has seen simultaneous all-time highs in what can be called the cyclical areas of discretionary stocks, Industrials, Financials, and Tech. Strength in these areas has lead to positive future returns.

Not all of Tech is being treated equally, at least when it comes to Software and the Semis. The latter is apparently being viewed as a Biden legacy – the Chips Act.  This likely will change, but unlikely to the detriment of Software.  We have always thought that someplace along the line there would be a speculative blowoff of sorts, and we suppose Bitcoin is threatening. Quantum computing stocks, many of which are low priced, also seem on the move. IONQ (26), where the company and the symbol are the same, also has been strong. And then there are the power companies like Talen (203), which just reported a good number, and Vistra (139). Like AI and data centers there are associated companies here like Nuscale (25) that builds the small reactors. Meanwhile, while still a good chart, we wonder how many Democrats will be Tesla (311) buyers.

Could Gold and Bitcoin actually be the same? Ever notice you never see Superman and Clark Kent together? Similarly, you never seem to see Bitcoin and Gold go together.  As much as they try, Gold and what drives it is hard to explain. It’s said Gold is an inflation hedge, yet in 1929 and after it proved a hedge against deflation. Similarly, Gold has ignored many opportunities to rally in times of trouble, even panic. It seems to cycle in a timeframe unknown to mere mortals. What is troubling Gold now seems the dollar strength, but who knows – correlation doesn’t mean causation. Or maybe the trouble with Gold recently is Bitcoin and its success.  Gold on this pullback looks attractive, as does Bitcoin.

To borrow from the Graduate, the word is garbage. More tastefully, Waste Management (222), Waste Connection (184), and Republic Resources (209). No tariffs, no supply chain problems, plenty of demand and excellent charts, what’s not to like.  They also fit the category of what we call long-term uptrends, with decent short-term patterns. The obvious advantage for these stocks in long-term uptrends is having the proverbial wind at their back. And there’s reason for these patterns – a franchise, superior management, whatever. People like to say they’re long-term investors, yet they end up buying stocks in long-term trading ranges. Among other stocks in this category are the often-mentioned Cintas (217), Grainger (1176), and Parker Hannifin (698). Back on track also seem Accenture (370) and McKesson (625).

So what could come undone? For stocks, as always it’s about the average stock, the A/Ds and stocks above their 200-day, not the Averages. All fine for now and not to look for trouble, but what might change? For stocks, that could be bonds, which already seem a worry. Rates surged on the election results on the fear of what tax cuts and tariffs would mean for inflation. They since have settled but they are important together with the A/Ds.  To curb too much enthusiasm you might consider this. The two markets have nothing in common, so for now it’s just coincidence it, but at this very early stage this market is tracking the very early Hoover Post-Election market in 1928.

Frank D. Gretz

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DJIA: 43,729

Trump rally … or relief rally? As important as the election’s outcome, it might well be there is one.  For now there are the winners, the Trump trades, and there are losers, but for how long is for now? The nice thing here is it seems another time when you get to figure things out – the time for predicting is over and now is the time for observing. Does a 5% overnight move in the Russell make sense? Is the Solar industry and the rest of renewables going away? Or are they the real opportunity here? And why sell Gold because the dollar is higher?  Won’t be long before inflation is higher as well. For sure there is a surprise here, testament to which are the boarded windows in DC.

Despite what some had thought, a Trump rally apparently was not priced in. Perhaps more to the point, any rally was not priced in. Last month’s quietly down-market helped set the stage for this rally, though its extent of course has been a surprise. It has gotten many indicators stretched in a hurry, but good markets do get overbought and stay overbought. At the very least, they don’t turn on a dime. Where you’re in is often more important than whether you’re in, and even at this early stage the rally seems to be following the historical script. Small Caps have done best during the first three months after an election, and Value best in the next three months. That said, three stocks in long-term uptrends we’ve often mentioned were strong on Wednesday – Cintas (220), Grainger (1189) and Parker Hannifin (690).

