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Major stock market tops and bottoms are both products of the shifting balance in the supply and demand for equities. However, the behavior of our proprietary supply and demand indicators is substantially different as the market approaches a major top from how the indicators behave as the market approaches a low risk tradable bottom. Bottoms tend to form during episodes of fear, and major tops tend to form as buyers first become fatigued, and then later exhausted, in an environment of euphoria. Euphoria is a gossamer like emotion, which usually takes time to dissipate, whereas fear is a powerful primal emotion calling into play a circumstance of “flight or fight”, which our helped our species survive as we evolved, and is now imbedded in our DNA.

There is some objective evidence starting to appear, which suggests that buyers may be becoming fatigued on their way to exhaustion. Predicting how long it may take for buyers fatigue to manifest as exhaustion would be an exercise in low probabilities. However, human beings tend to repeat their behaviors over and over, and in the markets our repetitive behavior can be quantified, and then compared historically as markets transition from bull trend, to bear, and then back to bull. Tracking the shifting values for our market generated supply and demand indicators, in a historical frame of reference, tends to have a much greater probability of success at determining where the stock market is in its risk/reward circuit than say relying on the average lengths of bull and bear markets, or other less than statistically reliable information.

For example, the major brokerage houses have been known to promote the notion of buy and hold, because according to them bear markets last about 18 to 24 months. However, a quick check of the history of the NYSE shows that if an investor bought at the September 1929 high it took until the mid-1950s before that investor finally got even. Yes, that may be an extreme example, but how about a more recent episode, say 1966 until August 1982, 16 years of the Dow making round trips between 500 and 999. An age 50-something investor may have found those recurring 50% declines a serious setback to their retirement plans. And, as Bob Prechter once observed in a letter years ago, the English stock market has experienced a bear market lasting almost a biblical lifetime, and another spanning over 200 years!

Obviously bear markets are worth the intensive analytical effort required to avoid them. In the current circumstance the evidence vis-à-vis our supply and demand indicators does not yet support the case for the completion of a major top, which would logically be followed by a nasty correction, or an outright bear market. However, as you will see in the analysis below, the evidence of buyers fatigue is growing, which implies that if the negative trend continues, then the weight of the evidence may result in our indicators issuing a “Big Chill” warning. The issuance of a “Big Chill” warning would likely compel us to take defensive action to protect accumulated gains and client wealth in general. Given the uncertainties normally surrounding presidential elections, volatility is likely to increase, potentially accelerating the formation, and perhaps confirmation of the completion of a major stock market top in the weeks ahead.

The bottom line for this section is evidence is emerging that buyers may be becoming fatigued, and perhaps on their way to becoming exhausted. In the days and weeks ahead investors will need to remain vigilant for additional evidence that the stock market may be completing a major top, which would logically be followed by a really costly correction, or even a multi-week, multi-month, or multi-year bear market.


TATY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format. This strategic big picture indicator finished the week above the red zone at 147 after painting out a bottom in the red zone the previous week. TATY is suggesting that the balance of supply and demand still favors demand over supply, which in turn suggests another assault on new all-time highs remains not only a viable probability. but also a likely one. However, not everything is rosy with this indicator, and the rub is with the premium/discount to value indicator shown in the lower panel of the TATY chart.

While the dust up in volatility these past several days has received a lot of attention in the financial media, the objective metrics being created by the stock market suggests the media attention may be a bit hyperbolic relative to what has actually been happening. You see the last two price declines have failed to drive the premium/discount indicator into deep discount to value range below the minus eight level before turning back up. Previous updates have drawn this anomaly to the attention of investors by suggesting the failure to decline below the minus eight level likely failed to drive all the weak hands, and/or would be sellers, from the mix of investors. Short of a complete purge of all the weak hands, and/or would be sellers, may have left a nervous group of potential sellers in the mix.

