THE BOTTOM LINE
A bear market which unfolds slowly is no less dangerous and may be simply in the process taking sufficient time topping out to match the likely huge “degree” of the preceding bull market. However, all bear markets eventually reach “a point of recognition” late, or soon, which results in investors urgently feeling the need to protect their wealth. And, it is during these moments when the price is marked down sharply, persistently and seemingly relentlessly. The exercise during bear markets is to protect one’s wealth well in advance of this stage of the bear market, even though such an exercise often requires extraordinary patience to avoid the “Siren’s Song” of rising bullish sentiment during often powerful bear market rallies.
Bear-Ly Underway
The September 5th weekly update declared: “THE BEAR IS BACK!” and the bear market continues to create evidence that it is, the return of overly bullish sentiment at the recent rebound high notwithstanding, which caused us to pen the following observation in last week’s update.
Powerful rallies are an integral part of a bear market, which cause investors to continue to believe what they want to believe, which is the previous bull market is alive and about to reassert its power on its way back to new all-time highs. This is a necessary psychology to allow bear markets to cause the maximum destruction to wealth, when a less risk tolerant approach would serve to protect wealth from the ravages of the inevitable panic out of equities, when investors simultaneously recognize the bear has them trapped and an accelerating panic decline begins.
While the bulls can make a reasonable case that the bear market ended on June 17th at S&P-500 3636 the odds for this case are not favorable. If the bull case turns out to be true, then the bear market would have been one of the shortest on record and would have ended without several classic signs of a bottom having been registered, panic selling and a spike in the VIX well above 40 for example. The more favorable odds are that the remnants of the ocean of global liquidity and confidence born of bullish sentiment are acting as a restraint on a more rapid development of the bear trend. This should not be a surprise given the historic extremes set by so many market metrics as the bull market drove toward the January 4-5th top and all-time high at S&P-500 4818.
Fast forward a week and the bear has now created more evidence that it is back by having produced a grinding and overlapping decline back to the often mentioned in these updates dual Fibonacci support surrounding the S&P-500 3800 level, where the decline has begun to struggle to go lower to mount an assault on the June 17th low at S&P-500 3636. Numerous supply and demand indicators have reached oversold levels, so investors should not be surprised if the stock market rallies again, possibly powerfully, to relieve the current oversold conditions before mounting an assault on the low to date for the bear market at S&P-500 3636 on June 17th.
A breach of 3800 and then 3636 on a closing basis would likely finally cause investors to reach their simultaneous “point of recognition” that the previous powerful bear market rallies had been bear traps resulting in the potential for an accelerating decline. Investors are admonished that even if the stock market yields up another powerful rally, it would very likely only be another rally in an ongoing bear market, which is likely yet to unleash its full fury upon investors, because relative to the too numerous to list historic extremes reached as the bull was marching toward the January 5th all time high at S&P-500 4818, these are likely still early days for the newly minted bear market.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week just above the caution zone surrounding the 115-125 level at 127. TATY has flashed three consecutive successful “BIG CHILL” warnings this year resulting in the identification of the all-time S&P-500 high at 4818 as it was happening, and the two rebound highs to date during the still unfolding bear market. If the current oversold conditions yield up another (powerful?) countertrend rally, then TATY may complete another “BIG CHILL” warning as the countertrend rally begins to run out of gas given TATY’s extraordinarily accurate history of identifying significant tops.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in yellow with the S&P-500 eMini futures contract overlaid in red and green candle chart format. SAMMY failed short of its long term dashed red resistance line, which confirmed TATY’s most recent BIG CHILL warning and demonstrating the countertrend rally was likely to fail, even as the rally resulted in the return of bullish sentiment, which is typical during bear markets. SAMMY is yet to reach oversold conditions, which implies the current leg down in the price is not yet fully developed and may not be before an intervening relief rally.
STERLING — A REPRESENTATIVE OF A NEW FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS UNDERGOING TESTING
STERLING is shown above in the top panel with the S&P-500 eMini futures contract shown in the lower panel. There are no positive nor negative divergences developing now, so SAMMY grades out as neutral for the time being.
Screenshots-985, 986 (both above) and 987 (Below) are of the S&P-500 cash and eMini futures for your additional information and perspective. These have all been shown numerous times before with explanations, so they are just updated here through Friday’s close. Some analysts may characterize these as showing a range bound market, but that would over-simplify the nuances at work as the bear goes through the machinations necessary to fool most investors into not adequately protecting their wealth.