On a day like Wednesday the losers stood out. The winners, or potential leaders, were more difficult to discern against the overwhelming strength. And in some cases, you have to wonder about that strength. One clear distinction was domestic versus international exposure, the former clearly outperforming.   Still, is every Regional Bank about to merge or be free of regulations.  Or are we never using toothpaste or washing clothes? While a great company, was Nucor (161) really worth 20% more on Wednesday than the day before? And when it comes to Tesla (297), his politics should help SpaceX, but probably not sell more cars. On a technical level, the blowout move in the Averages didn’t quite see the same move in the A/Ds – not important for now, but something to watch.

It’s the most wonderful time of the year.  No not Christmas, for the stock market the most wonderful time is between now and the end of April. Since 1945 $1 invested in the S&P during this period is now worth $125.  That entails a 76% win rate and a median return of 10%. Gains of 15% occurred 16 times while losses of 15% only twice, according to SentimenTrader.com. Making this all the more striking are the returns for the other six months, when $1 turned into just $2.75. These numbers make it sound a bit easier than it is – even good markets don’t go straight up; they often move in chunks. Little question, however, it’s a good time to be invested.

It seems a lifetime ago, but last month wasn’t a particularly good one. It was the first down month after five straight up. A/D numbers saw pretty much as many up days as down, and particularly weak were the level of new highs versus new lows – virtually flat on the NAZ. The weakness overall, however, was pretty much relegated to short-term time frames.  Stocks above a 40-day moving average, for example, dropped from 64% to 38%, while those above their 200-day remained above a healthy 60% level.  Important now is that we see a reset in these numbers to go with its renewed strength in the Averages. The end to five-month win streaks by the way, does not bode ill historically.

Frank D. Gretz

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DJIA: 41,763

Still dancing … but dancing in place. While The S&P and NAZ are doing the Meringue around their recent highs, most stocks are at best stalled. Stocks above their 200-day average remain around 60% down from 70%, but still clear uptrends. Looking at stocks above a 40-day average, however, shows a drop from 64% to 43% in just the last couple weeks – short-term corrections. Stocks never go straight up and the weakness should be resolved in favor of the overall trend, on the side of the overall momentum. Earnings have been a factor, but here too the backdrop is mixed. There is a Google (171) but there’s an AMD (144), there’s a Shake Shack (122) but there’s a Wingstop (288). As always best to just keep an eye on the average stock, the A/Ds, which on balance remain positive.

A stall is clear in most of the short-term momentum measures. It also seems apparent in less dramatic ways. Good markets we like to think have their way of ignoring most bad news while going with the good. Though we’re not exactly qualified to judge how good or bad any piece of corporate news might be, we will anyway. How bad was that McDonald’s (292) news that took the stock down Tuesday? For that matter, how bad was the E. coli news when clearly it was a vendor problem not a McDonald’s problem, and clearly unlike Chipotle’s (56) problems. The same might be said of GE (172), IBM (207), and even PayPal (79). This seems symptomatic of a market that has lost upside momentum – not terminal, but certainly noticeable.

By now it has become clear there is more to AI than just Nvidia (133). Rather there is a range of related businesses that have become integral to AI and the data center. There is the infrastructure itself, where names like Vertiv (109) and Trane (370) are relevant.  It’s also about power, specifically nuclear power, and the utilities that provide it. A few relevant names here are Constellation (262), Talen (181) and Vistra (125).  Utilities already have had a good year, the ETF here being XLU (80). The Reaves ETF (UTES-64) also seems interesting in that the three stocks mentioned above are almost 30% there. And then, of course, there’s Uranium itself, URNM (47) an ETF there.

