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Another Run at All Time Highs?

Last week’s update raised the possibility that the stock market may form a bottom without first painting out the classic signs of a tradable bottom vis-à-vis our proprietary supply and demand indicators. The indicators at that point in the development of the correction were mixed, and the evidence of exhausted sellers and resurgent demand present at low risk bottoms simply had not appeared. What followed was more listless movement of the price in the established range, and then a sprint higher past the 62% retracement level on the news that China and the USA were going to renew trade talks in October.

Having been close to fully invested in most accounts, especially those which have been with us for some time, we elected to add new purchases of stocks and/or ETFs only if our indicators flashed a low risk entry was at hand. Unfortunately, a low risk entry was never confirmed, and no new purchases were executed. Failure to use the recent weakness to make additional purchases of stocks and ETFs may penalize new accounts coming in with lots of cash, but the impact on accounts of long standing will be marginal. There will be other low risk opportunities to make purchases to soak up excess cash for accounts of long standing, and for accounts coming over to us with large percentages of cash. And, a recent update listed a copious number of reasons why investors should be very prudent with new investments in equities in the weeks ahead leading up to the 2020 election, and Alexander and I will be.

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. After bottoming marginally below the red zone surrounding the 140 level, TATY finished the week at relatively strong 149. As long as TATY continues to paint out bottoms in, or close to, the red zone the stock market will likely attempt to sustain its rally, and possibly assault new all-time highs.

The premium/discount indicator in the lower panel of the TATY indicator never quite reached the important minus eight level during the correction. Excursions below minus eight is evidence of sellers being so motivated to sell that they tend to become exhausted at a high rate. Purging weak hands, or would be sellers, from the pool of investors is an important step in the formation of a tradable low risk bottom in our supply and demand approach to risk management.

The failure of the premium/discount indicator to descend below the minus eight level suggests that not all the weak hands, or would be sellers, have been driven from the current pool of investors. This in turn suggests these nervous investors could turn into sellers much quicker than longer term investors. This situation, plus the recent listing of potential risks as the 2020 election looms, causes me to be concerned that this incomplete purge of weak hands may result in the potential for a truncated rally to follow? For the time being, the recent bottom in TATY does suggest there may be enough demand for the price to make an attempt at new all-time highs at some point in the days ahead.

Our ETFs are in position to go ex-div some time in late September. Once the ex-div date is announced, I will be inclined to trim some long positions into strength, if our supply and demand indicators do not confirm any additional price rally from present levels. Alexander and I expect increasing volatility in the weeks leading up to the election, so a larger percentage of our holdings will likely be used to make tactical trades in such an environment, as compared to our core longer term investments. Successful tactical trading in a more volatile investment environment may reduce risk exposure, and significantly increase potential returns on the allocation of capital exposed to equities.

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

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

SAMMY developed a range during the correction just like the price. However, SAMMY never confirmed that the sellers had exhausted their propensity to sell, nor just as importantly SAMMY never registered any objective evidence of resurgent demand to confirm the end of the correction, and a low risk entry for new purchases. This leaves investors with too many unanswered question for my comfort, which is why I have not made any new purchases. And, given that SAMMY is a tactical indicator, please take a look at the last chart above with the SPXL overlaid. A trained trader’s eye would instantly notice that while the price has spiked dramatically higher, SAMMY has remained in its recent range, a negative divergence between the price racing higher and the SAMMY indicator displaying a case of lethargy remaining range bound. This is not a picture of how low risk tradable bottoms form in our discipline. This kind of evidence tells me the developing rally will need to gather strength quickly, or it may run out of gas sooner than investors expect.

THE BOTTOM LINE

Strategic and Tactical indicators are displaying mixed signals, but on balance a rally has managed to exceed the 62% retracement level, and an assault on new all-time highs is possible, perhaps even probable. However, the recent listing of potential risks to the bull trend between now and the 2020 election still apply, and given the mixed nature of the signals from which the rally is developing, the potential for a short lived rally is significant without follow on evidence of growing strength in an array of supply and demand based indicators. The good news is the recent correction has likely ended, the bad news is there were not the classic signs of a low risk tradable bottom before the price began to move higher, which casts a shadow on the longevity of the rally.

 

DISCLAIMER: 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. 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.” 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 Optimist Capital LLC.

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