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Gregory H. Adams Update

Feb 11

MANAGING RISKS: LOSS OF OPPORTUNITY COSTS VERSUS A BIG BEAR ASSAULT ON WEALTH

Recent updates have been exercises in briefing our clients, and research customers, about the risks associated with bull and bear trends in the stock market. The former involves the implied costs of lost opportunities, and the latter the very significant damage to wealth represented by a mature bear trend during the recognition phase, as countless panicked global investors seek safety by trying to exit the stock market through a very small door, and all at the same time. Bear markets can develop in a multiplicity of ways, but for now we will look at only the most probable. We will save the topic of financial malpractice on the part of too many financial advisors, which unfortunately we discover in the portfolios of potential clients almost weekly, for a later date.

The Bull Case. As previous updates have stated, the holiday shortened market session on December 24, 2018 looms as a key date, both in terms of how we define a reversal day, and how TATY, a supply and demand indicator, has behaved historically following an excursion into its green zone surrounding the 90-100 level. This indicator spiked intraday to 101 on December 24, only one point short of the green zone. The previous ten excursions into the green zone were all followed by new all-time highs, albeit sometimes after a test of the low, so the one point miss on December 24 has positive implications. Following the eruption of demand on December 26, which set a one day Dow point gain record, the stock market has rallied to marginally above a 62% retracement of the decline from the all-time S&P-500 high at 2941 to the low of the leg down at 2347 (See The Chart Above). There is strong resistance at S&P-500 2888, and of course at the previous all-time high at 2941.

For the bull case to remain valid, a series of supply and demand indicators must continue to paint out higher highs and higher lows concurrent with the price doing the same. Should this occur, then at some point under-invested professionals will recognize the bull still lives, and a rush to get invested would likely follow, which would likely cause the price to accelerate higher. Investors positioned defensively in anticipation of a bear leg down would pay a substantial loss of opportunity costs for their error in this scenario. Currently the probabilities favor the bull case, but that could change as the market yields more information about itself, as we approach the resistance zones immediately ahead at S&P-500 2888, and the previous all-time high at S&P-500 2941. The rally off the December 24 low at S&P-500 2347 showed signs of needing to digest its gains this past week, so clients should not be surprised if the stock market settles into a trading range in the days ahead, before a resumption of the rally from the December 24 low.

The Bear Case. Most investors do not realize that a big bear market can make a new all-time high as part of the overall bear trend. I’ve drawn a crude representation of how “irregular” bear markets develop. For illustrative purposes, I’ve attached the bear example to the current chart of the S&P-500 (See Chart Above). The task of bear markets is to fool the majority of investors the majority of the time, as the bear goes about the business of correcting the excesses of the previous bull trend. Bull and bear markets tend to go to extremes as human nature tends to swing between extremes, and at the end of the day it is the perceptions of investors, which drive the price of markets. And, since we human beings tend to emotional extremes, then markets tend to do the same, as a reflection of our emotional journeys as a herd.

The chart above shows the most common Fibonacci retracement levels calculated for the rally off the March 2009 low at S&P-500 666 to the recent all-time high at S&P-500 2941. The October-December decline touched the 25% retracement level. If that leg down is only the prelude in an ongoing big bear market, then the rebound will likely assault new all-time highs before rolling over into a relentless and violent leg down in the big finale to the grand bear overture. Such an event may start with a “newsy” gap down from the territory of new all-time highs, which would likely be followed by a swift and accelerating decline driven by panic, as global investors recognize the mature phase of a big bear market has trapped them at all-time highs. Wealth literally evaporates in this part of a bear market, as panic drives the price swiftly in both directions violently, but mostly down. When a big bear gets down to business, then there is literally no place for equity investors to hide. The last chart above shows some reasonable Fibonacci retracement support levels for the big bear case are S&P-500 2078 (38%), 1808 (50%) and 1539 (62%). The decline could stop anywhere, but these are the popular math levels to watch. Please note that S&P-500 1808 is essentially the February 2016 low, so that one really gets my attention.

The big bear case is a relatively low probability at the moment, but probabilities are not static in the stock market, and as the market yields more information about itself, then the probabilities become subject to change, and perhaps dramatically.

Acceleration. The zone surrounding new all-time S&P-500 highs represents a danger zone in terms potential acceleration in the price up, or down. If the bull trend is real, then the remaining resistance zones at S&P-500 2888, and the previous all-time high at 2941 will be breached, perhaps more easily than currently anticipated? Should this happen, the rush to get fully invested to avoid a substantial loss in terms of opportunity costs may result in a brisk acceleration in the price higher. Under-invested institutional professionals lose their jobs for not being fully invested, or even leveraged during a bull trend. These conditions can lead to investors chasing a bull leg higher, even though the premium to “value” of the price may reach ridiculous levels. Remember the stampede into the internet stocks in the late 1990s, even though some of those stocks did not even have sales let alone earnings! So in the weeks ahead we may see an acceleration higher, even as values assigned to stocks by the market become ridiculous, if the bull case is real.

On the contrary, prices also tend to accelerate in mature bear markets due to recognition. Unfortunately, the acceleration is down, and in the mature bear case more in the mode of a meltdown, due to panic stampede conditions. So what will it be, an acceleration higher or a meltdown? Well given the multiplicity of options available to big bear markets, something other than the two options outlined above may be chosen by the market, but for now we will go with the probabilities and plan around these two strategic outlooks. This means as more information becomes known a tactical plan will be developed to address the emerging resolution of the current conundrum.

The Bottom Line. The odds remain favorable for the bull case, so in the days ahead we will hold our current longs, and possibly add to them should an attractive buy signal develop. An attractive buy signal may develop, if the market begins to digest its recent sharp gains, which could chew up most of February, and possibly into March. We will go with the bull case until it demonstrates it may be failing, at which point the issue of acceleration must be addressed correctly.

TATY, a supply and demand indicator, is the chart above in yellow, and the S&P-500 is shown overlaid in red and blue candles. TATY has found resistance just above the red zone, and may give up some ground, if the market enters a consolidation of its recent gains off the December 24, 2018 low. It will be important for this indicator to form a higher low and recover quickly off that low, to avoid a warning that the rally off the December 24 low is all the market can deliver before the resumption of an ongoing bear leg dating to October. When this indicator stalls out near, or in, the red zone, then the market may be vulnerable to a decline.

 

Vigilance required.