Rising yields, surprisingly, haven’t garnered too much blame for the market’s stall/weakness. Yellen’s announcement that auctions of long-term bonds will be unchanged compared to the previous quarter no doubt helped, and she also predicted there wouldn’t be a need to increase the amount of debt auctions for the next several quarters. Those auctions, you might recall, roiled markets a few times last year, and runs counter to the Trump trade idea that the Treasury will soon have to borrow more. Still, the fact remains yields are up, and this despite the jumbo cut of 50 basis points to the Fed funds rate last month. Higher rates can be a hurdle for stocks, but perhaps that’s just looking at the dark side. The positive economic data could be more than enough to explain what’s happening in Bonds.

Being wrong in the stock market is no fun – we’ve read about it. It’s especially annoying to be wrong because the charts don’t work. Annoying, but not enough to turn to the dark side – funnymentals. It seems to be happening quite a bit recently, including stocks we recently mentioned, those sketchy companies GE, IBM and McDonald’s. Being wrong happens, it’s part of the business. How long you’re wrong is the key to making money. If you recall, it was only a couple weeks ago that we were all great traders. We lay blame on the market, not that it’s bad, it’s just not the market of two weeks ago. This doesn’t seem a good time to push, especially given the chaos the election may bring.

Frank D. Gretz

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DJIA: 43,239

They were 4-to-1 up last Friday… congrats to all you great traders!  Back in our days at the Bob Farrell school of technical analysis, a colleague once quipped he was a great trader, all he needed was a bull market. We are always reminded of that when we see unusually one-sided up days like last Friday. Keep in mind, too, A/D numbers like that are not unusual when coming off of a washout sort of low, but not so common in the midst of an ongoing uptrend. The 70-80% of stocks above their 200-day speaks to the latter.  Simply put, this sort of momentum is impressive, and despite Tuesday’s setback doesn’t turn on a dime.  At market lows stocks tend to bottom together, but stocks peak a few at a time.

This idea that market peaks are a process is what makes measures like the A/D numbers and stocks above their 200-day important. They measure the average stock and the average stock peaks before the stock Averages – the big cap Averages typically are the last to give it up. Of course this adds to the psychology of a top such that while many stocks may have already peaked, the market still appears to be holding. That means there’s hope for the rest, but you know how that works out. When the Averages and the average stock diverge it doesn’t end well, it’s as simple as that. However, it doesn’t end immediately. As we’ve noted many times, it was five months before divergences ended in the Crash in ‘87.  Then, too, as markets narrow, unlike last Friday there are fewer and fewer great traders.

That Nvidia (137) should make a closing high on Monday, only to have the group take a big hit Tuesday, does seem a bit of a dirty trick. At the root of Tuesday’s weakness was the weakness in ASML (701), not exactly Nvidia, but an important Semi Equipment manufacturer. And, of course, it took the whole area lower as well – KLAC (670), AMAT (183) and so on. Adding to the surprise here, Semis have just entered a seasonally positive couple of months, with a win rate of something like 80%. Of course volatility is not exactly unheard of when it comes to Semiconductors. If you don’t care for volatility there’s always our favorite Semiconductor, Lawrence Welk. Meanwhile, a distinction needs to be made between the equipment names and the rest, including names like Nvidia, Micron (112), Broadcom (182) and Marvell (80), the latter broke out amidst the Tuesday turmoil.

Amidst Tuesday’s turmoil in Tech, it was bring your Financial stocks to work day. Tuesday’s configuration was unusually positive in that the Averages were all weak while NYSE A/Ds were slightly positive. This will only happen when, because of their numbers, Financials are unusually strong or the Oils are unusually strong. It wasn’t the Oils. It doesn’t much matter how you get there, those numbers are impressive. So too was Wednesday’s better than 3-to-1 A/Ds as the Averages recovered, not the bad up day about which we often warn.  The tide, so to speak, may finally be getting around to even Bitcoin. The relevant ETFs here might be IBIT (38) for Bitcoin, and WGMI (21) for the Bitcoin Miners. Meanwhile, Gold looks ready to go again while Defense looks like a growth industry.

