The stock market has been characterized as an institution, which discounts the future and this past week some of the financial media began to discount interest rate cuts as early as January, even as the Fed has only just recently embarked of an interest rate rising cycle to quelle the highest inflation in forty years. This, and other factors, have caused a rapid shift in investor sentiment from pessimism to increasing optimism, and in some cases predictions of new all-time highs.

These forecasts may turn out to be right, but there is ample evidence that a 78-year interest rate cycle has bottomed, and a new rising rate cycle began some weeks ago. Combine that secular change with the largest land war in Europe since WWII, mischief and bellicose language emanating from China over Taiwan and the South China Sea, the highest inflation in forty years, a persistently inverted yield curve, two consecutive quarters of negative GDP, and valuation extremes never experienced at the January S&P-500 4818 all-time high, and the case for a new leg up to new all-time highs in an ongoing bull market becomes a very heavy lift, possible but not favorable odds.

The odds and the weight of the evidence to date suggests that the first leg down in a new bear market was completed at the June S&P-500 3636 low and a multi-week countertrend rally is now underway, which will likely last several more weeks and, and in the process, drive optimism back to a measurable extreme, because bear markets are masters of deceit. Given the potential for a very large degree bear market being underway, investors should not be surprised to experience the emotional round trip from pessimism to optimism and back again to have multiple iterations before the bear market ends in despair, panic and capitulation; conditions which were absent at the June 3636 low.



I cannot summarize the status of the stock market better than the following quotes from our weekly update from last week (blue highlight), which also contains a reference to our weekly update from two weeks ago highlighted in yellow:

Here is a quote from last week’s update: A series of lower lows and lower highs remain in place in the popular stock indexes in an inverted yield curve environment, which means the bear market remains in effect. However, the five-week trading range dating to the S&P-500 June low at 3636 may be on the cusp of a breakout above the high of the range according to TATY, SAMMY and STERLING, which represent dozens of supply and demand indicators all suggesting the same potential breakout above the high of the range. Investors should be aware that a powerful rally in a bear market does not a bull market make, and any breakout higher would likely only be a rally in an ongoing bear market according to the weight of the evidence in the Lowry Research system and according to our own proprietary supply and demand indicators.

So, here we are a week later, and the yield curve remains inverted, which is often a harbinger of a coming recession, and the suggested price breakout above the then trading range has now happened. And, the weight of the evidence is still favorable that the rally is countertrend in an ongoing bear market. However, it appears the stock market has now drawn closer to answering the question of will the price decline accelerate lower upon the completion of this countertrend rally, or was S&P-500 3636, the low to date for the bear market, the terminus of the first leg down in the bear market to be followed by a more substantial correction than the one currently likely nearing an end? In either case a near term end to the rally, or if the first leg down is complete and a larger multi-week correction to the first leg down is underway, whichever is happening will likely still be only a rally in a bear market.

For the time being, and until there is hard evidence to the contrary, we will be treating this rally as nearing completion to be followed by another phase of decline in an initial leg down in a nascent bear market. If this is the case, then in the days ahead, and perhaps by early August or sooner, we should have confirmation by way of a change in the weight of the evidence.

Last week’s update was titled “BEAR RALLY: SMALL OR LARGE?” and suggested we would likely have an answer by early August, which has turned out to be accurate, as the weight of the evidence has now tilted decisively in favor of a larger and longer countertrend rally. This resolution now sets up for a very interesting and perhaps dangerous fall seasonal as September and October have a long and statistically valid history of being the weakest months for the stock market including some of the darkest events in stock market history. For example, the Crash of 1929 began on September 3rd and the 1987 Crash, which erased a bit less than 25% of market value in one day happened on October 19th. Bear markets are masters of deceit and can be vicious and powerful in their ability to persistently and swiftly destroy wealth accumulated over a period of years, and in the extreme case of 1987 in only a matter of hours. Investors which do not respect bear markets are likely to become victims.



TATY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week marginally below the red zone at 138 after having positively and dramatically diverged (green up sloping line) with the still declining price on its way to its S&P-500 3636 June low. TATY has now gathered strength and breached its magenta negative divergence line dating to last August. TATY will now likely play a key role in determining when the countertrend rally is likely to weaken and expire by issuing a “Big Chill” warning, which tend to happen prior to or as major tops form, or as countertrend rallies expire during significant bear markets.

