The stock market marked time this past week in a tight price range approximately one percent below the S&P-500 all-time high at 2941. There are number of ways in which this current situation could resolve itself, but the two most important, and opposed, are a short covering powerful rally to new all-time highs, or the rally continues to show signs of fatigue, and then eventually rolls over into a downtrend, which may be destined to test the December 24, 2018 low first, or in the worst case, as the final leg down in a very large bear market. For now the probabilities remain favorable toward more rally, but that is subject to change.
TATY — A FAMILY OF WEEKLY SUPPLY AND DEMAND STRATEGIC INDICATORS
TATY recently made a bottom in the red zone surrounding the 140 level and has now resumed its rally. When this indicator is making bottoms in the red zone it is an objective measure of the strength of the underlying demand for stocks. This condition can linger for months, and it’s history suggests that this condition must change toward weakness before the danger of the stock market forming a major top becomes a significant concern. However, this does not rule out periodic episodes of short term volatility occurring. These kinds of episodes tend to never gain enough strength to push the indicator into the caution zone surrounding the 115-125 level. If such a decline in the indicator does occur, then it is objective evidence that the balance of supply and demand under the market is weakening, and investors must be vigilant for additional signals that a major top may be forming. The indicator is shown above in the first chart in yellow with the S&P-500 overlaid in red and blue candle format.
SAMMY — A FAMILY OF DAILY SUPPLY AND DEMAND TACTICAL INDICATORS
SAMMY gave an unconfirmed buy signal in late March, which has now worked out just fine. However, in an abundance of caution to limit client exposure to unnecessary risks, I do not take SAMMY buy signals unconfirmed by other indicators such as the premium/discount to value indicator. SAMMY applied in conjunction with the premium/discount to value indicator tends to give investors buy signals, which are extraordinarily low in risks, and appropriate for adding excess cash into the market, or participation in intermediate trades to enhance overall performance with as little exposure to risks as possible. While most professional futures traders would take SAMMY unconfirmed buy setups without hesitation, adding the premium/discount to value filter is more appropriate for risk adverse client accounts. Alexander and I are risk adverse money managers, and risk management is job one at Optimist Capital LLC. SAMMY is shown in the second chart above without the S&P-500 overlaid, and below with the S&P-500 super-imposed.
SAMMY is currently showing some signs of fatigue just below the S&P-500 all-time high at 2941. This suggests that the current leg up may not have enough fuel left in the tank to touch new all-time highs before this leg gives way to a period of consolidation to rejuvenate demand. However, as long as any such period of weakness avoids pushing TATY into the caution zone surrounding the 115-125 level, then any new buy signals issued by SAMMY, which are confirmed by the premium/discount to value indicator, would be evidence that the next leg up may generate enough strength to set new all-time highs in the S&P-500. Touching new all-time highs may set off a chain reaction of short covering by institutions caught leaning the wrong way with their asset allocation to equities. Given these realities, I’d take any confirmed SAMMY buy signals in client accounts, both to put excess cash to work, and to use as a likely intermediate term trade to enhance overall performance.
Please notice that this potential trade depends solely on objective market generated evidence, and not some “expert” opinion being expressed in the financial media. I make client investment decisions based only on information generated by the market itself, and the market in this case means both NYSE based data, and modules of data taken from the derivatives markets. Incredible percentages of overall dollars devoted to risk management these days are done in the derivatives markets. This is important information affecting the overall balance of supply and demand most analysts totally ignore at their client’s peril.
THE BOTTOM LINE
The price of the S&P-500 rests about one percent below all-time highs, and an assault on new all-time highs remains a favorable probability. However, the stock market may need to digest some of its recent gains before another attempt on new all-time highs occurs, because according to the SAMMY indicator the current push up is beginning to look a bit fatigued. Current conditions suggest investors should remain invested toward the upper end of their equity asset allocation.
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