Back at the end of 1974 a technical analyst named Edson Gould, at the time as famous as any, correctly told an audience the bear market had ended. In disbelief they somewhat mockingly asked what he would buy. His answer was every third stock on the NYSE. It’s easy to have that feeling now, where stock picking is almost a waste of time, and we’re all great traders. It’s fun while it lasts, it lasts until it doesn’t, but when it doesn’t there will be warnings in the average stock versus the stock Averages. Some sentiment measures already are over the top, and at a macro level equities are 25% of assets versus 15% not that long ago. These are not timing tools, but they offer a backdrop of concern should things begin to deteriorate.

Frank D. Gretz

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DJIA: 42,454

It’s not that it’s a bad month it’s just tricky… it’s October. More market lows happen in October than in most months, but more 5% corrections happen as well. A market low doesn’t seem relevant here, and a 5% correction seems unlikely. Then, too, there’s the little matter of World War III and the election and its aftermath. More important, of course, is the matter of a still healthy technical backdrop. There’s plenty of jockeying around, but within the context of 70-80% of stocks above the 200, most stocks are in uptrends and the A/D Index is only a few days from its peak. The bad news is the good news of the economy has caused an uptick in yields, and a little shift in leadership.

Somewhat counterintuitively, it’s not unusual for yields to rise following a Fed easing, and the better economic numbers have added a further push. The rise in yields in turn has changed the landscape a bit in terms of leadership. It has put pressure on those high-yielding, defensive sectors of which the Utilities are a prime example. The Utilities of course have had a great year, and therein lies the other problem. Some 90% are within 5% of 12-month highs. That’s stretched to the point the odds of a further rise are greatly diminished. Stocks like Constellation (262), and Vistra (124) are quasi-Techs these days and Techs are acting better. Still, stretched is stretched.

Last Friday’s jobs number was a positive surprise to which the market reacted in its typical knee-jerk way. This, of course, despite the many subsequent revisions to which these numbers are subject.  We find most of this economic data pretty much useless, what is useful is the market’s reaction to the news.  A measure we do find useful, however, is the Citi Economic Surprise Index which measures economic reports against analyst expectations. After one of the longest negative streaks ever this measure has turned positive. When in the past these losing streaks ended, the S&P had a very high win rate over the next year.

If defensive stocks seem in for a rest, after their rest Tech seems on the rebound. Nvidia (135) isn’t back to its highs, but it has managed to break the downtrend from back in June. And the Semiconductor ETF (SMH-255) is holding above its 50-day. They’re also in a seasonally favorable period the next month or so. Defense stocks continue to act well, with XAR (157) and ITA (150) among the relevant ETFs there. Another possibility is the Industrial ETF (XLI-136), which includes Lockheed (597) and RTX (123) among its top 10 holdings.  Also included there are PayPal (79) and Uber (78), both positive charts. We admit to rarely looking at the phone carriers like AT&T (21) and Verizon (43) and by association, T-Mobile (211). The latter, however, is completely different in that it is in both short and long-term uptrends.  It’s worth a look.

The key to this market, and indeed all good markets, is keeping things in sync. Most important there are the A/Ds. They don’t have to be positive every day, but they have to keep up with the market Averages. Divergences between the two are what kills markets, though that takes time. For some reason, everyone likes to compare this market with ‘87 or 2000, while they could not be more different.  In ‘87 divergences began in March and continued into the October crash. In 2000 they actually gave the divergence a name – new economy and old economy.  When they give things a name, it is usually a late-stage phenomenon. Remember, down days happen, it’s the bad up days that cause problems.

Frank D. Gretz

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DJIA:  42,011

Dock strike, floods, more war … October has begun like a Country and Western song. And we thought September was supposed to be the bad month. If you define a bad day as a 1% decline in the S&P, bad days happen about 10% of the time. For reasons unknown to mere mortals, or even technical analysts, they happen 16% of the time on October’s first trading day, according to SentimenTrader.com. Monday saw a 0.9% S&P decline, let your conscience be your guide here, but a 1% decline that day comes with favorable implications for the remainder of the year. When down 1% or more on October’s first trading day, from the second day to year-end the market is up every time. Whether that includes times of war and pestilence we can’t say, we can say the technical background is supportive here. Even Tuesday with all its bad news saw almost 1800 stocks advance, hardly a down day.

