Daily Rundown: October 26

JD DURKIN: Good morning, Action Alerts Plus subscribers. I'm TheStreet's JD Durkin talking with Bob Lang from the floor of the New York Stock Exchange after about an hour or so after the open. Markets are mixed at this hour and largely negative led, of course, by big tech. Now, Bob, I'm hearing that you believe this market is overbought. And I'd like you to explain what you mean by overbought for people that may only have a loose familiarity with it. And what is leading you to that conclusion given the conditions right now?

BOB LANG: Well, JD, markets reach overbought levels on different indicators. But when most of them are in alignment like we have currently right now, it certainly raises a red flag. And what's an alignment? We have relative strength. Stochastics are overbought. We have MACD which is overbought. We have money flow that has been strong for the past four or five days and starting to peak out here. And then we have the oscillators, which is what I look at. McClellan oscillators are reaching some extreme overbought levels as of the close yesterday.

Now, of course, markets were down sharply this morning after some earnings warnings last night, but they bounced back a bit. And breadth is actually extremely strong today, JD, almost 3-to-1 positive. So we're seeing those overbought readings get even more overbought. And that's what you have with markets when you see overbought and oversold readings. They can get more overbought. They can get more oversold.

But as of now, the oscillators as I see them still put up a bit of a red flag here. So maybe the indicators are following what happened in the earnings last night. Maybe that's a coincidence. I'm not sure. But we follow the indicators on the technical side as an important marker to make sure we're getting in at the right point or getting out at the right point as well too. But let's not mince words over here. Listen, long-term and intermediate trends continue to show that the bear market lives on.

JD DURKIN: Yeah, McClellan is a market breadth indicator. Now, I like the McClellan oscillator. And I'm hoping you could walk our viewers through to say, hey, I want to see that sort of information. What is the best resource you recommend to people to say, oh, I've heard about that sort of indicator. I want to become better versed in it. Where do you recommend they take a look?

BOB LANG: Well, any chart platform can show the McClellan oscillator. It's called the NYMOT, which is the N-Y-M-O-T. For instance, if you went to stockcharts.com, which can be done for free-- I use something called trendspider.com. TrendSpider is one that has a lot of different features and functions. But you can find these anywhere.

McClellan's have sold their product out to other companies to allow others to use it for free. If you're using a trading platform such as TD Ameritrade or Thinkorswim, these are readily available. You can see all these ratings every single day.

JD DURKIN: Bob, what does this tell you ahead of the all-important holiday shopping season? It is bigger for some names than others. But I'm curious what's top of mind for you as we enter our way through already, somehow, at the end of October.

BOB LANG: Hard to believe, right? I'm already seeing a lot of holiday stuff going up in stores. We haven't even gotten to Halloween yet. So holiday is interesting here, JD, because this morning, we saw a reading on inventory levels on the retail and the wholesale level. And they've dropped a little bit from the prior month but still are very elevated levels right now.

I think from the summertime, the numbers have come down quite a bit. But still, as we head into that holiday season-- we're only, what, two months away from Christmas? In fact, I think a lot of these retailers are going to be scrambling to try to get product out the door and get them sold before 2023 starts.

And I think what we have is kind of a stalemate going on, JD, with retailers and with shoppers. Shoppers are just waiting for those bargains to hit, looking for those 40%, 50%, 70%, off maybe even more, bargains that they can get either get on Amazon or through Macy's or through other retailers as well too.

I think inventory levels still abnormally high, JD. They're going to be taking a big hit on margins, most of these companies, retailers are, when the discounting is commenced. So I think that that's something interesting to watch for over the holidays.

JD DURKIN: Yeah, inventory a huge challenge, especially for a lot of the retailer names that have sat there over the course of the pandemic and said, oh, we have quite a lot of stuff we need to sell. We also heard quite a bit from big tech last night, including earnings from Microsoft and Alphabet. We got to start with the folks over at Alphabet. Miss on top as well as bottom lines here. How concerned should members be about the reduced growth estimates? This is a big one from Alphabet, isn't it?