Feb 4

On the Cusp

Recent weekly updates have discussed that Christmas Eve was very likely a key day to remember going forward, as there were a number of important signs on that day, and the following business day, that at least a short term market reversal had taken place. As you may remember, December 24 and the previous couple days, had all three painted out consecutive 80% downside days, which were followed on December 26 with an eruption of demand setting a record for a Dow one day point gain. So this brief period of time bore evidence of exhausted sellers and rejuvenated demand, which in my discipline I’ve applied successfully for years, constituted a market reversal day. TATY, a supply and demand indicator, also spiked intraday on December 24th to 101, just one point shy of the green zone surrounding the 90-100 level, a very rare event. All ten previous excursions into the green zone by TATY, since the 1990s, have been followed by new all-time highs, albeit sometimes after a “retest” of the low. Given the strength of the rally since December 24, a retest of the low looks like a very low probability. So the very short duration (marginal) bear decline is over, and a new leg in the bull stock market is now underway right? Well yes there is some objective evidence that this maybe the case, but given the multiplicity of options for the development of big bear trends, a more insidious and very dangerous option may be afoot as well. Today we will take a look at how the two most probable options may develop vis-à-vis a series of supply and demand indicators. Please remember the two most probable options do not rule out the possibility that something entirely different may develop, such is the nature of bear markets.

First let us take a look at the bull case and the notion that the whiff of panic leading up to the December 24 cathartic type bottom may have birthed a new bull leg to new all-time highs. Recently the events surrounding the December 24 low were investigated with an exhaustive comparison to similar events over the decades. This created a very favorable bull case. With the exception of more marginal positive results, surrounding the uncertainty of war in the 1940 decline, the following weeks and months the stock market went on to post very favorable results, and in some cases dramatic results. Nothing is perfect in this game of probabilities being played by the brightest of the bright, but the research clearly slants the odds in favor of the bull case, at least for the time being. However, for the bull case to continue the newly minted bull leg must continue to prove that demand has the upper hand over supply by painting out higher highs and higher lows, both in the price of the S&P-500, and in a series of supply and demand indicators. And, given that the rally off the December 24 low has now arrived at a very important series of resistance levels, a test of the ability to paint out higher highs and higher lows is now at hand.

The first attachment above shows the decline from the all-time S&P-500 high at 2941 to the December 24 low at 2347. As you may recall, a previous update discussed the work of a 12th century mathematician named Fibonacci, who discovered an important number sequence and ratios, which occur both in nature and the markets. The chart shows that the rally off the December 24 low has now reached the popular 62% retracement level noted in Fibonacci’s work. The implication is that the rally may begin to struggle at this important math resistance level, so from our perspective the test to paint out the first higher low may be at hand? Clients should not be surprised if the fist half or so of February maybe consumed by a listless market, which may trade marginally lower. The problem is the supply and demand indicator, TATY, is once again showing signs of struggling near the red zone surrounding the 140 level, a behavior often associated with the expiration of major tops. So the test ahead is an extremely important one, because remember both the price, and a series of supply and demand indicators, must both paint out higher highs and higher lows. Stay tuned as this important test will very likely chew up a good part of February before a verdict will be issued by the market. So the bottom line for the bull case is the bull is likely to be tested here at the 62% retracement level, and to pass the test for this leg up, both the price and the indicators must paint out higher lows in order for the bull case to remain the highest probable outcome.The bear case makes the next 30-90 days or so a really critical time for investors. The bear case at the moment is the lesser probability, but clients should consider the probabilities to be on a sliding scale and not static. The bear case is subject to moving higher on the scale of probabilities, and perhaps rapidly so. Please take a look at the third attachment, which is the supply and demand indicator, TATY, shown in yellow, and the S&P-500 cash index overlaid in red and blue candle chart format. You will notice immediately that TATY finished the week at 147, a marginal improvement over last week’s 146, but far short of the zone beginning at the 150 level depicting very strong demand. Given the math resistance at the 62% retracement level, and the expected consolidation of the gains from the December low at 2347, some give back in TATY will likely occur coincident with the expected digestion of the recent gains in the price. However, this raises the short term risks given the history of the red zone being where bull trends go to die. Should both the price and the indicators form a higher low in February, or March if tardy, then the next significant resistance is not far down the road at the S&P-500 2888 level, where the previous counter-trend rally failed, and then finally the all-time high at 2941. Given the escalating number of resistance level directly ahead , a more ragged drift higher may be in the offing, if this rally is only part of a larger bear market. The larger bear market option remains a lower probability subject to seeing how the supply and demand equation shifts here on the cusp of what I consider to be a very large and significant danger zone.

Well Gregory that is all fine and good, but please tell me what you intend to do with my wealth! OK here is the very hard reality of dealing with the uncertainties of the stock market. Investors must constantly measure the risks of lost opportunity costs with the very real and instantaneous costs of becoming entrapped in a bear market, particularly a bear market, which has finished its prelude and is about to get down to the business of creating a violent vortex of panic, and the mindless program selling attendant to global investors in panic mode. If the market has not begun a new bull leg, then the prelude for the bear overture is nearing an end. The bear market could re-manifest itself right here, if TATY stalls near the red zone, and then fails to form a higher low along with the price. Alternately, and the more dangerous and insidious option, and bear trends are prone to take the most insidious and destructive path, the market squeaks out a marginal new all-time high, which will end the bear prelude, and investors last chance to escape a steep, relentless and violent decline, which may even begin with a significant gap down on some kind of newsy event. Please remember that the maximum and fastest destruction of investor wealth happens not in the prelude of a bear overture, but in the free fall of the finale, as countless global investors scramble to get through a very small door to safety. The numbers I published recently, based on reasonable Fibonacci projections, was a bear decline of 30-50% from wherever the final high is touched, not a prediction, but objective math applied to the important known price levels created by the market itself.

So here is the bottom line, for now we will keep your portfolios invested, as the bull case remains the most probable . The research is also supported by the history of positive results following a rare intraday TATY excursion into the green zone surrounding the 90-100 level, and for now a one point miss at 101 is close enough to tip the probabilities in favor of the bull case. However, navigating the stock market is not an exercise in getting married to a notion, but one of changing as the probabilities move up and down on the scale of probabilities. If the bull case proves itself, then demand will likely surge, and the resistance zones discussed above will not stop the rally, and once breached the bull will likely accelerate higher, as the under-invested scramble to get fully invested, a situation where he, or she, which hesitates becomes subject to paying an accelerating lost opportunity cost. If on the contrary, the market cannot generate strong and increasing demand, especially in the zone surrounding new all-time highs, then Alexander and I will be compelled to conclude that we prefer exposing clients to the risks of lost opportunity vis-à-vis to the risks attendant to a melt-down type final leg in a large and mature bear market. Remember, when a bear is done with the overture, the finale gets ugly quickly as panic is one of our strongest emotions. Now clients know why this update is entitled “On The Cusp”, because we very likely are!