The fact that we got through September, the worst month of the year, and the third week of September, the worst week of the year, should not be completely ignored. Seasonality is never to be taken as an investment plan, and in markets anything over-hyped rarely works. Then, too, these concepts can take on a life of their own.  So ignoring any chance to go down is always a good thing. At a more tangible level, last week saw 70% of NYSE stocks above their 200-day. A level of 60% has produced above average returns, 70% is associated with bull markets. As for the economy as it relates to the market, some 35% of cyclical stocks recently made 12-month new highs, a number associated with better than 85% win rate for the S&P over the next six months.

When they started calling China “uninvestable,” guess we should have known. China stocks now look uninvestable because they’ve run so much. We can’t in any way say we saw the rally coming, but we had noticed a dichotomy between the terrible news out of China and their not so terrible stock patterns. To the extent technical analysis applies, and markets are markets, more than 90% of the stocks are above their 10-day average, stocks above their 50-day have cycled from 15% more than 90%. That’s momentum that should not turn on a dime, and almost remarkably it has not. Even if you think you don’t care about China, if you care about commodities, copper, iron ore, casinos, and so on, you care about China. Importantly as well, China is another tailwind for stocks here.

We always find suspect anything too obvious – it’s already discounted. This would seem true of Defense stocks, but what can we say, the charts are good. If anything, we’re a bit surprised they’re not more stretched. Of course it’s not just about these never-ending conflicts, it’s about Defense as a business. The relevant ETFs here are XAR (158) and ITA (150).  A volatile but interesting chart is AeroVironment (AVAV-201), and then the usual suspects, Raytheon (124) and the like. Our two cents is the conflict has turned more serious if now they can rally even the Oils. Tech took the brunt of Tuesday’s weakness, but Tech/NAZ has been the weak link for some time now. We’re putting this in the category of a rest, and certainly they deserve one. Something like 10 stocks account for 30% of the S&P, Nvidia (123) alone some 6%. A thought is to go with the Equal Weight S&P until the Tech rest is over.

They say the market climbs a wall of worry. Then, too, they also say the market doesn’t like uncertainty. And here we are with plenty of uncertainty about which to worry. There is the election and its outcome/aftermath and there’s the little matter of World War III. Seems best to go with the technical backdrop which for now seems favorable. We say for now not because we anticipate problems, but we’ve noticed things do change. One day they hate China, the next day they can’t get enough of it. Stick with the basics, technically speaking. Down days happen, but up days should see the average stock keep pace with the stock Averages.

Frank D. Gretz

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DJIA:  42,025

Want a Tech stock… NOW?!   NOW, of course, is ServiceNow (919), one of the best acting Techs, especially given what has become a difficult area. While we tend to speak of Tech in an all-encompassing way, there is quite a difference between the Semis and Software.  Granted the Semis are simply correcting after a big run from April, and Software has flatlined since February, but the recent relative change could prove predictive. Meanwhile it’s striking that Nvidia is 6% of the S&P. There’s no magic number but at some point the question becomes who is left to buy? With Nvidia (118) having its troubles of late, it also helps explain why the S&P Equal Weight had outperformed a weighted index. Of course both have outperformed the NAZ.

Outperforming both Semis and Software are the Utilities. While not exactly techy, supplying power to data centers seems Tech enough to lead to a 25% gain this year. And they should be beneficiaries of lower rates though clearly they’re not trading as rate sensitive stocks. REITs, Home Builders, Insurance shares are rate- sensitive and have traded well even before the Fed cut. Meanwhile, even J.P. Morgan managed to shoot itself in the foot last week – you wonder why we don’t like the Banks.  This market has also taken to soap, at least to look at Procter & Gamble (172) and Colgate (102), available at your local Walmart (78) or Costco (901). Coke (71) and Pepsi (175) also are part of the Staples ETF (XLP – 83).  While only a staple to some of us, McDonald’s (294) seems to have righted the ship since July.

