The Fed… A Drama Queen

DJIA: 46,108

The Fed…  a drama queen. Should it stay or should it go? Of course it’s not as simple as that. The odds are good it will go, but then it’s a matter of what they say. If implied it’s one and done that’s not good. And, too, if all goes well, will it also go well in bond land? Late last year bonds did not respond to a 50-basis point cut. The long bond as measured by the TLT ETF (90) has acted better recently, but remains in a five-year bear market. The best guide here actually might be stocks, specifically the home builders, which are acting quite well. During the housing bubble the home builders didn’t see it coming, but the homebuilding stocks did. If they are similarly prescient this time, we should be seeing lower rates at the long end.

The Holy Grail of a rate cut has been a prop for the market during this difficult month of September. It is one of the two months of the calendar year to show a loss, and one that amounts to some 40% since 1972.   On the positive side, the technical background really isn’t bad. The A/Ds act well enough, there were more than 400 NASDAQ new highs last week, and NYSE stocks above their 200-day are in the respectable low 60s. It is a mixed picture in Tech of late which has raised some concerns, but mixed seems the operative term. Nvidia (NVDA – 177) is in its typical stall following earnings, but obviously not so Broadcom (AVGO – 360) or Oracle (ORCL – 308). Software shares have been weak, but have stabilized of late.

Lower rates should be a good thing for Gold. Gold’s problem is that it may already have too much of a good thing. We dislike terms like overbought and oversold and prefer stretched, which obviously is just semantics. These terms are a reference to what are called “mean reverting” indicators, also known as oscillators. We can show you a system using these indicators that is 80% accurate. It is 80% accurate and yet you will lose 80% of your money. Overbought and oversold markets can become more overbought and more oversold. Imagine you buy an oversold market that is actually a bear market. Chances are you’re buying half the way down. In turn, suppose you had sold Gold when it first had become overbought?  You would have missed out on quite a bit. All of this aside, let us point out that 90% of the components of GDX (70) are within 10% of their highs.  Call it what you like, that’s about as good as it gets.

You might be surprised to learn the best S&P performer this year does indeed start with an N – Newmont Mining (NEM – 80). The Precious Metals, however, are not alone in acting well, though hardly precious Uranium acts well.  And when that lustrous gray metal Antimony is acting well, you know how broad the move is. The Metals & Mining ETF, XME (86), of course is positive, but a monthly chart actually hints of a bull market here. All the more interesting since no one seems to be looking. Of course, it’s hard to talk about Metals and not think China. It’s not just BABA (155), the market there acts well despite well-known issues like Real Estate and Tariffs.

Maybe it was because of Oracle of all stocks, reminiscent of Cisco (CSCO – 68) back then, Wednesday had the look of 2000. Tech versus the rest. You fundamental guys will beat the table about how different it is this time – the dotcoms never made money, the Mag 7s are minting it. That misses the point. The fundamental argument is all true, but companies are not their stocks. Arguably rate cuts will help, but the determining factor of prices is liquidity. Our guide to liquidity is simply the average stock, that is, the A/D numbers. When most stocks are up most days, and dramatically, so on a day like yesterday, money/liquidity is still out there. When things change, as Keynes advised, we will change our mind.

Frank D. Gretz

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