Optimist Capital

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Jan 28

Into The Danger Zone

The last two updates have been longer than usual in order to brief clients on the most probable paths the stock market has available going forward based on an array of supply and demand indicators. This week’s update will return to a more brief format, as the drill going forward will be to monitor the progress, and probability, that the three pathways outlined previously are still the most likely to emerge, or if conditions are changing and a new option(s) may be emerging.

Almost a year ago now in February and March the stock market took a sudden and swift plunge. Indicators were not warning that a major top was forming, but they did signal that the swift decline was likely an opportunity to put cash to work with relatively low risks. So episodes of panic like decline during that brief correction were used to buy into the stock market, as some indicators were flashing that the price had descended below “value”. Even during bear markets compressing the price below “value” tends to be fleeting opportunities demanding adroit trading. As 2018 progressed the decision to buy was rewarded as the stock market embarked on a slow and steady grind higher. During the slow move higher negative divergences began to build in an array of supply and demand indicators, which eventually resulted in a break in the rally beginning in October, which may have ended completely on Christmas Eve, or a significant leg of a larger ongoing bear market may have ended on the Eve of Christmas. The brevity of the decline suggests it may be only part of something larger.

Major stock market tops are usually tested often enough to give investors time to sell into residual strength, as the gossamer like euphoria attendant with major tops slowly diffuses and then dissipates. Although TATY flashed a classic sell signal in November, I elected to hold our positions purchased in February and March 2018, as the odds of a retest of the all-time S&P 500 high at 2941 seemed to have reasonably good odds of success. A retest of S&P-500 2941 would likely linger into the spring of 2019 giving our positions purchased in 2018 time to collect two more quarters of dividends, and also qualify the purchases for long term capital gains. These are the kinds of challenging market and tax implication decisions you pay a Registered Investment Advisor to make, as opposed to a market letter writer, whose job is to just analyze the market. So now that evidence that the correction may have ended, or at least the first leg in a larger bear market may have ended, the decision to hold our long positions looms as a potentially good one.

A critical period in the stock market lies directly ahead. The events of the spring and summer of 2019 may very well be a dramatic demonstration of why you do not want to try and do at home what Alexander and I do every day. The challenge ahead will be to hold client long positions, or to put new cash to work in the stock market, or conversely prepare for another topping out situation, which would demand maximum protection for client accounts. You see if December 24, 2018 was the end of the correction/bear market, then it is very likely that months of rally lie ahead in a new born bull market, or extension of the previous bull market. On the other hand, if the December 24th low was only the end of a leg down in a larger bear market, then the current rally will fail in the zone just below the all-time S&P-500 high at 2941, or perhaps marginally above it. The difference in the impact upon client wealth could easily be in the range of thirty to fifty percent, if a new bull market was born on December 24th. Why? Read on for an answer.

If the stock market remains in the grip of a large bear market, then the current rally is a counter-trend rally destined to fail in the zone surrounding the all-time S&P-500 high at 2941. Once the rally rolls over, then the bear market will very likely be recognized by increasing numbers of global investors, which at some point will likely tip over into a “recognition” stampede, a violent vortex of mindless program and panic selling. This is how major bear markets do business as they mature. In finance this is something like the “event horizon” in astrophysics, where nothing, not even light, can escape the exponential power of the pull of gravity in a black hole. So if investors posture for the remainder of the bear, and then the market dials up a bull, there will be an immediate problem of how quickly can the tactical positioning error be corrected. Will that be twenty, or more, percent later as the bull accelerates higher driven by under-invested money managers scrambling to buy into the resurging bull trend? Or, on the other hand, if investors position for the newly minted bull, and the market dials up the terminal leg of a large bear, you know the leg containing the violent vortex of mindless program and panic selling, how long will it take to reposition in an effort to escape the remainder of the panic driven decline?

Experience tells me investors, which mis-position their portfolios in the weeks ahead, will be looking at a potential loss of opportunity, or real potential losses in their portfolios of around 30% on the light side, to perhaps 50% on the heavy side. For example, last week’s update showed that one popular Fibonacci target for a retracement of the rally from the March 2009 low at 666 to the all-time high at S&P-500 2941 was the 62% retracement level at S&P-500 1535. If the current rally gives out of gas at a marginal new all-time high as part of a larger bear market, then that S&P-500 Fibonacci target sitting at 1535 falls into the range of a 50% bear plunge. And, here is how bear math works, should that happen, then investors would need a 100% gain just to get back to even! So bull trend or bear trend matters, and it matters most to those over age 50 with less time available to recover from serious losses. Now please do not take this representation of the possible worst case as a prediction, as I do not do predictions. However, Alexander and I must always be aware of the potential worst case in order to protect clients from it. At this point the worst case is a relatively low probability, but statistically large enough for us to brief clients about it. If the probabilities begin to move higher, then (quick?) defensive action will be required.

The bottom line this week is a critical time in the stock market looms ahead as the calendar turns from winter to spring, and then to summer. My advice to investors is do not attempt to do at home what Alexander and I will be doing as the stock market flies “into the danger zone”!

An old Asian saying goes like this: “May you live in interesting times”, and the odds favor the year 2019 being a year of very “interesting times” in the markets.

TATY, a supply and demand indicator, is shown on the attached chart in yellow, and the S&P-500 is shown in blue and red candle chart format.

 

Regards,

Gregory H. Adams

Senior Portfolio Manager

Jan 20

Resurging Bull Or Insidious An Dangerous Bear Trap?

I have updated the attached charts through Friday’s close, but of course the Fibonacci retracement levels shown have not changed as the budding rally has gained strength, which further reduces the chance that the December 24 crash type low will be retested. So now it is time to cheer the resurgent bull market, which was left for dead only a few days ago right? Well not so fast, as the multiplicity of ways a bear market may develop would suggest a more step by step approach, confirmed all along the way by hard numbers generated by the market itself, before making such bold and unhedged statements.

This past week’s strong rally only increased the probabilities that one of the paths mentioned may eventually turn out to be the way the market chooses to develop going forward. However, the most probable does not mean these are the only paths available for the market. The multiplicity of ways a larger bear market may develop represents substantial opportunities for traders, but a literal nightmare of a challenge for researchers and analysts to correctly diagnose in real time, as crucially important as that may be.

