THE BOTTOM LINE
The stock market continues to touch new all-time highs powered not by sound economic fundamentals, but by the availability of incredible amounts of liquidity compliments of the Administration and the Congress taking on massive amounts of debt approaching WWII levels as a percentage of GDP. Supply and demand based strategic and tactical indicators like TATY and SAMMY have now arrived at levels, which will either confirm the bull trend, or cast a shadow upon it.
In the days, and weeks, ahead the evidence solving the conundrum of an aging and fatigued bull trend, or new and powerful bull market having arisen out of the March 23 low may arrive courtesy of the behavior of our supply and demand based indicators. Just as 2020 has been an eventful year in the stock market, 2021 is shaping up to be another. Investors should be prepared for at best a volatile and bumpy ride, and at worst the potential of an outsized move up or down, not unlike the decline, which followed the February then all-time high. If such an environment does become a reality, then our current implementation of tactical trading lasting approximately 8-13 weeks will likely become even more effective, and from a risk management point of view a likely a less risky experience for our clients, especially given the tendency for our tactical supply and demand indicators to be very accurate.
There will likely be experts proclaiming both bull and bear market forecast, but we shall look only for the truth, as being told by objective measures of the balance of supply and demand, and the application of appropriate risk management derived from market generated metrics.
New Bull?
The stock market remains in the historically over-valued price to earnings range, for example even higher than at the September 3, 1929 P/E; and with several key measures of bullish sentiment at, or near record highs since 1987. However, powered by the infusion of trillions of dollars of stimulus from 2020 rescue packages courtesy of the Administration and Congress increasing the national debt at a rate never experienced in the history of the Republic, and with more of the same apparently in the offing, the stock market touched new all-time highs this past week in the face of record COVID deaths, and troubling unemployment numbers, which appear positioned to continue rising.
When literally oceans of liquidity is available, prices tend to respond by floating higher in markets offering the best liquidity, and even some less liquid markets like real estate. For example, here in Palm Beach houses are selling within hours, sometimes even minutes of being listed. Just like personal and business bankruptcies, which are now soaring, debt at the Federal, and other levels of government will have consequences, but as every politician knows perhaps the consequences will not happen while they are still in office, and so the debt and deficits continue to grow, and in 2020 that growth has accelerated at a rate this country has never experienced before with perhaps the exception of WWII, when this country was unified like few times in our history, and obviously the country is divided now like never before since the Civil War.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in Snapshot-383 in yellow with the S&P-500 cash index overlaid in red and blue candle format.
TATY finished the week at 140, in the red zone surrounding the 140-144 level after first taking an excursion into the caution zone surrounding the 115-125 level. This has been a long time coming since the March 23 low, which was a consequence of the fastest decline in history to 20% down off an all-time high. The smash down covered 38.5% down in 27 days into the March 23 bottom, while driving TATY into the rarely visited level surrounding zero.
The long ragged fits and jerks rally since the March 23 low saw TATY lag the rate of recovery in the price, which was unprecedented since the indicator was developed in the 1990s. In more normal times TATY positively diverged with the price at significant bottoms, and then led the price higher during the recovery. So now that TATY has completed the first step in a “Big Chill” warning will it return to its previous pattern of being an incredibly reliable top warning indicator. Certainly high valuations and wildly euphoric bullish sentiment are suggestive of an environment ripe for at least a pause in the rally, but those very blunt instruments lack the historic accuracy of TATY’s record of warning that risks have risen too high for conservative investors to have fat equity exposure to the stock market.
So, here is what investors should be looking for in the days, and weeks ahead with regard to the TATY strategic supply and demand indicator. If TATY begins to weaken, and then stall out in, or near the red zone surrounding the 140-144 level, then the odds of a significant decline will begin to rise sharply. However, if TATY continues to gather strength, and is able to levitate itself above the red zone while it makes progress toward the blue zone at the 160 level, then the odds of the rally lingering, or perhaps even accelerating will begin to rise. If TATY begins to oscillate in a range bounded by the red zone on the bottom and the blue zone at the 160 level on top, then the odds of the rally ending spontaneously will decline dramatically, and the odds we are experiencing of a raging new bull market shall increase dramatically, as unlikely as that may seem here in late 2020. Bull markets are sustained by bidders willing to bid prices higher, and bidders have the power to bid ever higher for as long as they can provide the liquidity for their bids. For the time being, the “herd” has liquidity, and that liquidity will flow to where ever it appears to have the odds of being treated the best.
At this point we do not know which scenario TATY will begin to paint out, or even if it will return to it’s previous reliable behavior, as no indicator is perfect, but I like the odds that 2020 was a “one off” atypical event. This implies that the first test of the “Big Chill” warning post the February high lies directly ahead. This test will likely foreshadow a significant decline, or on the contrary tend to confirm that the March 23 low likely gave birth to a new bull market, as opposed to just another leg up in an aging bull trend. Oscillation of the values for TATY between bottoms in, or near the red zone would suggest a new bull market began at the March 23 low, and conversely if TATY calls a significant top by stalling out in, or near the red zone, then the likelihood is we are dealing with just another leg up in an aging, and fatigued bull trend surrounded by an environment of high valuations, and extreme measures of euphoria.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in Screenshot-185 in daily format, and in Screenshot-184 in weekly. The daily chart shows the indicator’s breakout above resistance, shown on the chart by the horizontal dashed magenta line, which has now been confirmed by the price rising to new all-time highs. The weekly chart of SAMMY still shows the significant negative divergence, shown by the down sloping dashed magenta line, which appeared prior to the February then all-time high. The record fast 38.5% decline to the March 23 low followed this negative divergence warning.
Currently, SAMMY has not developed any negative divergences with the new all-time high price on the daily, nor weekly chart. This implies that in the short term the rally has sufficient demand to power to price higher This is also confirmed by Lowry Research metrics for demand, although Lowry measures for supply remain stubborn to decline. For the short term, investors should not be surprised to see the price continue to attempt more assaults on new all-time highs.
SAMMY is telling a story about surging demand by breaking out above previous resistance, Screenshot-185, and then continuing to rally. TATY is telling a cautionary tale, which may turn into a confirmation of SAMMY’s more optimistic implications, should TATY not stall out in the red zone, and then continue to rally toward the blue zone surrounding the 160 level. This is a situation which is too soon to call, but the lack of any current negative divergences in SAMMY, or TATY suggests the normal favorable seasonal for the stock market between Halloween and Easter appears to have arrived right on schedule, in spite of uncertainties surrounding the ongoing election. Ongoing because the balance of political power remains uncertain due to the Georgia Senate runoff election.
And, lest one forget, one advisor to the current occupant of 1600 Pennsylvania Avenue, which recently acquired a presidential pardon, has lobbied recently for the implementation of Marshall Law. In other times in our history this would seem advice well beyond the pale, but these days who knows, and such an unlikely event would certainly suggests an immediate and dramatic response in the markets to the arrival of such an unforeseen and dramatic unprecedented uncertainty creating event. SAMMY’s recent breakout was a big positive for the price moving higher, but SAMMY also remains well below the January high, a big negative divergence, which implies some level of residual vulnerability to the arrival of uncertainty.
