We have repeatedly warned in this space that the internals, breadth or overall participation, was much weaker than the new highs would indicate. All indexes have made their final highs between early November and this January.
This column Friday, January 21, 2022
And that was correct, all major averages bumbled the rest of the year. Dow Industrials fell (numbers rounded) from 36,500 to 29,000 and is peaking again around 34,500. The SPX fell from 4,700 to 3,500 and peaked again at 4,100. The tech heavy NASD was hit the worst, dropping from 16,000 to 10,500, failing to match the other two indexes with any year-end rally.
Heroes tend to lose their luster in bear markets and we have two proving just that. Tesla dropped from 400 to 125. Now there are lots of electric cars to choose from. And Musk over leveraged himself buying Twitter for $44B. Happy Go Lucky Southwest Airlines had to cancel thousands of flights the last few weeks over its failed SkySolver routing software. Other airlines had problems but not like this. A career SW pilot post on FB blames the failure to modernize the software. Having accountants as CEO and COO focusing on share buybacks rather than operations and scheduling was a long time in coming but resulted in the photos of stranded passengers.
Our expectation is that the October rally has ended. The downtrend will resume with even more vigor in 2023. As stated January 21, our expectation is to re-visit the 200-month moving average now at 18,674 for the industrials. The transports did not make a new high so we do not have a Dow Theory buy signal. Our recommendation on closed-end municipal bond funds is working out and just generated another buy signal.
Crude Oil WTIC has dropped below its 50 day moving average of $81.49 trading at $78.40. But energy shares measured by the XLE at $86.92. Exxon is suing the EU over its windfall profits tax. After its worst year ever with COVID depressing oil prices, Exxon had one of its best ever. Team Biden of course gave no credit for the COVID losses but would also pile on a tax if it could.
I suspect the reality that we need carbon fuels for planes, trains, trucks, and even hybrid cars is setting in. And a hybrid with a less expensive battery which can also run on gasoline seems to fit the existing strained electric grid in a far better way.
Finally with a loss of 3,000 tanks, 5,800 armored vehicles and 100,000 troops, 2023 will reveal whether Putin’s double down strategy will finally exhaust the Ukraine.
We hope you have found our warnings way back in January useful. Keep reading for more in 2023.
