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Weekly Economic and Stock Market Commentary: April 25, 2022


As for the stock market specifically:

It was another week of losses for investors, no matter the market average I track.

We now have all the major market averages down more than 10% for the year. Long-time readers may remember that we should expect a decline of 10% every year. This is what is known as a correction.

What we don’t know (I would charge an awful lot more if I did know) is what will occur next. Over the past few years, market history suggests we will get a rapid snapback. History going back further says there is some reasonable likelihood that the market will continue to decline to the extent to bring on a bear market about every five years. Bear markets begin when you go 20% below the “recent” high. The average bear market has a peak to trough decline of ~ 37%.

About six weeks ago, the relative strength of stocks vs. cash and bond went to favor cash and bonds. That lasted about a week before stocks made a reversal to be back in favor, at least vs. bonds but not cash. Adding evidence to the negative side, the S & P 500 did go into a negative trend with Friday’s trade.

That means I am going to be less forgiving of holdings breaking down on the charts. I will do my best to match gains and losses, but we largely have long-term capital gains with few losses. While I am not in the business of giving tax advice, I do know that capital gains tax rates are the least damaging to wealth.

What follows for the next few paragraphs is the stock text that I present occasionally.

Above I highlighted a bullish chart pattern that I will call a double top break. This is a column of demand that exceeds the previous column of demand. The “signal” occurs when the stock shows demand (buyers) at $35.00.

The blue numbers and letters are used to tell time, 1 for January, 2 for February, etc., with A for October, B for November, and C for December.

Above I highlighted a bearish chart pattern that I will call a double bottom break. This is a column of supply that exceeds the previous column of supply. The “signal” occurs when the stock shows supply (sellers) at $38.00.

The blue numbers and letters are used to tell time, 1 for January, 2 for February, etc., with A for October, B for November, and C for December.

The bullish percent is the number of stocks that have bullish patterns, nothing more, nothing less. It is calculated by counting the bullish charts and dividing that number by the number of stocks in a sector/market. Then multiply by 100 to get the percentage. A key item to remember is that all stocks that have traded for some time will be either bullish or bearish, not both.

About once a quarter, I explain the difference between a market capitalization-weighted index, such as the S&P 500, and the “one-stock, one-vote” weighting of the bullish percents. Today is that day.

The discussion comes down to a variation of this: “Why are the bullish percents increasing, but the numbers I see on TV are a little up, flat, or a little down?” Since this is election season, think of the difference in terms of the composition of Congress.

There are two basic answers. One potential answer comes from the nature of the bullish percent. It is based on the notion that a stock as large as General Electric counts as much as a stock of the size of the smallest stock on the NYSE. Think of the bullish percent like the US Senate – California counts as much as South Dakota.

The other potential answer stems from the composition of the index, such as the Dow Jones Industrial Average, S & P 500, or Nasdaq. The S & P 500 and the Nasdaq are known as capitalization-weighted. That means the largest companies in the respective index holds greater influence than the smaller companies. The metaphor here is to the US House of Representatives. There, California has approximately 52 representatives, while South Dakota has 1.

The risk indicators weakened again last week. Once again, the OTC bullish percent is sitting on the green zone. The recommendation for the week is to pursue WEALTH PRESERVATION strategies.

Remember, Xs mean OFFENSE or wealth accumulation, while Os mean DEFENSE, or wealth preservation.

Below is where our indicators stand as of April 22, 2022 (Courtesy Dorsey, Wright, and Associates).

On a general note:

The National Association of Realtors announced March’s existing-home sales.  The report that I saw did not give an absolute seasonally adjusted annualized number. It only reported in terms of percentage changes.  Existing home sales fell 2.7% from February 2022 and 4.5% from March 2021.  The likely culprit for the decline is the rise of interest rates.  In March, the median sales price was $375,300, which is an increase of 15% from March 2021, which is a record high in the 23 years of tracking.
Please contact me if you have any questions.