Admittedly, the idea of Utilities and soap as leadership versus Nvidia in Microsoft (439) may not seem ideal. Then, too, we are talking about a few weeks, and even these temporary rotations can last a few months.  Things change, rotation happens, it’s not the worst thing. It’s one thing to lose participation without replacing it, but that’s not the case now. In fact, we could argue the tactical backdrop is net better for the change. The A/D Index is at a new high, the names that make that so are far less important than the fact that it’s so. Markets just don’t get into big trouble against this sort of backdrop. Over the years many Tech stocks have gone away, Tech/Growth never goes away. The names may change and from time-to-time extended stocks need a rest.

It’s too early to say they’re back, but Thursday saw a bit of Tech reversion. Then, too, that’s part of what you usually find – down the most turns to up the most on days like Thursday. A pullback in the stocks that have been leading also seems little surprise. It’s hard to judge durability here.  Oil shares finally lifted, Industrials made new highs – things you would expect anticipating a better economy. Then, too, we never saw the economy as worrisome.  Grainger (1030) has a division they call “endless assortment.”  Parker Hannifin (626) is the company Greenspan used as an economic indicator. Both made new highs this week.  Advance-Decline numbers have been positive eight of the last nine days, that Index is at new highs, and 70% of stocks are above their 200-day, that is, in medium term uptrends.    There’s plenty from which to choose.

Of all the times inside information might have been useful, this was not one of them. Even the market itself didn’t seem to know what to do with the rate cut news Wednesday afternoon. The fact of the matter is 25 or 50 didn’t much matter – Wednesday afternoon was just the usual post meeting dance. The real inside information wasn’t inside at all, it was last Friday’s 5-to-1 up day.  That would not have happened had the market been worried about the rate cut. Like any news, it’s not the news but the market’s reaction to the news that matters.  We can’t expect great numbers every day, but the A/Ds should keep pace with the market averages.

Frank D. Gretz

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DJIA:  41,096

Overbought, oversold … not over. Last week’s start to September was surprisingly poor. For the first time in a month, the S&P was down 2% in a day, the Dow and NAZ both dropped 600 points, and everyone’s favorite Tech stock shed more market cap than any one stock in any one day, ever. And this despite a decent technical backdrop.  So, what bell rang that first trading day of September? Or was it just that the calendar turned?   September gets a bad name in part because of September 11 and the Lehman bankruptcy. For sure the month is no prize, but blaming it for last week seems a stretch.

To put this in perspective, you have to go back to July when the Yen carry trade turned toxic. By early August the selling had left the market oversold, while by late August the recovery had left the market overbought. We don’t care for the terms overbought and oversold, which are overused and typically prove meaningless. In this case, however, they serve a purpose. If you put a 10-day moving average on almost anything you have what is called an oscillator, which ranges from stretched up or overbought, to stretched down or oversold. These measures can be as much as 70 – 80% correct at turns, but follow them and you will lose all your money. Bull markets become overbought and stay overbought, leaving you to sell and miss out. Meanwhile, bear markets become oversold and stay oversold, leaving you to buy too soon and really take a hit. The time these oscillators work is perhaps in a market like this, a trading range of sorts, but a trading range within a bull market.

By the end of August, the market once again had become overbought or stretched to the upside, leaving September more excuse than cause of the recent weakness. We could but don’t have to become deeply oversold again, and we would be surprised if we do. But even the anticipated rate cut has been out there so long it should have a little impact. Meanwhile, the election and its outcome for stocks looms, particularly in terms of some groups – note the sharp rally in Solar stocks following the debate. Regardless of the election, already there has been a shift in leadership. This is apparent even in the performance of the S&P versus the NAZ, where the recovery in the latter has lagged, at least so far.