BOB LANG: Sure is, yeah, and tough quarters for both these stalwart companies. They both said that there were headwinds coming up in the economy. And maybe they're being a little bit more conservative here. Who knows? But certainly seeing some weakness in their margins. This has been happening, though, for the past quarters for Alphabet.

The last four quarters have seen declining revenue growth and earnings growth, and now we have a negative reading on both of those from year over year. So this is a bit of a concern for us. But listen, these companies are big. They're large size, and they span a lot of areas.

For Microsoft, it's consumer. It's retail. It's technology. It's cloud. And for Google Alphabet, it's search and mobile and advertising. So when these areas of the economy start slowing down, even the biggest among them are going to feel some pain. And this is what's happening with Microsoft and with Alphabet right now. So these companies are stuck in cycles, and the cycles are going to go up and down. Currently, I think we're heading into a down cycle. So these companies are going to feel the pain of that part of the process.

So the guidance was poor, as expected, from both of these companies. And these former leaders are struggling right now. So we're pleased to have sold some of these shares about a month or so ago. We sold some Alphabet at around $105. We sold some Microsoft about $255, $256, though we do have some in the portfolio still. But we were happy to get rid of some of it.

JD DURKIN: Yeah, a lot of these big names are ensnared by the macroeconomic environment here. And you mentioned there Microsoft feeling the pain. But specifically here, a lot of weakness in its cloud computing business. This is part of the earnings report, Bob, people tune in so closely to hear. And it may have done better in other parts of the earnings, but it's cloud computing. And I wonder from your perspective, how are you approaching this one?

BOB LANG: So yeah, this cloud computing part for Microsoft [INAUDIBLE] has been a linchpin for their earnings for the past couple of quarters, but now it's starting to slow down. We did see recently some worries and concerns from some chip companies about the PC market. And certainly, Microsoft is right in the forefront of all that business.

And we did hear them say that they see a much greater slowdown in the PC market coming into 2023 and beyond. So I don't know, really, where they're going to pick it up. But they are in the gaming area. Of course, they have the Xbox. They're trying to close the deal for Activision a little bit later on this year, maybe early in 2023.

So I don't see where the growth is going to be coming from here for Microsoft. It did take their numbers down severely to single digits or possibly even negative growth for the coming quarter and coming couple of quarters. So again, I don't know where that growth is going to be coming from. And I think the down move here in Microsoft today, JD, is reflecting that hesitancy and that worry from big investors.

JD DURKIN: Yeah, absolutely. I do want to talk Chipotle with you here, Bob, because we did see earnings from that company continue to cook up-- see we did there-- strong results despite a recent price hike. What does increasing pricing pressure tell you about any potential action from the Fed?

BOB LANG: Oh, I love that. That was beautiful, cooking up-- this company beat really nicely on the top and bottom line here. And they've been managing to push through price increases on their burritos and tacos and other items that they've been putting out there like quesadillas and so forth. And not only have they been pushing higher prices through, but they're sticking.

And even as their costs continue to rise, they're able to keep those margins fairly lofty, which is interesting because if their prices start coming down, those margins are going to start increasing because that spread between what they're paying for a burrito and what the retailer is charging or the consumer is paying for that burrito is going to widen as well too.

So we like the position where Chipotle is in. They've been taking share. And again, increasing prices-- they're kind of in the sweet spot right now. Eventually, it's going to fall on-- it's the law of large numbers for them. But at this point in time, I think I like the trajectory. I like the direction that Chipotle is in. They're going to be opening up quite a few new stores as well too in 2023.

The sticky margin situation is going to help drive their growth over the next couple of years as long as they're able to keep those prices elevated. So in the end, a higher-rate environment-- you asked about the Fed. A higher-rate environment is going to present a lot of challenges to companies, even Chipotle and others like Pepsi, ones that we have to decide between what's more important. Is it market share, or is it margins? And that's never really a happy discussion for management teams to have.

JD DURKIN: Yeah, certainly not. More than its few share of headwinds for a lot of these big companies in the days and weeks and months ahead. Thanks a lot for taking the time, Bob. Great to have you here as always. As a reminder for you watching at home, please keep sending us your questions to aapclub@thestreet.com. Thanks a lot for joining us, and we'll see you next time.