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Gregory H. Adams Update

Artigras Palm Beach Shades
Feb 18

UNCONFIRMED NEW ALL TIME HIGHS

After recently completing a new TATY low in the red zone, the price rallied back to touch new all-time highs as measured by the S&P-500. As long as the TATY strategic supply and demand indicator continues to form bottoms in, or near, the red zone surrounding the 140 level, the price will likely continue to attempt to assault new all-time highs. This is not an opinion, but a reference to the historical behavior of the TATY indicator over three plus decades. That is the good news.

The bad news is although the price has touched new all-time highs as expected, it has done so in the face of a persistent, and growing, negative divergence between the declining indicator and the rising price. These kinds of negative divergences can linger for weeks, but are almost always resolved by the price eventually following the indicator lower. The positive seasonal bias from roughly Halloween to Easter is also getting long in the tooth, so given these factors, plus a market which is certainly moving toward the rich end of the valuation spectrum, clients will likely witness a growing propensity toward increasing volatility as election looms closer on the horizon.

TATY   —   A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY finished the week at 151, and well below the negative diverging orange line on the first chart shown above. Investors will also notice that the premium/discount indicator in the lower panel of the TATY chart is also displaying a negative divergence, which is depicted by the down sloping orange line in the lower panel. This means the price has managed to touch new all-time highs on weakening demand for equities. This situation implies that any increase in supply may have the potential to quickly overcome already weakening demand. Obviously this is a situation, which will require constant monitoring in the days ahead. However, history suggests that the rally should be given the benefit of the doubt until our family of supply and demand indicators issue a “Big Chill” warning, which would begin with TATY descending into, or close to, the caution zone surrounding the 125 level.

The chart gymnastics required for TATY to complete a “Big Chill” warning would likely take days, or perhaps weeks, to complete, but the accompanying volatility would likely begin immediately. Its been many months since volatility ruled the stock market, so when it returns, possibly suddenly, investors will likely be shocked, and perhaps instantly uncomfortable with their exposure to the equity market. However, Alexander and I expect to turn the increasing volatility into opportunities to enhance the wealth of our clients, as the speed of price movements will likely move from something resembling a turtle to that of a road runner at full sprint.

SAMMY   —   A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

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

SAMMY is a wonderful tool for detecting resurging demand after sellers have exhausted their desire to sell. However, it is of very little value once a sustained rally gets underway, so it is shown above for information only. However, investors will notice that SAMMY is also showing a pronounced negative divergence, as depicted by the down sloping orange line on the second chart. With three key indicators displaying negative divergences with the price touching new highs, prudent investors would likely do well to postpone any additional purchases, and cash out any long leveraged holdings. Family members received quick and substantial profits on the SPXL ETF positions I purchase near the recent low, and I have now cashed out all those leveraged positions. I’m going to hold all non-leveraged long positions for clients, and family members for now, but fully invested accounts will be subject to some marginal profit taking, if it becomes more apparent that this leg of the rally may be nearing an end.

THE BOTTOM LINE

The previously discussed negative divergences between the price touching new all-time highs, and a series of fading indicators suggesting a continuing trend toward weakening demand for equities, has compelled me to take profits on our SPXL 3X leveraged positions in family accounts. The arrival of more evidence that the current leg up in the bull trend maybe ending may result in some marginal profit taking in long non-leveraged positions in both family, and client accounts. The eventual issuance of a “Big Chill” warning would compel Alexander and I to consider protecting accumulated profits, and client wealth, by lowering our asset allocation to equities firm wide in the face of objective measurements of rising risks to portfolios. We expect to see a substantial rise in volatility as the calendar marches toward the election, but we expect to turn potentially rising volatility into opportunities to increase client wealth

 

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.

Time Travel
Feb 10

HAVE WE ALREADY BEEN, OR YET TO COME

Last week’s lengthy update reviewed the process of how low risks buying opportunities usually develop in the stock market according to our proprietary supply and demand indicators. The update observed that the negative divergence between the price touching new all-time highs, while several of our key indicators were in obvious down trends, had finally resulted in the price rolling over to chase the indicators lower. Then in the afternoon of last Friday the decline in the price accelerated driving our premium/discount to value indicator below minus eight. Discounts to value touching this zone almost always represent a significant enough of a discount to deploy some excess cash into the equity market. A discount of minus eight in magnitude also implies the correction likely has more to go before the price bottoms, and then commences a new leg higher. We did do some ETF purchases as part of our plan to dollar cost average into a larger equity asset allocation, as the anticipated remaining steps in the bottoming process completed, which unfortunately failed to develop before the rally back to new highs.