Tech isn’t going away, it never does. Growth will always do well, and almost by definition it will always command a premium.  Then, too, as we’re fond of pointing out, growth is a reference to companies not always their stocks. Tech has had a good year; we can see it going trading range for a while. As for everyone’s favorite, contrary to what Rod Stewart may say, the first cut is not the deepest. Before collapsing 90% in 2000 Cisco (50) first recovered from three 30% corrections. These big uptrends almost always go away, but they don’t do so easily. Wednesday’s rally made that clear. Still, while Nvidia (119) has retaken the 50-day, the group has not. Meanwhile, many defensive names, which are not as defensive as you might think, act well.

The Fed, a couple of wars, the election, you might say there’s a lot going on, including the mystery that is September.  Seems best to stick with the basics, especially since the technical basics seem just fine. The market averages get all the attention, but market analysis would be better served were the attention given to the average stock. When as measured by the A/Ds or stocks above their 200-day, the average stock is performing well – not how markets get in important trouble. It’s when the Averages and the average stock diverge, the Averages outperforming, that there are problems. Down days happen. It’s the bad up days – up in the Averages but flat or down in the A/Ds that cause problems.

Frank D. Gretz

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DJIA: 40,563

The earth’s surface is 71% water … the rest they say is covered by Naeher. No, that’s not a misspelling of Nvidia, it’s the US Olympic soccer goalie who recently outperformed Nvidia (123). Corrections happen and the one in Tech was on its way even before the global margin call in the yen-carry trade. And NAZ 10% corrections are hardly rare – six in the last five years. The good news is in three cases the 10% was pretty much it. The problem is these sharp selloffs are often followed by uninspiring recoveries. The S&P reached the 10% mark only intraday, but here history shows a high likelihood of a test. Meanwhile, the recovery has impressed us in what we care about most, positive and impressive A/Ds six of the last eight days.

Nvidia’s 30% recovery from the recent low has to be called a good one. Then, too, the guy who jumped from the 50-story building on floor 25 said the fall was a good one. Nvidia’s recovery is more than good if you’re in around the low at 90, but not so much if you’re in around the high at 135. And the problem here is that there was a lot of trading in that area between early June and late July. The theory goes that is now supply/resistance. As it happens, we don’t so much worry about that, but we do worry about the 50-day which also is around 120. So, this is a bit of a moment of truth, so to speak. A move above the 50-day would certainly be a positive.

The VIX (15) or Volatility Index is one of those measures which for the most part has no message. Sometimes called the “Fear Index” it’s at those times that it screams at you. It began life in 1990 and since then has seen an average close of 19.5. It closed a week ago Monday at 35.5, and earlier in the day hit 65. That’s panic and can be taken as a sign of real selling. And of course it’s selling that makes lows, not as most think the buying. Often misunderstood is it’s the level of the VIX that’s important. In different markets and different lows, it varies. What is important is what happens after a peak. A reasonable drop in the VIX means the panic is over. Currently well below 20, it seems safe to say that’s the case now.

Typically, we place greater emphasis on momentum, market movements, rather than on sentiment, how investors react to those movements. Other than the drama of that 1000-point Dow loss and the 9-to-1 down day, we haven’t exactly seen real washout numbers. Then, too, for the Averages it has been more or less your garden-variety correction. Where there have been standout numbers has been on the sentiment side, the VIX being a prime example. Though they get little attention, and perhaps because of that, put/call ratios also have proven useful. An appeal here is they are measures of what people actually do, rather than just opinions. These numbers worked well at the low late last year, and again in May. The equity only ratio has reached an extreme in Put buying, and according to SentimenTrader.com, the ratio for retail trades has done so as well. Together with the VIX, they suggest a low is in place.

