THE BOTTOM LINE
With the bottom of a five percent shallow decline in place, the S&P-500 has broken out to new all-time highs. In the absence of a viable relatively low risk alternative to equities, and in the absence of a “Big Chill” warning, the likely path of least resistance for the stock market is higher, as the positive seasonal from roughly Halloween to Easter has now begun. However, this does not necessarily imply that the ride higher will not be without some volatility. On the contrary, until TATY begins to oscillate with bottoms forming in the red zone, and tops forming near the blue zone at the 160 level, then the ride higher, if it happens, will likely be volatile.
Ignorance is Bliss
Last week’s update noted that although the price had made new all-time highs, it had done so on less than wonderful measures of supply and demand. What a difference a week makes, as the price has once again surged to new all-time highs on much improved metrics in the Lowry Research system and our own.
The bears continue to beat the drum of over-valuation, and historic levels of bullish sentiment, and they are certainly right. These obscene levels of either would in more normal times be reason for alarm. However, these are not normal times, and the stock market has proven over and over these past few months that it can, and will move higher regardless of some blunt market measures touching historic extremes. That which is extreme can become even more extreme, as the “herd” stampedes to buy in fear of missing out on this global liquidity driven equity bull market. For example, is Tesla, which has a tiny share of the automotive market, really worth over a trillion dollars, which is more than giants GM and Ford combined! By the way, a trillion dollars is a billion dollars times one thousand, think about that.
With a shallow five percent decline over, and a positive seasonal directly ahead due to annual contributions to retirement plans, investors are likely to see increasing references to a “Santa Claus” rally. And, even though the Infrastructure bill, which passed Friday night, and is on its way to be signed by the President Biden, has its spending spread out over ten years, the psychological impact on the markets is likely to be positive. This implies that the weakness in February of 2016, 2018 and 2020 may be a repeat in the late winter or spring of 2022, even as the bears are still expecting an immediate crash sequence to begin. And, they maybe right, but at this point there is scant evidence of such an event in the Lowry Research measures of supply and demand, or our own indicators.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week marginally above the red zone surrounding the 140 level.
Although the price managed a new all-time high, TATY finished the week at a virtually unchanged 147. However, at this point TATY has not completed any steps, which may lead to a new “Big Chill” warning, nor has it begun to form bottoms in, or near the red zone oscillating with tops near the blue zone at the 160 level. The former (Big Chill) would be reason for concern, and the latter confirmation of a strong and continuing bull trend. So, for the time being the advantage goes to the positive seasonal given the recent bottom following a shallow decline, which has now given way to new all-time highs.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICTORS
SAMMY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format.
A recent update noted that SAMMY breaking out above its red dashed resistance line implied that the price would likely make new all-time highs, even though SAMMY was still negatively diverging with its previous February 2020 all-time high in the indicator, and the S&P-500. That long time negative divergence (not shown) remains, which may be one of the reasons TATY has failed to begun to oscillate with bottoms in, or near the red zone, and tops near the blue zone at the 160 level. Taken together both indicators are suggesting that new all-time highs are being achieved on relatively less force than was in effect at the February 2020 then all-time high in the price.
Please note that as the S&P-500 closed at a new all-time high on Friday, SAMMY finished with a modest fade. A single data point does not a trend make, but this budding negative divergence needs to be watched carefully.
STERLING — A REPRESENTATIVE PROTOTYPE OF A NEW FAMILY OF SUPPLY AND DEMAND TRADING INDICATORS
STERLING is shown above in the top panel with the S&P-500 shown in the lower panel for comparison.
There are currently over two dozen members of the STERLING family of indicators undergoing testing for their efficacy in identifying short to intermediate trading opportunities. The version shown above is testing well to date, but may not be the eventual survivor of a rigorous real time trading testing process.
As the price has marched to new all-time highs, the amplitude of the swings in STERLING have grown ever tighter. This indicator family tends to form “island” bottoms, and/or positive divergences as the price struggles to bottom. More importantly, STERLING tends to form strong negative divergences as price rallies begin to run out of gas, hence its implied substantial value given that tops are so very difficult to identify as they form, regardless of their degree, or size. Some sample divergences remain on the STERLING chart shown as dashed magenta and green lines.
Investors should note that STERLING, like TATY, faded on Friday as the S&P-500 closed at new all-time highs. Here again a single data point a trend does not make, but this budding negative requires careful scrutiny.
Above shows the S&P-500 eMini futures contract with a support and resistance magenta line drawn in. The price has spiked above this resistance line, and investors should watch to see if any pull back holds at, or near the upsloping line. If the line contains any decline, then the price may be set up to sprint higher as those short the market rush to cover their shorts. On the contrary, a breach of the support line would imply rising volatility immediately ahead.
Please stay safe!