I am going to update the options outlined in last week’s update, and then tell our clients specifically how we will deal with each option, as the market hands out more clues about its further development. Let’s begin with the probability of a retest of the December 24 low, which was the subject of a research piece by a firm in NYC mentioned last week. My response to my friend and former colleague, which sent me the piece, was to suggest that such a simplistic notion would seem to have a low probability of happening given the three consecutive 80% downside days culminating in the December 24 crash type low, which was followed by evidence of resurgent demand on December 26, which in turn resulted in a record for a one day Dow point gain. And, please remember TATY also took a rare intraday excursion to 101 during the tempest of December 24. Since the 1990s TATY has only touched into the green zone surrounding the 90-100 level ten times, and all ten times the S&P-500 went on to touch new all-time highs, albeit sometimes after a retest of the low. So the intraday spike to 101, only one point shy of the green zone, would tend to support the case that December 24 was at least a short term low, and likely something even more significant.

The events of this past week would only appear to diminish the probability of a retest of the December 24 low even more, which no doubt is frustrating to those posturing to buy the retest. So to summarize this section, the probability of a retest of the December 24 low was not significant last week, and is even less now after the strong rally of this past week. However, please note that a low probability is not a zero probability. Even if a retest does develop, as long as the retest occurs with strong positive divergences in place among supply and demand indicators, then I would use the retest as an opportunity to put excess cash to work.

The shrinking probability of a retest means the bear market ended on December 24, and the resurging bull is ready to resume his bull run right? The first chart above shows the calculations for the most frequent Fibonacci retracements applied to the rally from the February 2016 low to the all-time S&P-500 high at 2941. The bear managed to clock a 20% decline from the high to the intraday low, which translated into an approximate 50% retracement of the entire rally leg dating to February 2016, which is well within the kinds of numbers expected for correcting the excesses built up during that leg of rally. So yes there is some objective market generated evidence that the bear market may be complete, and a new bull leg has begun. However, if this is the path the market does eventually choose, then supply and demand indicators must confirm every step in the process ahead by painting out higher highs and higher lows not only in the price, but in a series of indicators as well.

As long as the rally in price continues to be confirmed by increasing strength in the supply and demand based indicators, then we just go with the developing bull trend. Remember, last week’s update said that our clients were already invested, so if the market did not serve up the retest of the December 24 low as postulated by the NYC research firm, then we were still golden. So to summarize this section, we stay long our current positions, many of which will soon qualify for long term capital gains treatment, as long as the price rally continues to be confirmed by growing strength in the indicators.

Well now that is all fine and good, but what is this business about “Or An Insidious And Dangerous Bear Trap” mentioned in today’s header of the weekly update? I’ve mentioned “multiplicity of paths available to bear markets” several times for a reason. Bear markets have a long history of fooling investors over and over until they are eventually sucked into a vortex of violence, which occurs as the bear approaches a climatic panic driven end, where mindless program and panic selling become the order of the day. Yes there was a whiff of panic on December 24, but not on the order of magnitude normally associated with a major bear market bottom.

Please take a look at the second chart above, which calculates the most common Fibonacci retracement levels applied to the rally from the March 2009 low at S&P-500 666 to the all-time high at 2941. I would submit to clients that a bear market on this scale, or degree if you will, would likely generate an ending sequence attendant with the panic and mindless program selling normally encountered during the “recognition” phase, or vortex phase of major bear markets, as multitudes of global investors stampede to exit through a small door all at the same time.

I do not do predictions, as I leave that exercise in futility and frustration to those, which hold themselves out as having that particular gift. However, as a matter of due diligence for clients, I always include an assessment of probabilities concerning the worst case scenario. At the moment, the worst case just described above has a relatively low probability, but a significant enough probability to put Alexander and I on guard for any shift in the probabilities from lower toward higher for this potential bear path. All clients, especially those over age 50, must be protected from a bear event of this potential degree and potential for wealth destruction.

Now for the good news. Unlike the vast majority of financial advisors, and legions of insurance sales people trying to pick up some extra revenue masquerading as financial advisors, we actually have the experience, tools and courage of conviction to navigate any of the paths outlined above. No not with opinions about earnings, Brexit, impeachment, China tariffs, or countless other global factors impacting aggregate supply and demand for stocks, but rather armed with market generated objective information related to the ever changing balance of supply and demand for stocks, which is the ultimate driver of the price regardless of the reasons assigned after the fact!

The bottom line for this week is the balance of supply and demand, as measured by a series of objective indicators, is growing stronger after signs of a cathartic type bottom on December 24. So for now we ride the developing bull trend, and monitor it carefully for increasing strength, or creeping weakness. Last week’s update showed TATY finished the week at 141, and on Friday it finished at 146 (see last attached chart), which is above the red zone. A series of higher highs and higher lows in this indicator would be a sign of diminishing risks, especially if the indicator can touch high numbers in the 150 to lower 160 range, while bottoming above, or near, the red zone. Failure to generate these kinds of numbers in the weeks ahead would likely begin to raise the probability that a larger degree bear was still in effect, even if the price achieved new all-time highs. The word for the days and weeks ahead is “vigilance”!

My apologies for the length of this update, but the “multiplicity of paths available to bear markets” demand a more robust explanation for clients to understand what we are doing with their wealth and why. Just how it is when dealing with bear markets.

TATY, a supply and demand indicator, is shown in yellow on the attached chart, and the S&P-500 is shown in red and blue candle chart format.

Regards,

 

Gregory Adams

Senior Portfolio Manager

Jan 14

The Key Day – Christmas Eve 2018

The stock market has arrived at an important juncture, so this weekend’s update will cover more detail than usual. Alexander and I always want clients to be fully briefed, so I will do my best to keep this update at a level that non-professional investors can understand.

During my post-up recover from back surgery, I received an email from a close friend and former colleague. It had attached a research report from a firm in NYC, which laid out the case that since the market experienced a very negative trading shortened day on Christmas Eve, a retest of that Christmas Eve low would almost surely follow. My former colleague asked me to comment on the research piece, so I told him to beware of such a simplistic observations, as the market may be setting up for a more complex and insidious outcome.

Let us cover some basics, and then try to put the current situation into a stream of probabilities. A bull trend is the most easy to identify in market analysis, because the generally accepted definition is that bull markets move in a series of higher highs and higher lows. Some disciplines get more sophisticated and add non-overlapping rules, but for our teaching purposes today we shall keep it simple and stick with the higher highs and higher lows definition. Now this is where it gets more complicated, because bear markets can develop into multiple forms of overlapping movements, and to make matters worse one complete series of overlapping movements can connect to another making for an even more complex bear market when complete. So a bear trend may be simple or quite complex, and the analyst has no way of knowing early on, which kind of bear the market may dial up, or the duration. While bear markets may be wonderful environments for traders, they are often extreme challenges for researchers and analysts due to the multiple ways in which they may develop.