The history of these sharp selloffs is a probable test, and a struggle higher. There’s also the problem that August and September seasonally are no prize, and World War III if not already begun, could be about to start. That said, do you worry about the above, or do you believe your eyes – the recovery has been impressive. It’s rarely right to be negative on Tech, and we would rather not risk what career we have left. That said, there is real damage to most of the charts there, and remember down the most turns to up the most but only initially. Meanwhile, as Walmart (73) made clear on Thursday, there are alternatives, and in its case with a better long-term chart than most of the Tech. Cintas (768), of course, and Parker Hannifin (591) fit that pattern, and among the still positive Financials, consider Progressive (237) or AJ Gallagher (284).

Frank D. Gretz

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DJIA:  40,347

It’s likely a long and winding road … the next six months.  A couple of weeks ago there was a dramatic change in market momentum. Consecutive days of 3-to-1 advancing issues, coming near a peak in the Averages, has led to higher prices virtually every time six months out. It’s not the 3-to-1 numbers per se, it’s the idea these sort of numbers are more typical of lows rather than markets near peaks.  Last week we saw a nasty selloff that took the S&P from 5% above its 50-day to below that average. Outcomes from this pattern are similar to the one described above, that is, higher prices six months out. While this may seem surprising, there is a logic here in that sharp declines are not how bear markets begin. Those are a process. Declines like last week’s might better be described as profit-taking panic.

The Russell 2000 is all the rage. If the truth be known, we’ve often and unkindly referred to it as love among the rejects. Of the component issues an amazing 40% lost money in the last 12 months. As for what you might call the up-and-coming, they are rare. The up-and-coming no longer go public, they are funded by venture capital. The good guys, the growers, they graduate to the grown-up indexes. So how is it the Russell is up more than 10% since mid-July? It’s what technical analysis is all about – supply and demand, more buyers than sellers. The Russell is 17% Regional Banks – how many do you own? Chances are few do, and hence the lack of supply. Will it last, of course not. The problem, however, is it could outlast you. This so-called move to secondary stocks seems more simply a move to Financials, big and small.

When at Merrill Lynch a long, long time ago, we would have a 9 o’clock meeting every morning.  At the meeting we would all express our thoughts on the market. Then Bob Farrell would offer his, which pretty much then became ours.  After all, he was the smartest guy in the room, and in most rooms.  What prompts this bit of nostalgia is an indicator we used to follow back then. We kept track of the number of stock splits and found they rose with the market and coincided with peaks.  There is, of course, no magic here, rather stocks peak when they’re up a lot and when they’re up a lot they split a lot.  Still, we can’t help but wonder why stocks like Nvidia (109) and Amazon (184) after all this time suddenly decide to split.  Perhaps it’s not the mechanics that’s important here, rather the sentiment – a bit euphoric?

In market declines it’s typically only near the end of the weakness that you find the reason for the weakness. What makes this time a bit different is already there’s talk of, can you imagine, double ordering in Semiconductors. If you’ve been at this for a while, you know double ordering has been going on since Lawrence Welk was a Semiconductor. Next they may figure out there could be competition. It’s way too soon for bad news to kill Tech, that will take time. Meanwhile, Nvidia seems to be tracing out its pattern of last March. To look at Aerospace and Defense Stocks, there seems little threat of an outbreak of peace. Then, too, business might just be that good.

This market makes it difficult to talk about THE market. On the NYSE stocks above their 200-day at the end of last week were above 70% and had never dropped below 60%. For the NAZ the number was below 50%.  Much of this is about the Financials, which is not to say that’s a bad thing. And by Financials we’re really speaking of rate sensitive shares like the REITs, homebuilders, insurance brokers, banks and so. There are many. And whether you think the Fed will or will not cut in September it doesn’t really matter. The market thinks they will. The Financials seem here to stay, though come September you may want to sell on the news. Wednesday’s rally was led by Tech, but that’s more about down the most turning to up the most in a lift. Recovering won’t be easy, the winding part of the road.

Frank D. Gretz

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