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A Summer To Fall Correction?

MEMORIAL DAY 75 YEARS AFTER D-DAY

During the pre-dawn hours of June 6, 2019 a restored C-47 (Douglas DC-3) transport plane will lead dozens of WWII vintage aircraft from England to Normandy in a reenactment of the D-Day invasion on June 6, 1944. The lead airplane will be the very same airplane, which led the 900 airplanes transporting thousands of paratroopers to Normandy on their missions to secure important roads and bridges, and take out enemy artillery targeting the beaches code named Omaha, Utah, Gold and Sword. The French have planned extensively with allied military to make this anniversary of D-Day especially significant (see the attached link https://www.nbcnews.com/news/military/d-day-anniversary-ceremonies-will-include-plane-rescued-boneyard-n1008181).

After the Japanese attack on Pearl Harbor, my father and his brothers Herbert, John, James, Robert and Harris all joined the Army. My mother’s brothers, Robert joined the Navy, and Uncle Frank joined the Army. Incredibly all these men survived WWII, but the things they witnessed stayed with them all the rest of their lives. In the post WWII era my cousin John Adams served in the Airborne, John Shedd served in the National Guard, and my cousin Marshall Shedd was career Navy, and was flown from Rota Spain during the Cuban Missile Crisis to Washington to brief president Kennedy on Russian ship movements through the strait of Gibraltar. My son-in-law, and a wonderful husband and father to my three grandsons, is a Marine Lt. Colonel, whose mother has worked in the Pentagon, and whose father was career Navy. And, my late father-in-law, Army General Bill Gantt, and my brother-in-law Army Ranger Colonel Matt Gantt have served with distinction on my wife’s side of the family. While we are grateful for the service of our family members, which have all come home safely, this weekend we are remembering all those, which as president Lincoln said: “gave their last full measure of devotion to their country”.

“Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of Government except all those others forms that have been tried from time to time.”  —  Winston Churchill

American War Fatalities: Civil War 750,000, WWII 405,399, WWI 116,516, Vietnam 58,209, Korea 54,206, Revolutionary War 25,000, War of  1812 15,000, Iraq 4497, and Afghanistan 2216 to date. The following link will take you to an appropriate tribute honoring those which have given “their last full measure of devotion to our country”,  https://www.youtube.com/watch?v=Omd9_FJnerY.

Alexander and I want to express our appreciation to all those receiving this update, which have served our country in uniform.

 

CLIENT AND RESEARCH CUSTOMER STOCK MARKET UPDATE FOR THE WEEK ENDING MAY 24, 2019

I have friends and colleagues of long standing in this business, whose work using other approaches to the stock market I respect. We often share our analyses, and recently one of these analysts made the case for the current correction to linger through the summer, and perhaps into the fall with a possible decline into the range of the December 24, 2018 low, plus or minus. He may be right. So, how would such an outcome look vis-à-vis our supply and demand approach to risk management, and should we change anything to account for this possible painful decline? Given that certainty is not possible in navigating the risks of the stock market, let us take a look at how this uncertainty may be navigated with the odds in our favor.

In the analysis which follows we shall assume that my friend is right, and by the way he spent part of his professional career as a strategist for Merrill Lynch in New York. In this hypothetical case we shall take a look at the potential decline not just re-visiting the zone of the December 24 low, which would be just shy of a bear market decline generally accepted as a 20% decline from a new all-time high, but all the way to a bear market exceeding the 20% guideline. Obviously there are multiple paths available for a bear market to develop along, but for this example will assume a quick and nasty decline as opposed to a complex overlapping decline taking many months. This outline will be done in the context of how the big picture strategic indicator, TATY, would likely develop as the onset of the hypothetical bear market progresses.