Those nervous potential sellers did suddenly re-appear just below new all-time highs, which created enough supply to trigger the volatility dust up of the last few days. Additionally SAMMY, a representative of the family of tactical  supply and demand indicators, had also failed to flash a buy signal at the previous bottom, which is why we optioned to not deploy our excess cash into the market so close to all-time highs. So far that decision, based on our proprietary indicators, and the probabilities, seems to have been the correct one.

The decline of the past several days has unfortunately been too weak once again to reward us with an opportunity to be buyers at deep discounts to value. This decline did manage to take out the previous price low, but failed to drive the premium/discount anywhere close to the minus eight level, which historically has resulted in exhausted sellers, and a completed purge of potential sellers. So once again we have a situation where sellers could suddenly re-appear, which in turn casts a shadow on the longevity of the budding rally, which began yesterday. Given the probability for nervous potential sellers still in the mix, a question arises about probability that the previous all-time highs may become a significant barrier to any rally sustaining itself much beyond marginal new highs. And, there remains the potential for the rally to fail short of new highs, since indicators were mixed as the price made bottom,

The bottom line for this section is according to TATY the balance of supply and demand is likely favorable enough for the stock market to attempt new all-time highs. Unfortunately, the condition of the premium/discount indicator implies a failure to completely purge weak hands, and/or would be sellers, from the mix of investors. This casts a long shadow of doubt on the ability of the budding rally, which began on Thursday to sustain itself.

Also, please note the down sloping orange line in the upper part of the TATY chart denoting a negative divergence developing in the favorable balance of demand over supply. And, the orange line on the premium/discount to value indicator in the lower panel illustrating the failure of the recent price decline to drive the indicator below the minus eight level, which historically is indicative of a decline strong enough to result in a mostly complete purge of potential sellers from the investor mix.


SAMMY is shown above, and below with the SPXL 3X leveraged S&P-500 ETF overlaid. The SPXL is for reference only.

SAMMY did not issue a tactical buy signal at the previous (bounce) low. However, following Thursday’s low it has shown signs of resurgent demand, which has triggered a tactical buy signal. However, as explained above in the TATY strategic section, the tactical buy signal was not confirmed by a sufficient discount to value in the premium/discount indicator. Accordingly, we have elected to disregard the SAMMY tactical buy signal. I suspect the tactical buy signal will be profitable, because SAMMY signals tend to be deadly accurate. However, given the less than satisfactory purge of potential sellers suggested by the explanation in the previous section, I do not like the risk/reward for putting new money, or excess cash, in the market this close to all-time highs. This is a game of probabilities, and the probabilities are simply not favorable enough to put new money in the market. I’m comfortable holding positions purchased previously, but not comfortable adding to those positions unless more favorable conditions are quantified by our objective measures of the balance of supply and demand.


The new SAMMY tactical buy signal will be disregarded, even though I suspect the signal will be successful, because the buy signal is not being confirmed buy the premium/discount indicator. Non-confirmation implies the possibility of a sudden re-appearance of nervous potential sellers. I’m comfortable holding previously purchased positions of VOO and QQQ, but not adding to them due to the mixed nature of our indicators.

VOO and QQQ went ex-dividends in late September. I expect clients to receive the quarterly dividend in their accounts sometime in October.


DISCLAIMER: Optimist Capital LLC, does not guarantee the accuracy and completeness of this report, nor is any liability assumed for any loss that may result from reliance by any person upon such information. The information and opinions contained herein are subject to change without notice and are for general information only. The data used for this report is from sources deemed to be reliable, but is not guaranteed for accuracy. Past performance is not a guide or guarantee of future performance. Optimist Capital LLC, and any third-party data providers, shall not have any liability for any loss sustained by anyone who relied on this publication’s contents, which is provided “as is.” Optimist Capital LLC disclaim any and all express or implied warranties, including, but not limited to, any warranties of merchantability, suitability or fitness for a particular purpose or use. Our data and opinions may not be updated as views or information change. Using any graph, chart, formula or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such device. The information contained in this report may not be published, broadcast, re-written, or otherwise distributed without prior written consent from Optimist Capital LLC.

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