The evening news you are listening to very likely is referring to the stock market being in a bear market, and by one generally accepted definition the market has intra-day touched the required 20% down off the all-time high to qualify as a bear market. So here is the rub, is the bear market complete as of the December 24 low, or are investors caught in the beginning of a larger and much more complex developing bear market? In a former update I quoted Churchill’s famous observation during WWII that “This maybe the end of the beginning”. In this analogy the intraday low on December may have been the end of the beginning, or it may have been the end of the entire bear?

In Lowry Research analysis there were three consecutive 80% down side days culminating in the December 24 low. Then on December 26 the stock market erupted higher to set a one day point gain record for the Dow. This in the Lowry discipline constituted a reversal of the short term trend from down to up. While there may very well be a retest of that intraday low of December 24, the odds would have appeared to have shifted in favor of the bulls. TATY, a supply and demand indicator, also spiked intraday on December 24 down to 101, a rare event. There have only been 10 times since the 1990s that TATY has descended into the green zone surrounding the 90-100 level. In all ten cases new all-time highs followed, albeit on some occasions after a retest of the low. Does the one point miss at 101 on December 24 signal that another assault on new all-time highs is probable? So the notion according to the NYC research firm that a retest of the low is almost a sure thing could be right, but the notion that the bottom of a complete bear is in, or only the first leg down in a more complex bear is complete may be just as probable?

Just in case the walk through above is a bit confusing to you, I want to add some more perspective to what is actually happening, and then focus on what must happen to narrow these probabilities down to a tactical plan within a larger strategic outlook. To do this we need the help of a 12th century Italian mathematician named Leonardo Fibonacci. Fibonacci discovered a number sequence and series of ratios, which occur repeatedly in nature, and interestingly enough the markets. It is beyond the scope of this brief update to delve deeply into the application of Fibonacci’s work to the stock market, so we will just say declines in bear markets more often than not tend to stop at a Fibonacci retracement level. Currently there are two propositions being put forward about the current bear market. The first is that it is correcting the rise since the low in February 2016, and the other is that a huge bear market is underway correcting the entire bull trend, since the March 9, 2009 low at S&P-500 666 to the recent all-time high at 2941. While either degree of bear trend would inflict serious pain on investors, the latter would be devastating to those over age 50. So which portion of the bull trend is being corrected is more than an academic exercise. As an aside, before you look askance upon Fibonacci, please be informed that in all races and cultures, those having features in symmetrical Fibonacci proportion are thought to be “beautiful”. The Mona Lisa, for example, displays these proportions. There are even plastic surgeons these days, which use Fibonacci masks to aid in their reconstruction work.

The first chart above shows the three most common Fibonacci retracements of 38%, 50% and 62% applied to the bull trend beginning in February 2016 to the all-time high at S&P-500 2941. The current decline has already touched the 50% level, and given the Lowry Research discipline outlook for a reversal, and the rare TATY intra-day decline to 101, a case can be made that the bottom may in, or according to the NYC research outfit may be in on a retest of the December 24 low. My clients are already invested, so if the re-test does not happen we are already golden.

The second chart above shows the application of the three most frequent Fibonacci retracements applied to the bull trend from S&P-500 666 to 2941 beginning at the March 9, 2009 low. The minimum expected 38% retracement would carry to S&P-500 2072, and a 50% retracement would take investors to the March 9, 2009 low at S&P-500 1804, or the total loss of the last 14 years of accumulated gains! So the degree of the bear market one is dealing with really matters in terms of accumulated wealth. The good news is the opportunities created by bear trends on a scale equivalent to correcting the excesses accumulated during the bull run from February 2016, or March 2009 will be substantial, even as the average buy and hold investor stranded in chronically underperforming annuities and/or high commission mutual funds are pummeled by what the weight of the evidence continues to tilt toward a larger and much more complex bear market being underway.

So here is the bottom line as it pertains to preservation of your wealth, and the enhancement of your wealth with the least risks possible. The probabilities are drifting more and more in favor of the onset of a large and complex bear market. The first leg down in this new bear market has thrown off objective evidence on December 24 and 26 that this first movement down may have ended, or will likely end on a retest of the December 24 low. A lesser probability is that a bear market is complete at the December 24 low, and the resumption of the larger bull trend is at hand. If there is going to be a retest of the December 24 low, then the supply and demand indicator, TATY, will likely falter and stall in, or near, the red zone surrounding the 140 level. Please notice it ended the week at 141, see third chart above. If there is a retest of the low with supply and demand indicators painting out strong positive divergences, then I will use those conditions to put excess cash to work in anticipation of a substantial rebound rally to follow.

On the contrary, if there is no retest of the December 24 low, then TATY will likely begin to paint out objective numbers above the red zone surrounding the 140 level, and pullbacks will continue to form higher and higher lows vis-à-vis the indicator. If the low is in, then TATY must continue to strengthen. Please note that in a huge complex bear trend a new all-time high could occur in advance of a relentless and devastating final leg plunge down as the big bear trend entered its recognition phase where mindless program and panic selling become the order of the day. This setup could occur even if the degree of bear is only correcting the rise from February 2016, or for sure from the March 2009 low at S&P-500 666. Obviously the difference in “degree” at work could devastate investor wealth. On the other hand, properly navigated, investor wealth could be enhanced substantially by adroit trading guided by supply and demand indicators taking advantage of rare and fleeting discounts to “value”.

The weeks and months ahead are pregnant with opportunity, but unfortunately not for the vast majority of money managers, which lack both the tools, skill and courage required to navigate a big, complex, and violent bear market.

My sincere thanks to all doctors and nurses at Archbold Hospital for their care and skill, while repairing my chronic back injury of long standing. I’m making steady progress with my recovery.

Jan 7

A Bounce Or Resumption Of The Bull Trend?

The stock market appears to have experienced a cathartic event as the recent decline painted out three consecutive 80% down days followed by a 90% up day on December 26th. In the Lowery Research format this behavior constitutes a reversal in trend from down to up. And, two violent rally days have contributed to the signs that at least a short term bottom has formed. The first big up day went for 1086 Dow points and the one on Friday for 746 Dow points.

