THE BOTTOM LINE
Weeks of decay in a number of key indicators, and absurd levels of valuation and bullish sentiment seemed to finally have become too much for the bull trend, and a big 90% downside day this past Monday seemed to raise the prospects for a budding correction. However, by the end of the week, and like so many previous weeks, aggressive bidders had driven the price back close to new all-time highs. So, is the rally a trap, or evidence of the resilience of the big bull trend? The answer will require seeing more evidence, but for now in the absence of a “Big Chill” warning, we will defer taking aggressive defensive action, subject to change as the market paints out more information.
When I was a boy growing up in the Great Southland, I loved playing Little League Baseball. Mornings in the summer would often begin with clear blue skies, and the promise of playing “Y” ball in the afternoon. With hand in baseball glove, I’d entertain myself by playing “pitch and catch” with any neighborhood boy I could find, and as the day wore on my anticipation level would rise. Finally, the afternoon would arrive, and one of my parents would dutifully deliver me to the YMCA to be taken to one of the many baseball diamonds in town for that day’s game.
Unfortunately, here in the Great Southland surrounded by the Atlantic Ocean on the East, and the Gulf of Mexico on the South, we often experience sudden, and sometimes violent afternoon thunder storms. These towering cumulus thunder clouds build up all during the day as hot and humid air begins to rise shortly after day break, and by the afternoon become fully developed storms, and a big hazard to pilots. As my flight instructor once observed as we watched a towering cumulus cloud build up one summer afternoon sitting by Cherokee Five Two Two Five Tango in the hanger: “Drive into one of those at 5000 feet, and you will come out at 50,000 feet along with the pieces of aluminum, which was your airplane”! Point made! So, my summertime routine would often become one of anticipation of playing ball only to be followed by disappointment as my Little League game of the day too often turned into a rain cancellation.
In like manner, the bears must be undergoing a similar seemingly unending cycle of anticipation for the onset of a big bear market only to be followed by disappointment, as every dust up, or budding decline, seems to be met almost instantly by motivated bidders. These weekly updates have detailed the usually lengthy process of how major stock market tops form, including a link to Paul Desmond’s award winning white paper about his research on major tops dating back to 1925. Recently with valuation metrics reaching absurd historic levels, bullish sentiment as measured by multiple methods also at historic levels, and finally with Lowry Selling Pressure breaking above and out of a stalemate with Lowry Buying Power, it appeared the stars may finally be aligned for the bears, as the calendar turned toward the statistically worst two months of the stock market calendar.
The long suffering bears must have felt finally vindicated, when on Monday the stock market opened with a big gap down, and then proceeded to decline until a bounce developed late in the session. Even with the late bounce, the Monday session racked up a 90% downside day, which Lowry notified subscribers was likely a kickoff to more decline after months of decay in their indicators, as opposed to a capitulation day, which would imply new all-time highs in the offing. When Tuesday’s session devolved into a seesaw trading range, it appeared at long last the bears were going to enjoy some time in the sun.
Alas, then came the rest of the week and a persistent rally, which by the close on Friday had taken back more than 62% of the decline off the all-time high (See Screenshot-384 Above). However, this rally did not contain a 90% upside day, nor two back to back 80% upside days, which would have reversed the influence of the 90% downside day on Monday in the Lowry system. This implies that the rally may only be a bounce in a still developing correction, or new bear market.
Next week’s action looms as being important to the bull/bear analysis. If the price begins to move significantly higher above the 62% retracement level, and on a powerful advance/decline line say on the order of 4:1 advances, then the odds of new all-time highs will rise significantly. On the contrary, if the rally begins to fizzle at current levels, then the probability that Monday’s 90% downside day is still the command influence will begin to rise. A recent weekly update said that in the absence of a “Big Chill” warning, one must respect the notion that the bull market in stocks was still in place. The Monday 90% downside day is testing that notion, but at this point no “Big Chill” warning has occurred. In fact, TATY ended the week stronger than last week, which is a plus for the bull case.
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 at 142, and in the red zone.
TATY has a decades long history of issuing a “Big Chill” warning prior to the onset of significant corrections, bear markets, or rebound rallies in big bear markets. Even though the bear case has grown stronger in recent weeks, TATY has stubbornly refused to issue a “Big Chill” warning, and we have refused to trim our exposure to equities in response.
Bear markets begin when absolute belief in the bull trend is shaken to its core causing a big break in the stock market, which results in a TATY decline into the 115-125 caution zone, which is the first step in a new “Big Chill” warning. Then true believers in the bull trend try to regain control of the market from the would be newly minted bears, and the price is sent on its way in an attempt to assault new all-time highs, but TATY does not buy the rally, and negatively diverges, then stalls out in, or near the red zone to complete the “Big Chill” warning. In the absence of a new “Big Chill” warning, we will continue to give the bull trend the benefit of the doubt. Changing circumstances affecting the overall weight of the evidence may cause us to revisit this stance, but for now we need to see more cards before taking any dramatic defensive action.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format. Last week SAMMY appeared on the verge of confirming the budding weakness in the stock market having broken below the up slopping dashed green line, and poised it seemed to break the horizontal dashed yellow support line. What a difference a week makes!
SAMMY has now soared back above the green up sloping dashed line, above the long term down sloping dashed orange line, and is poised to make new highs from the March 2020 low. This casts a serious shadow on the ability of Monday’s 90% downside day to maintain controlling influence on the price, and sets up an important week next week. If TATY continues to strengthen and SAMMY begins to make new highs, then the seasonal negative pressure may have already begun to slip into history, making new all-time highs a real possibility.
STERLING — A REPRESENTATIVE OF A NEW PROTOTYPE FAMILY OF SUPPLY AND DEMAND INDICATORS
A version of STERLING among about two dozen undergoing testing is shown above in Screenshot-385. STERLING is the product of decades of work attempting to develop an indicator capable of detecting, with statistical confidence, both tops and bottoms in the short to intermediate time range. So far the testing is progressing on a satisfactory path, but at this point it is unknown, if this version of STERLING will survive, or if one of the other candidates will eventually outperform it. However, a cloudy situation like the current one is a terrific test for this new family of indicators, as Lowry so far says Monday’s 90% down remains the controlling influence, but questions arise due to the lack of a “Big Chill” warning.
STERING, in the version shown above, has painted out nice “island” bottoms below the lower Bollinger Band at each short term bottom. And, more importantly has negatively, and dramatically diverged at each short term top, shown as down sloping dashed magenta lines on the chart, as opposed to the up sloping dashed green lines under the rising price. In the fast moving game of futures trading using 50:1 leverage minutes can be lots of dollars, and STERLING is doing an admirable job of giving up to a couple, or three days warning! And, even though I do not normally show indicators in development, this one may end up playing a role in determining, if the stock market is putting on just a bounce in a budding correction, or if the seasonal low is already in, and new all-time highs are next. STERLING is shown in the top panel of the chart, and the price in the lower panel.