This past Monday the brief price decline ended abruptly, and the market rallied back to touch new all-time highs by the end of the week, giving clients instant profits on the positions purchased Friday afternoon. So is the shallow correction already over, or is the rally back to new highs a trap to be followed by nasty decline to set up the completion of the usual steps in the process of forming low risks tradable bottoms? Or, as the Time Lord in the hit British Sci-fi TV series, “Doctor Who”, once said: “Have we already been, or yet to come”. Yes, time travel can cause one to become confused as one skips around the centuries, or experiences unusual, or atypical, episodes in the stock market.

So, our clients were offered a discount on new purchases, and we did some buying in anticipation of doing more, as the usual steps in a low risks bottoming process completed. And, while an instant profit on our new purchases is a plus, there is the matter of those pesky negative divergences remaining in place, and at this point growing much more pronounced, as the price has achieved new all-time highs. This suggests the potential that only a phase of the correction may be complete, and another leg down may be required to put in place a strong foundation for a new leg up in a continuing bull trend. The next two sections will explain how this conundrum may be resolved in the days to come.

During bull markets corrections happen like breathing in and out for you and I. Bull market pull backs tend to be in the range of three percent to less than twenty, with most falling into the less than double digit percentage range. Bear markets, generally accepted to be defined as declines exceeding twenty percent, are often correlated with economic recessions. Recessions are often defined as two or more quarters of negative GDP, but for a more complete definition you may want to Google “NBER”, the organization, which officially declares when recessions begin and end. So, when MIT released a report this past week that there was a 70% percent chance of a recession in the next six months, it caught my eye. There’s a 70% chance of recession in the next six months, new study from MIT and State Street finds. Click on the link to read the article. Obviously, the longest recovery in history implies that a significant stock market correction, and/or economic recession is overdue relative to history.

TATY   —   A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY is shown above in yellow with the S&P-500 cash index overlaid in red and blue candle chart format. I have left the orange lines indicating negative divergences in place, because they are likely still telling us important information. TATY bottomed marginally below the red zone surrounding the 140 level and finished the week at 145. Long time clients know that when TATY is painting out bottoms in, or near, the red zone, rally attempts are likely to follow.

In the current case, a new rally attempt has assaulted, and then the price touched new all-time highs, rewarding clients with instant profits on the purchases made during the accelerating decline of a week ago Friday. However, investors will notice that the new rally high shown on the chart looks a bit lonely, because the confirming strength of the demand represented by the TATY indicator is lagging way behind. If the rally is to continue, and possibly accelerate, then evidence of strengthening demand must arrive soon in the form of a better confirming rally in the TATY indicator. Should the negative divergences shown on the TATY chart remain, or grow worse, then the rally back to new all time highs may only be part of a bull trap, which may then be followed by a persistent and accelerating decline. The outcome of this conundrum will likely take some time to be known.

The bottom line for this section is the continuing negative divergences shown on the TATY chart by the down sloping orange lines imply that perhaps only a phase of an on going correction has been completed with possibly another leg down yet to come when the intervening rally expires.

SAMMY   —   A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

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

The conditions for the effective application of the SAMMY indicator never appeared during the fleeting three percent decline in the price, so SAMMY is shown this week for information only. SAMMY becomes critical when there is evidence of exhausted sellers in determining re-surging demand has begun. Since at this point there has been scant evidence of exhausted sellers, SAMMY is of no applicable value to us. However, I would call investors attention to the fact that the negative divergence discussed in the TATY strategic section exists also with SAMMY in the tactical section. The negative divergence is shown by the orange down sloping line on the second chart. So, SAMMY, in like manner as TATY, is suggesting to investors that the rally back to new all-time highs is so far unconfirmed by objective evidence of gathering strength in demand in these two important representatives of supply and demand indicator families.

 

THE BOTTOM LINE

 

Recent purchases made when our premium/discount indicator reached the minus eight level, a level indicative of the existence of reasonable discounts to value, has reward clients with instant profits. However, the subsequent rally back to new all-time highs has yet to be confirmed by gathering strength in a number of supply and demand indicators, which suggests that perhaps only a phase of the correction has been completed, and another leg down may yet develop.

 

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.

Rifle Target
Feb 3

RIFLES VERSUS HAND GRENADES

After weeks of a slow grind higher setting multiple all-time highs, the stock market has arrived at a potentially important inflection point. As a result, I’ve decided to cover the current situation in greater detail than usual.

Although Alexander and I have the discretion to trade client accounts as we feel is appropriate for our clients age, and financial circumstances, we have as a goal of our firm to constantly stay in touch with you about what we are doing with your wealth and why. These weekly updates are designed to keep clients informed about the strategies, and tactics, being applied to your account(s), and to over time do some basic education about how the stock market really works. And, how that understanding is key to managing the risks associated with your participation in dynamic, and often chaotic global markets.