Investors will notice that TATY, a supply and demand indicator, has recovered to the red zone surrounding the 140 level, and the Premium/Discount indicator is also trying to recover from deep discounts represented by the minus eight level. What we need to see at this point is a continuing positive divergence in the indicators to the price, which may experience episodes of testing the recent bottom. As long as TATY continues to grow stronger by painting out higher highs and higher lows, then we shall want to remain invested and allow the positive divergence, like gravity, to pull the price higher. Hopefully this process will take long enough to qualify our purchases from last February-March for long term gains tax treatment. The odds at the moment would seem to favor such an outcome.

The bottom line is perhaps the entire bear market decline has run its course, and the resumption of the bull trend has begun. On the contrary, if TATY and other indicators begin to weaken as the price falls short of new all-time highs, then maximum defense will need to be employed to protect client wealth from what is likely a much larger and complex bear market. Given the behavior of the market during the recent weakness, then I am quite suspicious that the larger and complex bear market is the most probable. So, TATY and other indicators must continue to generate strength, or defensive action will be required to protect client wealth. Obviously, the market’s behavior during the first quarter will be critical to the actions required vis-a-vis risk and portfolio management.

Dec 24

Too Late To Sell And Too Early To Buy

The stock market is experiencing atypical weakness during what is historically the strongest seasonal period of the year. Powerful rallies sprint higher intraday only to encounter motivated sellers before the market close. The premium to discount indicator in the lower panel of the attached chart has descended below its deep discount to value line at minus eight, but so far has failed to develop a positive divergence with the price to suggest this episode of weakness may be nearing an end. TATY, a supply and demand indicator, has declined back into the caution zone surrounding the 120 level after stalling out marginally above the red zone confirming the recent bear market warning signal. And, all this has happened after the rebound in the price failed just above S&P-500 2800, and close to a 62% retracement of the initial decline from the all-time high at 2941. This objective evidence being generated by the market has now tilted the probabilities in favor of a developing bear market.

A bear market is the ultimate destroyer of wealth for the buy and hold type investor, as profits accumulated over months, or years, are erased in a relatively short period of time. Bull markets take the stairs on the way up, but bear markets usually take the express elevator down, so the power of a bear market must be respected, especially as a bear market matures. In the early stages, a newly minted bear can linger for weeks, or months, near the high before investors recognize something is wrong and become more and more motivated to sell. As recognition spreads investors become urgent sellers, and urgent sellers morph into panic sellers as the bear process begins its terminal phase. Unfortunately, this progression in the price decline can occur over a period of time lasting weeks, months, or in extreme cases years; the Japanese stock market after it peaked in 1989 comes to mind. So the damage done to the psyche of investors occurs not only in terms of wealth melting away, but also in terms of how much time it takes for Mr. Bear to complete his wealth destruction mission.

In my world wealth and risk management involves an objective assessment of the strategic big picture, a tactical plan appropriate for the strategic situation, and an accounting for the tax implications for any action taken to manage the risks to client wealth. During and after the dramatic and swift correction in February of this year, investors were given an opportunity to put money to work while the stock market was offering a fleeting discount to value. I took advantage of that opportunity to do some buying for clients, and during the subsequent rally clients have collected three quarterly dividends, and those purchases will soon qualify for long term capital gains in late February and March. When the bear warning was recently completed, I made the decision to continue to hold those purchases weighing the impact of the tax on the potential short term gain versus the potential for the early phases of a new bear to linger near the all-time highs until clients could collect a full year of dividends, and also for the purchases to quality for long term capital gains. In most cases the tax due on the short term gain would still outweigh the impact of the current market weakness. It remains to be seen if the stock market will soon put in a significant bottom for the current leg down from which a substantial recovery rally may emanate creating a long term capital gain opportunity?

The are multiple ways a bear market may develop, but history has shown that the most powerful rallies on record have occurred during big bear markets. In the current case it is likely too late to sell into this deeply oversold market, and too early to buy the discount to value currently being offered by this probably first leg down from the all-time high. It is also too early to tell if further decline will result in bringing an end to a brief but very nasty correction, or if the stock market is setting up for a long and devastating bear market. I am suspicious that the current decline is just the first phase in what may turn out to be a complex bear market lasting weeks, months, or possibly longer. This current weakness will end when the last would be seller has sold, and the supply and demand equation shifts back in favor of demand over supply. In the interim bear markets often create substantial albeit fleeting opportunities, so we will endeavor to take maximum advantage of those kinds of intermediate trading opportunities regardless of the tax implications.

So to summarize, the current decline may still be only a correction from which a new rally leg will be born, which will also have the potential to assault new all-time highs. However, given the lack of positive divergences in an array of indicators, and the lack of evidence for a cathartic bottom, then this move down likely has more to go, and the probabilities are turning in favor of a developing bear market. However, even if the stock market is in the early phases of a new bear market, then according to one discipline I follow only as tertiary information new all-time highs may still be touched as part of a complex bear market. If a bear market does develop along this path, then it will be particularly insidious, and will likely rip investors just as they feel it is safe to re-enter what will appear to be a continuing bull trend. Yeah I know new all-time highs and a bear market would appear to be mutually exclusive, but yes occurrences of these kinds of bear market phenomenon have been well documented down through the years. Please note that I’m not predicting such an outcome, I do not do predictions, but clients need to be aware that this is one possibility among several along which a complex bear market may develop. Such an outcome would likely create big profit opportunities inside the ongoing bear trend for investors with the tools and courage to navigate the volatility and implied risks.

All of us here at Optimist Capital want to wish all our clients, family and friends a Merry Christmas, Seasons Greetings and Happy Holidays!

Dec 17

Neither Bulls Nor Bears Are Happy

I’m going to try and make this simple for non-professional investors, and perhaps for some professionals as well.

A leg up in a bull trend has obviously ended at S&P 500 2941,and so now the debate is whether the stock market has begun just a correction in an ongoing bull trend, or if a bear market is now in its early phases. A bear market has no official definition, but the generally accepted guideline is corrections are less than a twenty percent decline, and bear markets decline twenty percent, or more, off the high. Lay people may want to think of this as the difference between a nasty cold, and a potentially deadly case of pneumonia.

Bear markets have been promoted by big institutions as lasting about 18-24 months, so they say investors should just ride out the pain and not try to avoid it, since of course that is impossible (especially for them). In addition to being obviously self-serving, these ruminations are grossly inaccurate, and most likely a product of data mining. For example, there was a bear market lasting from 1966 to August 1982, sixteen long years, with the Dow locked in rallies and declines from 500 to 999. Finally in August 1982 the Dow rocketed higher supported by huge positive numbers in numerous measures of market strength. And, oh yes, there have been bear markets lasting decades, a biblical lifetime type bear in England comes to mind, and a multi-decade bear in Japan, which began in 1989. So the bottom line in this brief bit of history is bear markets must be respected as the ultimate destroyer of investment wealth.