TATY   —   A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY, shown in the first chart above, continues to signal that the big picture balance of supply and demand remains favorable for demand over supply, as it has continued to bottom in, or above the red zone. It is a bit curious that with the recent increase in volatility, which we have been warning about in these weekly updates, that there has been relatively little atrophy in the strength of TATY, as the stock market has gyrated hundreds of Dow points a day. If the bear hypothesis is correct, then the history of the TATY indicator strongly suggests that there will be an excursion of the indicator into the caution zone surrounding the 115 to 125 level. Excursions into the caution zone have preceded every major top over the last thirty plus years, and/or the expiration of substantial counter-trend rallies during bear markets.

Nothing has a perfect record in this business of dealing with uncertainty, but it is very likely that the onset of a new bear market would once again cause the TATY indicator to go through its “Big Chill” warning gymnastics, just as it has done so consistently in the past. The “Big Chill” setup makes psychological sense, as investors tend toward euphoria as tops form, and a sharp break in the market turns euphoria into caution. When caution comes into the mix the propensity to buy and hold changes toward an urgency to protect accumulated profits. TATY painting out the “Big Chill” warning is just holding up a mirror to the aggregate shift in investor psychology from euphoria to caution. And, since human beings tend to be evolutionary creators of habit, this phenomenon of human crowd behavior tends to repeat over and over.

The increase in market volatility to date has failed to trigger a “Big Chill” warning, so either the market will dial up a rare miss for the TATY indicator, or the current decline has more work to do in order to trigger the setup. Since the strategic big picture remains favorable according to TATY, I will continue to hold our long positions in the expectation that it is likely premature to harvest some of our accumulated profits. This does not mean I expect less volatility going forward. On the contrary, I expect an increasingly volatile investment environment, as the calendar turns toward the 2020 election.

So the bottom line for the bear market decline hypothesis is that given the lack of a “Big Chill” warning so far, the odds favor investors treating the current volatility and mild to date correction as part of a potentially incomplete topping process, or just a pause in an ongoing bull market. A TATY decline into the caution zone surrounding the 115-125 level would change this outlook into one of potentially harvesting some profits during any subsequent rally following a “Big Chill” warning.

SAMMY   —   A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

SAMMY recently issued a tactical buy signal, which was followed by a rally to the 62% retracement level of the S&P-500 decline to date. Given the strategic picture remains favorable, I elected to hold our longs, even though the rebound rally appeared fatigued at the resistance level shown in previous updates. One of those updates stated that the math resistance level had to be breached in order for a another assault on new all-time highs to occur. Once the current decline is over, then I would expect another assault on the math resistance where the previous rebound rally failed. How that level is approached will be key to our trading tactics going forward. A rebounding rally with powerful metrics would likely take out the resistance level, but another fatigued type rally would likely cause me to consider taking some profits.

SAMMY is shown above with the SPXL 3X leveraged ETF overlaid, and in the last chart by itself. SPXL is traded only in selected family accounts and not in client accounts. Clients should note that the SAMMY indicator is in a rally, but the price is not rallying as sharply. This negative divergence is not a healthy sign for the rally in the price, and suggests the correction may have more work to do before it puts in a bottom sufficient to support another assault on first the math resistance, and if that is overcome. a subsequent assault on new all-time highs.

 

DISCLAIMER: Alpha Wealth Strategies, LLC (AWS), and/ or Optimist Capital LLC, does not guarantee the accuracy and completeness of this report, nor is any liability assumed for any loss that may result from reliance by any person upon such information. The information and opinions contained herein are subject to change without notice and are for general information only. The data used for this report is from sources deemed to be reliable, but is not guaranteed for accuracy. Past performance is not a guide or guarantee of future performance. Alpha Wealth Strategies, LLC, and/or Optimist Capital LLC, and any third-party data providers, shall not have any liability for any loss sustained by anyone who relied on this publication’s contents, which is provided “as is.” AWS and Optimist Capital LLC disclaim any and all express or implied warranties, including, but not limited to, any warranties of merchantability, suitability or fitness for a particular purpose or use. Our data and opinions may not be updated as views or information change. Using any graph, chart, formula or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such device. The information contained in this report may not be published, broadcast, re-written, or otherwise distributed without prior written consent from Alpha Wealth Strategies, LLC and/or Optimist Capital LLC.

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