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A RALLY TO SELL?

Last week’s update alerted investors that even though a classic SAMMY low risk tactical buy signal had not been completed, the stock market would probably attempt to make new all-time highs. This past week the stock market, as measured by the S&P-500, did finish just shy of new all-time highs.

Last week’s update also mentioned that the failure of the stock market to complete the necessary requirements for a low risk SAMMY buy signal may result in a rally to follow being less than satisfactory in terms of having purged all the nervous weak hands, and/or would be sellers, from the pool of investors. That observation also appears to be coming to fruition, as the rally has been more of a creeping and stumbling affair than one being powered by rejuvenated strong demand. While there is some evidence that demand may be sufficient to power the rally to marginal new highs, the overall profile of the rally leaves me uncomfortable with the notion that the rally will move much beyond the previous highs. If more evidence emerges that concerns me, then we shall be compelled to consider trimming some equity exposure by banking some accumulated profits, almost all of which already qualifies for long term capital gains treatment.

TATY   —   A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY is shown above in the first chart in yellow with the S&P-500 overlaid in red and blue candle chart format.

TATY bottomed in August marginally below the red zone and finished the week at a strong 150 level. However, sharp eyed investors will notice that with the price essentially tied with the previous all-time highs, TATY remains substantially below the level it achieved as the price was painting out its all-time high in July. Should the price touch new all-time highs, which at this point is a reasonable expectation, and TATY continues to develop a negative divergence with the price relative to its level in July, then the failure to complete a classic low risk buy signal, as this leg of the rally began, would cast a shadow of concern on the quality, and potential endurance, of this new leg of the rally. In short, I am less than sanguine about how this rally began, and I’m on high alert that it may fail to have much follow through, should it achieve new all-time highs. However, like hurricanes down here in south Florida, today’s observations are subject to change as conditions change.

The bottom line for this section is the current rally likely has enough demand under it to drive the price back to new all-time highs. However, questions remain about the strength and longevity of the rally, and strategic conditions must be monitored carefully for signs that markers for the formation of major top conditions are beginning to creep into the balance of supply and demand. The formation of a negative divergence between the price touching new highs, and the strategic indicator TATY failing to confirm by also touching new highs for its rally, would compel Alexander and I to consider cashing out some accumulated profits, and potentially lowering our overall client asset allocation to equities. Our appraisal of the potential for rising risks in the equity market will require more information over the days to come, which is ideal since our ETF holdings will go ex-dividend before the end of September, and we like dividends

SAMMY   —   A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

SAMMY is shown above alone and below with the SPXL 3X S&P-500 leveraged ETF overlaid. The three times leveraged SPXL is used for reference only.

Last week’s update reviewed the failure of the premium/discount indicator, shown in the bottom panel of the TATY indicator, to decline below the important minus eight level. Sell offs with enough power to drive the premium/discount indicator below minus eight result in motivating nervous weak hands, and/or other would be sellers, to sell at an accelerating rate, which purges the investor pool of potential supply at a relatively fast rate. The recent mini-correction drove the premium/discount indicator almost to the minus eight level, but then it turned higher suggesting a less than complete purge of the nervous weak hands, and/or other would be sellers. Such a situation could obviously leave a pool of nervous investors in the supply and demand potential mix. So, the strategic sequence related to the mini-correction concluded in a less than satisfactory manner.

The less than satisfactory strategic picture was followed by the tactical indicator, SAMMY, failing to issue a clear buy signal born of evidence of exhausted sellers followed by evidence of strong resurgent demand. And, now a somewhat wimpy rally has carried back to close to new all-time highs. There appears to be enough residual demand to drive the price back to new all-time highs, even in the absence of evidence of strong resurgent demand, as the price turned higher off the low. However, as president Reagan once said: “trust but verify”. The current rally may gather strength at some point, but until it does it shall remain a candidate for some selling into strength vis-à-vis our approach to risk management. Rallies unconfirmed by objective measures of the increasing strength of demand relative to supply are environments, where risks may rise dramatically and quickly. So, obviously we have entered a period, where constant vigilance will be required by risk adverse investors.

THE BOTTOM LINE

The good news is the market, as measured by the S&P-500, will probably touch new all-time highs. The bad news is the current leg up has begun from less than satisfactory supply and demand conditions, and will require constant vigilance on the part of risk adverse investors. The rally may gather measurable strength at some point, but until it does it will remain a candidate rally to sell into strength to reduce potential rising risks, and to cash out some hard earned accumulated profits. Additionally, the rally will likely linger long enough for our clients to collect another quarterly dividend on our ETF holdings, which are due to go ex-dividend by the end of September.

 

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