Given that the difference between corrections and bear markets is a matter of not only of time, but also in terms of wealth destruction, then investors should do all they can to avoid becoming participants in the latter.So where are we now in this exercise of probabilities, which may have profound implications for growing, or protecting, the wealth of investors? Here is the most simple and straight forward answer I can offer given the current status of an array of supply and demand based indicators. If the stock market is in the midst of a correction, then it will be likely nearing an end once the price presses new lows for the decline with strong positive divergences having been painted out in a number of supply and demand indicators. Some indicators are currently showing marginal positive divergences, but evidence that the price decline to date has caused a washout type bottom has yet to arrive. This implies the probability of lower lows for the decline. Once this decline finds its bottom, perhaps during a newsy type event, then if the positive indicator divergences are still in place, it would be reasonable for a rally to develop,which has the potential to assault new all-time highs. This is the best case scenario, and currently a lower probability.

If the stock market is in the early phase of a newly minted bear market, then what appears to be a correction setup in the previous paragraph,will likely turn out to be only the first leg down in a multi-week,multi-month, or in the extreme case a multi-year bear market. In the bear case the next significant rally will fail to make new all-time highs, and once the now counter-trend rally fails, savvy investors will take notice and begin to sell the rally in size. As recognition spreads among investors that the bull has indeed expired, then the potential for episodes of panic selling will rise,and with it a parabolic rise in risks to accumulated wealth. Mature bear markets are animals to behold as no manner of “good news” can levitate them, and waves of selling interrupted by violent, albeit short lived, rallies become the order of the day.

Investors would do well to remember how bear market mathematics work. For example a fifty percent decline means investors must then make back one hundred percent to get even! And, once unlucky investors are cut in half,they may still be vulnerable to being cut in half again! You don’t believe me,then Google a chart of the Dow from the all-time high on September 3, 1929 at 381.17 to the bottom on July 8, 1932. Count back from the July low to the late winter and early spring of 1932 when the Dow was trading at around 80, and just a few weeks from its bottom at 41 and change on July 8, 1932. After declining from 381.17 that 80 number in the spring may have looked like a bargain, and it was if investors did not mind getting cut in half again! No I’m not suggesting that investors are vulnerable to a disaster on the scale of 1929-32, but I am suggesting that the uncertainties surrounding the potential for wealth destruction during bear markets should compel investors to protect their wealth sooner rather than later.

A long history of a positive seasonal bias from roughly Halloween to Easter, and some indicators displaying budding positive divergences, would seem to imply that the current decline may find a bottom in the days ahead? If the decline ends soon, then the next significant rally will become critical in determining if the stock market is only correcting, or if the market has begun the early phases of a new bear market. The difference between the two is copious amounts of wealth safely banked, or portfolios made vulnerable to the ravages of a bear market due to failure to take defensive action as the warning signs grow stronger.

There are other ways this current weakness could play out, but for now the two candidates outlined above are the most probable. Market analysis is an ongoing detective story for which we get new clues daily, so depending upon the latest clues the probabilities may change.

TATY, a supply and demand indicator, is shown in yellow on the attached chart, and the S&P 500 cash index is shown in red and blue candle chart format.

Regards,

Gregory H. Adams

Senior Portfolio Manager

Dec 9

The Long Goodbye

The Byrds, a 1960s pop music group, incorporated the words of the preacher in Ecclesiastes into their best known hit song, which was set to music that is as iconic and memorable as the biblical lyrics.

              And a time to every purpose under heaven

             “To everything there is a season

              A time to be born, and a time to die

              A time to kill, and a time to heal

              A time to laugh, and a time to weep”

The recent passing of Senator John McCain, President George H. W. Bush, and myfather-in-law, General William A. Gantt, provided for at least one of the presiding ministers at the funerals to quote these ancient words once again. Death, the uninvited guest, can cause us to have moments of reflection as an event, no matter how long anticipated, suddenly arrives. In the cases of these three men, which served their country with distinction, the moment of their passing followed the opportunity for a long goodbye during their declining health. The lifetime of service of Senator McCain and President Bush is well known, but that of General Gantt almost not at all, because the military recognized that the General’s gregarious and affable nature, and personality, could be put to good use  —  covertly. The General’s service could be considered representative of countless others, which would suddenly disappear for periods of time during unannounced travel to foreign and hostile countries on Cold War missions, which were never discussed upon returning home to family. And now, years later, after our long goodbyes we honor them in a singular moment at their funeral for their service, as they pass away, and intoour memory. So what does all this have to do with the stock market?

Major stockmarket tops are in like manner as the long good bye, as opposed to a singular moment when a major bull trend finally expires as measured by an index. Capitalization weighting and the math involved in stock indexes can obscure the degradation occurring in many dozens of underlying stocks, as a stock index approaches its terminal peak. Major tops are processes, as opposed to events. Since October the stock market has begun to display some characteristics, which in the past have been precursors to bear markets. The process of declining underlying strength in objective measures of supply and demand is continuing. For example, a bear warning signal was recently completed as the TATY indicator declined into the caution zone surrounding the 125 level, and has now stalled out near the red zone not once but twice.

The effects ofthe favorable seasonal period, which occurs roughly from Halloween to Easter each year, must begin to show up as strengthening numbers in an array of supply and demand indicators soon, or the triggering of the recent bear warning may give way to more episodes of actual bear behavior. Even newly minted major bear markets can sometimes linger near all-time highs for weeks before getting down to the business of wealth destruction, as recognition slowly gives way to panic selling. The capital preservation drill is an exercise in avoiding the panic episodes of mindless selling, which often occur as bear markets mature. The early innings of a new bear market can be sneaky and very difficult to diagnose, but the late innings not so much.

Objective measures of supply and demand have changed enough since October to slant the strategic big picture toward favoring a developing bear market. The shifting strategic picture implies we must begin to make a turn toward protecting profits and portfolios, as opposed to trying to maximize profits. So the bottom line is given the developing strategic picture, a time has arrived for new tactics tobe implemented to address the arrival of new  and potentially harmful circumstances. Please take a look at the attached exhibits, and then read on for a briefing on our tactical plan for changing strategic circumstances.