The law of supply and demand is the absolute bedrock upon which all of capitalism rests, and is derived in its various manifestations. Over the decades I have devised many strategic, and tactical, indicators to measure and monitor the ever changing balance of supply and demand in the equity market. The indicators we are using today have been constantly evolved over many iterations, and updates to things like control parameters to enhance the effectiveness of the original concepts now in the form of their resulting indicator formulations.

These surviving indicators incorporate modules to account for NYSE type data streams, and for selective data from the derivative markets, given that huge amounts of dollar risks are managed in the derivative markets these days. So the simple chart representations clients, and research customers, see in these weekly updates belie the sophisticated nature of the underlying, and constantly evolving products, and the math driving their formulations. Leonardo da Vinci once said: “Simple is the ultimate sophistication”. So, while the indicator representations shared with clients in our weekly updates look simple on purpose, the genesis behind them is quite sophisticated.

A good many of the supply and demand indicators, which are not shown from week to week, started life as tools for a futures trader I once tried to coach. Alas, the gentleman refused to incorporate the discipline required for successful futures trading into his approach to navigating day, and intermediate term trading, which in turn shortened his trading career, although he remained a successful tax attorney.  The survivors of those early tools, first developed in the late 1980s with personal computers with a fraction of the computing power available today, are still suitable for trading the S&P-500 eMini futures contract, although obviously that venue is not a focus of my work these days.

The fast moving venue of day trading futures, options and highly volatile stocks require indicators with “rifle” type accuracy, and the requisite laser mental focus to properly apply them. However, short term trading with highly leveraged instruments is still done most effectively with tools measuring the swift intraday changes in the balance of supply and demand. Given the dynamics of short term trading, one would likely expect the won/loss record to be adversely affected as the trading time frame shortens, even with indicators more on the “rifle” end of the accuracy scale, because random market “noise” tends to become more and more of a factor.

So where is the sweet spot for investors wanting to systematically, and methodically, increase their wealth? After decades of doing this research intensely, I prefer the intermediate time frames as the best balance of risk/reward for conservative investors needing to grow their wealth. Supply and demand indicators tracing their genesis to their development as futures trading tools tend to become more like hand grenades than rifles, as the trading time frame lengthens. But, as we shall likely soon see in real time, a strategic supply and demand indicator registering an accurate, but less than perfect, representation of the balance of supply and demand can be highly profitable, if combined and effectively applied with our proprietary tactical supply and demand indicators.

On the beaches of Normandy on D-Day the most effective weapon against the Nazis machine gun nests were grenades, not rifles. A grenade will do the job, even if you only get it in the general vicinity of the target, as opposed to exactly between the cross hairs. In like manner, as bottoms are forming according to our proprietary strategic indicators (hand grenade type market tools), a series of dollar cost averaging purchases will likely result in an averaged cost near enough to the price of the absolute low tick to effectively reduce the risks to a level, where an eventual profit becomes a significant probability. During this process, if our objective measurements determine that sellers have likely exhausted their propensity to sell, and our tactical indicators confirm a re-surgence in demand, then the already significant odds of success for our new purchases will likely be enhanced even more.

There are no guarantees of success in this business of managing risks, but objective measurements confirming the existence of exhausted sellers, followed in a reasonable length of time by measurements confirming a re-surgence in the demand for equities, tends to stack the odds of success heavily in favor of investors armed with these kinds of proprietary supply and demand tools. All that is left to do at that point is to have the courage to act on the potentially profitable information being displayed by the indicators. Having the courage to act, when opportunity arrives as it often does cloaked in fear, and/or whiffs of panic, has been the undoing many an extremely bright, and often highly educated, would be stock market operator!

So, never under-estimate the courage required to be successful in the arena of trading and investing. All the high intelligence, exclusive and expensive education, and elite training are meaningless, if one’s courage fails, or is lacking altogether. Coach Bobby Dodd, the late Georgia Tech football legend, was once playing a round of golf with his buddies, when his partner needed to sink a three foot putt to win the match. After leaving the putt an inch short, the partner turned and said: “Coach I hit it will every once of strength in my body”! When the pressure is on, one’s courage can fail, which can result in costly missed opportunities, if it happens while navigating the financial markets!

The current price weakness, which began in late January, continued this past week after an intervening bounce earlier in the week. The stock market finished near its low on Friday, and a number of objective measurements are now confirming that stocks are experiencing weakness on a level not seen since August 2019, and the fall of 2018. In the absence of objective information to the contrary, Alexander and I intend to treat the current correction as an opportunity to put excess cash to work.

I’ve included the weekly update from the week ending January 17, 2020 as additional information outlining how we intend to use this budding weakness to our client’s advantage. Please note this general outline was written as a loose template explaining how to identify price declines as opportunities, or on the contrary rising threats to invested wealth. At this point in time, this decline appears to be developing as an opportunity, but that is subject to change as measures of supply and demand change.

