Just when the impotent bears seemed on the verge of being completely routed, and new all-time highs for the S&P-500 were about to be touched, the stock market turned listless, range bound, and on low volume. The previous all-time high at S&P-500 3393.52 was threatened, but held as the bears managed enough strength to hold off the bulls, which appeared to be suffering from early signs of fatigue. So, another week where the master of disguise has managed to keep its true intentions secret.
There are many reasons to characterize this prolonged recovery rally as a bear rally except for one, which is the seemingly unbreakable bid under the market, as every selloff is immediately met with aggressive bidding, which has continued to rachet the price higher. The bear trap setup is classic with bullish sentiment measures hitting multi-decade high readings, and overlapping price movements, especially on the shorter time interval charts. Even so, unprecedented amounts of borrowed liquidity compliments of the Fed, the Administration, and the Congress continues to find its way into the stock market in volumes so substantial that the impotent bears have been over run time after time.
The Senate adjourned this week, and will not return until after the Labor Day holiday, so for the time being the prospect of the financial system being juiced again with liquidity has diminished. This failure to act means that the millions of unemployed depending on the Cares Act passed earlier in the spring to pay their rents, or mortgages, will fall further behind on their payments, or default outright. Most of the Depression like consequences of the pandemic have been held in abeyance by the Federal rescue packages, but with the expiration of nearly all those stop gap provisions, it will be interesting to see how the numbers registering the health of the economy change going forward. The powers that be will do everything possible to keep the economy afloat before the election, but will the markets begin to discount an escalating economic fear filled period post the election?
The failure to take out those last few S&P-500 points guarding new all-time highs this past week may become more important with the passage of time, if the recovery rally is complete. Its just a handful of points you say? Yes, just like Dow 999 was never bested on multiple attempts from 1966 to August 1982, when the price finally rocketed higher to kick off a great bull market. Time will tell if missing new all-time highs by just a few points may be just as important this time around.
The time period between now and the election will be even more important than usual, as both sides duke it out with negative, vicious, and often false ads. And, with international players chipping in, masked by the vagaries of the internet, the next 80 days are set up to be a time of uncertainty, and potentially rising volatility in the stock market. Even if new all-time highs are achieved, will the bulls have arrived at that level fatigued, on the cusp of exhaustion, and in an environment of fading liquidity as the Fed, the Administration, and the Congress fail to agree on another round of borrowed liquidity, and as rental and mortgage defaults begin to spread like the COVID virus itself? The fall of 2020 is setup to be a very interesting time, and more than one “October Surprise” is likely a very good bet with the current occupant of 1600 Pennsylvania Avenue overtly trying to suppress the vote.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in Snapshot-367 in yellow with the S&P-500 overlaid in red and blue candle format. TATY continues to paint out a negative divergence, even as the price has rallied to a zone only a hand full of points marginally below new all-time highs. Obviously this is a sign that the recovery rally to date has not enjoyed the across the board strength that powered the Dow to its all-time high on February 12th , and the S&P-500 on February 19th. The bulls have been beating the impotent bears increasingly in a rout, but past experience has shown that failing to deliver a timely knock out punch can lead to a change in the balance of supply and demand, as the ying-yang of how the markets do business begins to shift. The onus remains on the bulls to push into new all-time high territory, and if they fail to do so say by Labor Day, then the probabilities may begin to shift back toward favoring the rejuvenated bears. We can navigate either outcome, but a clear resolution of the bull/bear struggle would be critical in the determination of our tactics.
THE BOTTOM LINE
The recovery rally has many of the markings of a bear market rally, and a potential trap, save one: It keeps painting out higher highs and higher lows, as the impotent bears fail repeatedly in their attempts to break ever higher support zones. Given global uncertainties, and an important looming election, investors should prepare for increasing volatility as election rhetoric escalates, and the positive effects of the Cares Act economic relief give way to the economic realities formerly being masked by Federal relief programs.
We can navigate either a bull or bear market resolution, but until confirmation arrives we will respect the potential that the recovery rally may be a trap set by the bears. And, if the bulls prevail, then perhaps they will have arrived at new all-time highs fatigued, and near exhaustion once a short sprint due to short covering comes to an end. Even bull markets do not move in a straight line, so there will be opportunities for buying at discounts to value. However, for now the odds seem to favor preservation of capital as the most prudent strategy, until objective evidence to the contrary arrives. And, under the radar this past week was the decline in bond prices, which translates into higher yields. Rising yields imply rising risks, so yes prepare for a very interesting, and perhaps volatile fall, and winter season.
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