The first chart above should be very familiar, as it is the S&P 500 weekly in red and blue candle format, and the supply and demand indicator, TATY, overlaid in yellow. Last week this chart showed divergences, which this week I have not included. The important information on this chart is that the indicator has stalled out again just above the red zone. I have been giving the bull trend the benefit of the doubt, because although the indicator has labored near the red zone, it hasbeen painting our rising bottoms  —  until Friday. The rising bottoms and the potential arrival of the positive seasonal pattern demanded that I respect that another assault on new highs was still possible. However, with the collapse of the rising indicator bottoms on Friday, it is becoming more obvious that another successful assault on new all-time highs is becoming a declining probability. So, hard evidence has now developed that the strategic big picture is likely shifting toward a developing bear market. Only a strong resurgence in the supply and demand measures would likely halt this shift toward a bear trend.

The tactical picture must now account for the changing strategic picture. The second chart below is the S&P 500 on a daily chart with Fibonacci retracements of the decline from the all-time high at 2941 to 2603 shown. The recent rebounds have encountered resistance at the common 62% retracement level. As the chart shows,there have been two trips up to this zone, and both failed to go higher. So now we have TATY stalling near the red zone, and the price struggling around S&P-500 2800 after a “long goodbye” type negative divergence during most of 2018. A picture seems to be emerging, does it not? Well analysis is all fine and good, but what does all this mean for portfolios?

Alexander and I have been fortunate recently to have a number of potential clients decide to entrust us with their wealth. Most of these new clients have portfolios, which are coming over to us, but which have not yet arrived. We are trying to complete these transfers for obvious reasons given the shifting big picture. Unfortunately, most of these accounts have been loaded up with high commissions, and high trails to the selling brokers, under performing mutual funds. Even if the market was still strong there would be lots of work required to clean up these incoming portfolios. In these cases, tax considerations notwithstanding, rallies will be used to exit these underperforming products into strength. Given that mutual funds are dinosaurs, which can be sold only on the market close, up days will be critical to get the best possible price for clients. Ditto for individual underperforming stocks, as we will do our best to get as favorable prices as possible. The decline this past week may have been strong enough to put in a short term bottom, so another substantial rally soon in this volatile environment is a good possibility. A rally above S&P 500 2800 would be a huge gift at this point, but for now 2800 appears to be strong, and now tested, resistance.

For clients already in our managed ETF model, we will be peeling off some of your VOO and QQQ into residual episodes of strength, with an eye toward both of those ETFs going ex-div around the 15th. Any rally attempt from current levels will likely linger until after the ex-div date. Alexander and I like dividends, so we always check potential sell candidates to see if an ex-div date is looming near term.

In summary, the positive seasonal trend of years past has not yet shown evidence of having arrived yet this year, but evidence that the supply and demand balance under the market is weakening is emerging. If this pattern continues, then portfolios will need to be re-configured for preservation of capital. Are we on the cusp of a “winter of discontent”? In the days and weeks ahead critical risk and wealth management decisions will be required.

Dec 3

Santa Claus Rally?

The financial media has begun to beat the drum about a possible Santa Claus rally, and soon I have no doubt there will also be discussions about the so called Super Bowl indicator. These kinds of topics make for nice cocktail party talk, but alas do nothing to aid investors in making sound decisions about their wealth.

The Law of Supply and Demand is the bedrock upon which all of the capitalistic system is built, and it is the only absolute in the science of economics, also known as the dismal science. So from my point of view, if an investor wants to make good decisions about the stock market, or any market, the first consideration must be some reasonably accurate assessment about the strength, or weakness, in the ever changing balance of supply and demand. A perfect measurement of this balance remains beyond what is possible at the moment, but fortunately a less than perfect system of measurement is capable of yielding risk adjusted performance results, which most sophisticated investors would covet. Unfortunately, the investing “crowd” tends to pursue other approaches, which year in and year out fail to deliver strong performance, and too often leave investors at the mercy of the ravages of a bear market, an insidious wealth destroyer best avoided, especially by investors over age 50.

Please take a look at the attached chart before reading the rest of this week’s update. The supply and demand indicator, TATY, shown in yellow, was frequently touching the 160 level, depicted by the light blue line, prior to January of this year. However, in the weeks after the first quarter correction the indicator painted out a negative divergence, depicted by the down sloping red line. This negative divergence, representing fading strength in the supply and demand balance, finally resulted in the current correction. You will also notice that as the first quarter correction was ending both the TATY indicator, and the premium/discount indicator in the lower panel, were positively diverging with the price, as the correction in price approached its end (upsloping green lines on the chart). This is not uncommon as corrections, and/or bear markets, approach their termination and yield to a new bull leg, or bear rally. So what does this have to do with the current situation?

In these past several days the price has been testing its panic low at S&P 500 2603, and in like manner as the first quarter correction, a positive divergence in the TATY indicator, and in the premium/discount indicator, has begun to appear. The up sloping green lines on the indicator, and premium/discount indicator, clearly show that some investors have been using the recent weakness to accumulate stocks. Believers in the Santa Claus rally nonsense may actually be rewarded, if the positive divergence in both these two indicators continue to gain strength. The key issue yet to be determined is will this positive divergence yield only an anemic counter trend rally destined to fail below the all-time high at S&P 500 2941, or will the indicators continue to gain strength causing TATY to begin to assault the 160 level while painting out bottoms in, or near, the red zone? And, the premium/discount indicator continues to gain enough strength to levitate and stay above its zero line. The bottom line is simple this week, the budding rally must generate enough strength in the indicators to result in the price rally sustaining itself. A TATY top in, or near, the red zone surrounding the 140 level would have potentially very serious negative implications, as it may tend to confirm the recent bear warning setup.

In summary, recent developments in the TATY indicator, and the premium/discount indicator, suggest the recent correction may have ended, or the first leg down in a new bear market may have ended, and a period of rally may lie ahead in the coming days and weeks. However, given the seriously negative implications of one of these probabilities, investors must remain vigilant for any signs of fading strength in both indicators. Quite frankly, the TATY indicator is currently struggling intraday to levitate itself above the red zone. If the indicator fails to gather strength soon, and evidence appears that it cannot get above the red zone, then appropriate defensive action will be required in client accounts, especially those which are now being transferred in to Optimist Capital LLC from other financial firms. A review of these accounts has revealed that many are loaded up with poor performing stocks, or even worse high commission poor performing mutual funds. Obviously even if the correction is over and a new leg up has begun in the ongoing bull trend, action will be required to clean up accounts with poor performing holdings, tax considerations notwithstanding. The days and weeks ahead will likely be critical, and sound investment decisions based on objective market generated information will be required to first protect, and then increase client wealth. As my late friend and mentor the Rev. Dr. Wilson L. Nearing would often observe about his profession: “This ain’t no place for amateurs”! Ditto for the markets!

The never ending detective story of the stock market continues, and I can hardly wait for it to yield new clues daily.