Taty Tops

The attached “TATY Tops” chart is an exhibit from a presentation I did in 2014 to a group of private investors at St. Simons Island, which shows with red circles nine major tops, or significant rebound tops during bear market rallies. If you expand the chart, you will notice that “Big Chill” warnings accurately identified the tops as they were forming, when TATY stalled in, or near the red zone surrounding the 140 level after first having declined into the caution zone surrounding the 115-125 level. Please also note that investor sentiment was quite negative during each of TATY’s excursions into the caution zone and extremely positive, even giddy as TATY recovered approaching the red zone. This is part of the insidious behavior during bear markets as investors moods tend to swing wildly between fear and euphoria. Investors should not be surprised to see the return of consensus optimism, if TATY makes its way back into the red zone surrounding the 140 level.

Given a host of factors including a continuing inverted yield curve, inflation at a forty-year high, the largest land war in Europe since WWII, and the bellicose language and gestures coming from China over Taiwan and the South China Sea, there was ample evidence the leg down off the S&P-500 4818 high would likely continue. However, the financial media this past week began to promote the notion the Fed had already defeated the nominal 9% headline inflation and interest rate cuts were on the way perhaps as early as January due to the disappearance of the “immaculate” inflation, regardless of the Fed having just embarked on a rising rate cycle! I remember hyper-inflation and the Paul Volker Fed laboring to quelle it, and it was a long journey to victory requiring Treasury Bond rates in the high teens. So, the odds remain favorable that investors are in the midst of a bear rally, as on the contrary some financial media has suggested one of the shortest bear markets on record has ended.



SAMMY is shown above in yellow with the S&P-500 eMini futures overlaid in red and green candle chart format. SAMMY did its tactical job and raced ahead of the slower moving strategic TATY indicator by painting out a huge positive divergence to the June price low and then taking out its magenta down sloping negative divergence line and its dashed yellow horizontal long time support line on its way to its dashed red horizontal resistance line. Now we shall see how much “juice” SAMMY has left in its effort to go even higher. I suspect as positive investor sentiment continues to soar then SAMMY will likely begin to weaken and possibly begin to develop a negative divergence as the countertrend price rally builds out.



STERLING is shown above in the upper panel with the S&P-500 Emini futures contract in the lower. After giving a very brief positive divergence in mid-July (up sloping green lines), STERLING began to soar ahead of the rallying price and at this point has shown no signs of weakening. STERLING does not always negatively diverge with opportune price levels at which to sell longs, but it often does. If TATY and SAMMY begin to show sign of weakening, then I would expect STERLING to confirm. However, until all three supply and demand indicators begin to wane the price will likely continue to rally, possibly for weeks as opposed to days.

Screenshot (926)

Screenshot-926 is the daily chart of the S&P-500 eMini futures contract with the previous broken support levels shown as horizontal dashed lines. Previous support once broken tends to become resistance for reasons beyond the scope of today’s discussion. Depending on the behavior of TATY, SAMMY and STERLING, if the price approaches the upper horizontal dashed red resistance line, then investors may want to be on the alert for a pause or expiration of the rally. However, the route the market takes to attain this potential price level may likely prove to be circuitous.

Screenshot (927)

Screenshot-927 is the S&P-500 cash index with a Fibonacci grid overlaid to show potential resistance levels for the price just based on the math related to Fibonacci relationships found throughout nature and often in the markets. The price has already attained the 25 and 38% retracement levels, which implies potential assaults on the 50 and perhaps 62% levels to come. Of course, weakness in TATY, SAMMY and STERLING coincident with signs of some price weakness near a Fibonacci target would raise the odds on the bear rally waxing toward expiration.

Screenshot (928)

Screenshot-928 has been shown before and is just updated here and depicts Fibonacci retracement target levels using the common S&P-500 all-time high at 4818, but two different origination lows, the March 23, 2020, low at approximated 2190 and the March 9, 2009 low at 666. The solid grid lines are for the 2020 low projection and the dashed for the 2009 low. The color coding is the same for both projections, which are orange 25%, red 38%, yellow 50% and green 62%. Sharp eyed investors will notice that the two different projections have two projection levels nearly in common, 3800 and 3200 of which 3800 has already come into play. Over time history suggests some, or perhaps nearly all the rest will become important as the bear market progresses.


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