THE BOTTOM LINE
While some internal metrics continue to suggest improvement in the demand under the stock market, the behavior of investors this past week is suggesting a “wait and see” attitude is guiding their behavior, perhaps until election uncertainties are resolved. There are global risks, and the very real risks of rising interest rates, in addition to the uncertainties of the pending election. And, this past week investors seemed to be gravitating toward a “wait and see” posture toward the stock market.
Investors tepid behavior toward the stock market may linger until resolution of the current election uncertainties, but unfortunately we also live in an environment of global risks, which our potential enemies may attempt to exploit during the run up to the election, or in the post-election aftermath, in a test of our resolve to retain our long standing role as protector and defender of the free world. Unfortunately, there are multiple choices for potential mischief makers working contrary to our global interests, and one or more of them may decide to take our domestic division, as an opportunity to escalate their own agendas to test our resolve to remain the leader of the free world.
However, even if global bad actors do not cause any mischief, the incoming administration, be it Democratic or Republican, will be immediately facing daunting challenges domestically, and abroad, which have no easy solutions. And, chief among them is our massive federal debt, and rising interest rates. Our national debt as a percentage of GDP just tied the record high set during WWII, making us particularly vulnerable should interest rates continue their recent drift higher.
Investors would do well to expect an increase in volatility both before, and potentially after the election, albeit inside perhaps a range bounded by the September 2-3 all-time high and S&P-500 3400 until the election, and then perhaps a breach of the range in the post-election period.
A World of Risk
Investors demonstrated a reluctance to make big decisions this past week with an important election looming less than two weeks away. The stock market has traded in a range since the September 2-3 high with support at S&P-500 3400. Strategic and tactical supply and demand indicators have remained tame, and range bound as well, confirming investor reluctance to get in front of the uncertainty represented by the election, and the potential for sweeping political change, or on the contrary legislative deadlock should the outcome turn out to be less than definitive, or even worse contested in the courts. While we do not make predictions, a reasonable case can be made that the tepid action of the last couple of weeks may continue until more certainty arrives to tip the supply and demand balance in one direction or the other.
I have some concern that while all eyes are focused on the domestic election, and post-election, mischief abroad may become an unexpected factor in tipping the balance of supply and demand. Mr. Putin and his lust for territory in Ukraine, or the Baltic region, comes to mind, and then there is North Korea, or China’s claim for most of the south China sea including reunion with Taiwan, so multiple choice on the potential for the unexpected abroad. However, while the current occupant of 1600 Pennsylvania Avenue dotes on the stock market, below the financial radar has been the steady decline in the bond market, which means interest rates are rising, which could generate even more uncertainty in an already uncertain environment. We live in a risky world, which is not presently reflected in the risk component of interest rates, as nominal rates hover barely above zero, which by definition is an abnormal and atypical condition. One must wonder how long creditors will be satisfied to lend their capital in a risky global environment without demanding a reasonable, and commensurate risk premium.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in Snapshot-378 in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week in the caution zone at 124 without ever gathering enough strength to assault the red zone beginning at the 140 level. The negative divergences in place since the February and September highs remain in place, as does the negative divergence in the premium/discount indicator in the lower panel of the TATY indicator. This means the components powering the price are relatively weaker now than at the all-time highs in February and September, which implies the price may be vulnerable to the arrival of an unexpected event, and/or news.
TATY continues to warn that conditions driving the price to new all-time highs may not be as strong as the new price high suggests. So, without historic precedent to guide us, I will take the picture being painted by TATY as a warning that the September all-time high in the Dow and S&P-500 were made in an environment, which may be of a rising risk nature, which is difficult or impossible to quantify. And, which may become more critical should the rise in interest rates accelerate for a number of reasons including creditors demands for a more appropriate risk premium.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in Screen-shot 167 (Daily) and below in Screenshot-168 (Weekly). Screenshot-167 clearly shows the steep negative divergence in place before the September 2-3 all-time highs, which was a warning to not follow the euphoric crowd into buying top tick so far for the bull market. And, the horizontal magenta line shows that significant resistance is in place marginally above the current price level. While a number of internal metrics have improved in recent days, this resistance level vis-à-vis the SAMMY indicator remains, and will likely require further strengthening in the internal metrics before the price, and the indicator can break out higher. Given the lack of evidence so far that investors are comfortable with taking on more market risks prior to the election, a reasonable case can be made for increasing volatility, but perhaps confined to the recent range, as opposed to a breakout sprint higher.
Screenshot-168, in like manner as the negative divergence shown on the daily SAMMY chart, shows the yawning negative divergence in place prior to the February all-time high in the price. That divergence was a warning not to follow the euphoric crowd into buying top tick for the rally to date. Long time readers of these updates will remember that measures of bullish sentiment were touching historically high levels at that price high, as were valuations. Unfortunately, the warning also proved a harbinger of the swiftest decline to 20% down from a new all-time high in history, but the potential for such a steep decline was readily not apparent at the time. So, we got the “do not buy” message, but were subsequently surprised by the rapid decline to 20% off the high.
The current message from the weekly SAMMY chart is that much demand energy will likely be required to move the price to new all-time highs, until the resistance shown by the horizontal magenta line on the SAMMY weekly chart is breached on the upside. A breach in this resistance area on the SAMMY weekly chart may cause a short covering rally, and a subsequent sprint toward new all-time highs in the price. Given the length of time the resistance has been in place, a significant increase in demand, and corresponding decline in supply, would appear to be required to power the price to new all-time highs, which is possible but not probable given the apparent evidence of a “wait and see” attitude on display this past week with tepid investors.
Please stay safe!