Thinking Outside the Box… the Technical Box

DJIA: 51,232

Thinking outside the box… the technical box. The technical box is where those indicators live, things like advancing versus declining stocks, stocks making new highs versus new lows, stocks above their various moving averages, and that sort of thing. The look there is “buckle up, they’re going down.” That said, we’ve come to think of this market from a historical perspective rather than one strictly by the numbers. Most markets respond eventually to technical parameters, but to borrow from AI, some do escape the sandbox. Nvidia (NVDA – 230) certainly has the look of Cisco (CSCO – 115) back in its day, AI the look of the dotcoms, and the rest of this market, the old economy of 2000 which languished.  No two markets are ever the same, and this one has its dangerously weak side.

If the 1999 scenario were to play out, it’s not as scary as you might think. Indeed, scary was the outcome for sure, and scary was not recognizing the new economy from the old economy as they were called back then.  If you had figured that out, the period leading up to March 2000 was quite profitable. The Semiconductor Index (SMH – 607) just had a 20% correction and now seems back on track – Nvidia just broke out.  Software is better, making XLK (198) with its holdings of Microsoft (MSFT – 523) and Nvidia attractive. This seems the new economy. Meanwhile, rates are hurting sectors like Home Building, while inflation and affordability hurt Staples, the old economy. And no two markets are ever the same?

After that Tech table pounding, have you ever considered buying a Utility stock? In the words of George Carlin, if you’re like me and I know I am, you might rather stick needles in your eyes. That sort of says it all, when opinions are that dire, that seemingly one-sided, could be time to think reversal. We’ve actually come to believe that from time to time we are not a bad indicator when it comes to our own opinions, it’s human nature. And, Utilities are after all Utilities, not exactly cool in the best of times and not exactly risk free in periods of rising rates. Still, sentiment alone is not reason to buy stocks, and washed out can become more washed out. In this case, however, there is some helpful data. Only 5% of Utility stocks are above their 200-day average, leaving a win rate of some 90% one year out, according to Sentimentrader.com.

Comparisons with the dotcoms make most uncomfortable. Yet, many make the comparison as evidence this market is not a bubble. The dotcoms, it’s argued, made no money while most of AI are minting the stuff with no end in sight. All too true, but it misses the point. Bubbles are not about the numbers, they’re about the psychology.  No one is buying AI because the companies make money or because of a P/E ratio. There’s a story and the stocks go up. They’re buying because they expect the price of what they buy today to be higher tomorrow. The trend overrides the reason for the trend. While the dotcom bubble seems fresh in the minds of many, apparently less so is the “Nifty 50” bubble, which led to the 1973-74 bear market. Those Nifty 50 companies made money and sold at what at the time was an unheard of 30 P/E – it didn’t help.  

If a replica of 1999, there’s risk to all that is not Tech. If it’s not 1999, there’s a risk to all. Divergences don’t end well.  It also has been suggested that the divergences can be self-correcting. Hope springs eternal, but that would go against a lot of history. If you look at a chart of stocks above their 200-day average it swings from 70-80% to 20-30%. It doesn’t stop in the middle, so to speak, since once set in motion, downtrends usually end in a more general correction. Unlike market lows, where stocks often make lows together, peaks are a process, stocks peak a few at a time, and that takes a while. Best to look to the strong stocks – typically the last to give it up are the first to make it back.

Frank D. Gretz

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