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Weekly Economic and Stock Market Commentary: January 24, 2022



As for the stock market specifically:

It was a short week. The markets took a bath each day. However, there was some good news.

The good news is that the week was short, and it closed Friday afternoon at 4ET. That may be little comfort to investors, but that is the best I had.

For the first time in a long time we start with the YTD part of the table in the red.

As some of you know, I post these commentaries on various websites each week, including Linked In. This can present a somewhat humbling experience at times, since people can go into the archives to see what I thought at a given time, and hold my words against me.

That is a risk I will take, since I do take credit for the calls that turn out to be correct on occasion (normally in private).

Last month I wrote some about a couple of contradictory sentiment indicators. One of them told me to warn everyone about the market thrashing that was coming soon, and the other pointed to a strong gain. The following week the bulls won out, and now a few short weeks later? Well, that’s why I don’t do predictions. My views are based on data as it updates on a day by day basis.

January thus far has been a month for the bears to come out of hibernation.

We are back to the point where bullish indicator won out last month, but that is a sentiment indicator, and not based upon the irrefutable Law of Supply and Demand.

We are at a point where my spring metaphor for the stock market is compressed with a big load on top it. That is not to say the spring won’t compress (prices fall) further.

We are below the 30% line on the OTC Bullish Percent. Upon reversal to a column of Xs, that presents a buying opportunity for those who have cash built up. For others, it represents a time to take profits in one area, and move a chunk of that money to new areas of strength.

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

On the left 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.

On the left 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 nature of the evidence tells us WEALTH PRESERVATION is in effect in all areas.

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

Below is where our indicators stand as of January 21, 2022 (Courtesy Dorsey, Wright, and Associates).

On a general note:

I will keep this section short this week. The National Association of Realtors announced 2021 existing home sales moved to a 15-year record high. For the year, there was a sales increase of 8.5% to 6.12 million homes sold. The median sales price was $346,900, and increase of 16.9% form 2020.