THE BOTTOM LINE
The requirements for a new “BIG CHILL” warning were accomplished this past week when TATY was rejected at the red zone. If this warning is confirmed by a cohort of other supply and demand indicators followed by the violation of support levels at S&P-500 3898, 3859 and 3800; then S&P-500 3500 would loom large as a possible level at which, if violated, may trigger an accelerating decline and sharply rising volatility. Given that every asset class except the American dollar are in bear markets, the best alternative to the implied current levels of high risks is the a bit less than 5% available almost risk free in three to six month T-bills courtesy of an 80-plus basis point inverted yield curve!
We are risk managers as opposed to market predictors, forecasters, or timers. We leave predictions about the future to those, which believe they have that most elusive of talents. We measure information created only by the stock market itself, because the best expert on the stock market IS the market itself! Strength or weakness in the balance of supply and demand determines price, so we carefully monitor this ever-changing balance with proprietary supply and demand indicators, which over time tend to form repetitive patterns, which are critical to our calculations revolving around risk versus reward.
Today’s update is NOT intended to be a prediction, but a warning that risk levels remain beyond our risk tolerance, which compels us to be defensively deployed with client assets, which is why due to the “gift” of an inverted yield curve, more than 80 basis points this past week, we continue to roll over three to six months T-bills yielding a bit less than 5% virtually risk free in client accounts. Until the stock market begins to paint out hard numbers in support of declining risks, then we will remain defensively postured in client accounts.
Last week TATY nosed into the red zone surrounding the 140 level and this past week a “BIG CHILL” warning was completed when TATY was rejected at the red zone. This means 2022 has now witnessed a very rare four “BIG CHILL” warnings in one year, which is more evidence that the stock market may be experiencing a large “degree” bear market under construction. On the contrary, if TATY weakens some more and then due to resurgent strength begins to rally toward the blue zone surrounding the 160 level while forming pullback bottoms in, or near the red zone, then the odds will shift in favor an atypical bear market bottom having formed at the October low and the Great Bull market remains intact. The odds are not favorable for this resumption of the bull market possible outcome.
So, the stock market has reached a critical tipping point, where various support levels will begin to fail as the price likely begins to resume its previous decline, or resurgent, persistent and strong demand encounters diminishing supply causing TATY to rise above the red zone on the way to the blue zone surrounding the 160 during which time the red zone will become support for the inevitable pullbacks along the way. For example, the exhibit from my 2014 presentation to a group of private investors at St. Simons is shown above labeled “TATY TREND” , which shows with a green ellipse the emerging new leg up in the Great Bull market after the 2000-2003 bear market bottom. However, such an outcome here remains a low probability possibility.
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 130 after having been rejected at the red zone triggering a completed “BIG CHILL” warning. The stock market was constructing a complex countertrend rally correction prior to last week, so the price may attempt to loiter near the recent rebound rally high due to the positive seasonal trend, but the gravity like pull of the new “BIG CHILL” warning is likely to exert itself late, or soon. We need to see confirmation from other supply and demand indicators and for price support zones to begin to fail, which would confirm this new “BIG CHILL” warning given that two “BIG CHILL” warnings in a year are unusual and four perhaps unprecedented.
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 green and blue candle chart format. SAMMY has now confirmed TATY by declining back below its red horizontal dashed long-term resistance line. This suggests the price will continue to struggle to go higher during rallies, if there are any.
STERLING — A NEW FAMILY OF SHORT TO INTERMEDIATE TERM SUPPLY AND DEMAND TRADING INDICATORS UNDERGOING TESTING
STERLING is shown above in red and green candle chart format in the top panel with the S&P-500 eMini futures contract in the lower panel. The negative divergence shown last week as a down sloping dashed magenta line in the upper panel STERLING chart did exhibit some gravity like traction this past week against the rallying price in the lower panel (green dashed up sloping line). If STERLING continues to weaken, then that would be additional confirmation suggesting that the new “BIG CHILL” warning will likely be successful. Although the negative divergence in STERLING was brief, it did call the terminus of the countertrend rally to date, which is no small accomplishment.
Screenshots-1100 (above) and 1101 (below) are the S&P-500 eMini futures contract and cash index, respectively. So far, the countertrend rally in the S&P-500 eMini contract has been rejected below the next higher chart resistance shown as a horizontal dotted orange line. This resistance level may yet be challenged due to the positive seasonal and the complex form of the countertrend rally. However, I suspect this contingency will likely be resolved before the calendar turns into the New Year.
Screenshot-1101 is an exercise in the notion in chart analysis that former resistance becomes support once broken. The countertrend rally in September failed at this horizontal dashed red line but then was able to rally back to it in late October, when the rally was rejected again. The resistance was assaulted again in mid-November, when the price finally broke above the horizontal red dashed resistance line. Please note how the declining price post the new “BIG CHILL” warning is struggling to break the now horizontal red dashed support line at approximately S&P-500 3898 after coming back to challenge that support shortly after besting it as resistance back in mid-November. If this “BIG CHILL” warning is destined to be successful as the previous three this year have been, then this horizontal red dashed support line will need to be breached, and the sooner the better for the bear case.
Screenshot-1102 (above) has been shown numerous times and is updated here for your additional information and big picture perspective. A breach of S&P-500 3898 followed by violation of 3859, and then 3800 would almost certainly confirm high odds of success for the new “BIG CHILL” warning. A close below S&P-500 3500 would establish a new low for the bear market and raise the specter of an accelerating decline, escalating volatility and violent price movements both up and down. And a violation of S&P-500 2190, as has been pointed out frequently in these weekly updates, would almost certainly confirm that the stock market was in the grip of a large “degree” bear market with dire potential consequences for global chaos socially, economically, financially, politically, and geopolitically.
However, until S&P-500 2190 is breached on a closing basis, we will continue to approach this bear market as an ongoing correction of the last leg up in the Great Bull market from the March 23, 2020, low at S&P-500 2190 to the January 5th, 2022, all-time high at S&P-500 4818.