TATY   —   A REPRESENATIVE 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 137 marginally below the red zone surrounding the 140 level, as the often mentioned negative divergence (see down sloping orange line) finally won the weeks long struggle, and pulled the price lower with it. On a percentage basis, this is how divergences between the price and this strategic indicator, regardless of whether the divergence is negative or positive, are almost always resolved in favor of the indicator. Clients, and research customers, will likely see a positive divergence develop between TATY and the price, as this correction begins to end. TATY will likely bottom first, and begin to rally, before the price completes its decline creating a positive divergence between the indicator and the price. For a recent example, take a look at the month of December 2018 in the first chart above.

At this point in the development of the correction, a TATY reading marginally below the 140 level is not a reason for any serious concern. However, a TATY decline into the caution zone surrounding the 115 level would have to be treated as an early warning that the strategic (big picture) balance in the supply and demand equation may be beginning to change in favor of supply over demand. A follow on issuance of a “Big Chill” warning, would compel Alexander and I to consider, if defensive operations in portfolios were becoming necessary.

I’ve left the orange down sloping lines shown on the TATY chart to illustrate why it is important to pay attention to divergences, even though it may take weeks before a negative divergence grows strong enough to pull the price lower. The divergence shown on the TATY chart has been measuring the creeping loss of strength in the bidders driving the price higher, and recently the bid under the market has weakened enough to drag the price lower. Remember what TATY is measuring, while it looks just like a price chart, it is a record of the strength (or weakness), in the changing balance of supply and demand.

This is in like manner as your physician taking a number of medical measurements being created by your body, and then presenting them in chart form. The quantified medical readings are fundamentals impacting the health of your body, but the presentation is most often in the form of a technical looking chart. My work revolves around the most important fundamental in the stock market, the measurement, and constant monitoring of the balance of the supply and demand for equities. However, the presentation of this most fundamental of all market information often leads some clients, and would be clients, to mis-construe the work as technical due to its presentation format.

Now let us turn to the other negative divergence, the one shown by the other down sloping orange line in the lower panel of the TATY chart. The lower panel is a representation of the never ending journey of the price from premium to value, to discount to value, and back again. This round, and around circuit must be quantified in order for it to be applied in any useful way. I view the lower panel as the “LADIES” indicator, because our mothers, wives, and/or daughters are usually the most astute buyers in the family.

Peter Lynch, the former manager of the once famous Fidelity Magellan Fund, credited his success to following his wife around stores, and then buying the stocks of the companies, whose brands his wife was buying. The premium/discount indicator in the bottom panel of the TATY chart has nothing to do with brands, but everything to do with how our mothers, wives and/or daughters usually operate in a store. If she needs one of “My Favorite Brand”, and today she discovers it is on sale two for one, then guess what happens. Ditto for the ladies I see in the check out line with their hands full of coupons, must have those extra discounts you know. I like to buy stocks for clients the way my mother, wife and/or daughters have purchased for our needs over the years  —  at a discount to value.

Currently, we have TATY declining marginally below the red zone in the upper panel, and the premium/discount indicator in the lower panel finishing the week marginally below the red line at minus eight. Historically registering minus eight on the premium/discount indicator is evidence that a substantial enough discount to value is being offered by the stock market to do some buying in accounts with excess cash. Minus eight does not mean the discount is so large that the price decline will likely end immediately, nor that better prices are not yet to come. Until both TATY in the upper panel, and the premium/discount indicator in the lower panel, begin to paint out positive divergences to a still declining price the odds would still favor lower prices to come.

However, remember we are doing grenades here in an effort to dollar cost average into a really good price relative to recent history, as opposed to attempting to get the fleeting absolute price low between the cross hairs, which is virtually impossible. So, given that a persistent decline accelerated late Friday, I used the minus eight discount level to do some buying in accounts with excess cash, because recent corrections have been fleeting, and who knows what Monday may bring. The first couple rounds of dollar cost averaging into a long position is like an appetizer,  so save some hunger for the main course to come, and if the main course is a no-show, then we took what we were offered, and enjoyed the appetizer.

TATY has now painted out numbers consistent with those it generated during the fall 2018 correction, and the brief price weakness in August 2019. However, having dipped below the red zone surrounding the 140 level, and with the premium/discount indicator declining below minus eight, the potential exists for the development of positive divergences with a still declining price, then the appearance of objective evidence of exhausted sellers, followed by re-surging demand would likely compel us to consider putting all available excess cash to work in equities. Should TATY and SAMMY paint out a classic buy signal, then we will review the asset allocation of clients already reasonably invested to see if their exposure to equities needs to be adjusted in proportion to the strength of a new buy signal, and potentially renewed attempts to assault new all-time highs to follow. A new buy signal would likely take several days to complete, so this correction may linger for a while. If it does not linger long enough to complete the steps just described, then the implied failure to completely purge all the would be sellers from the mix could result in a potentially fragile and dangerous resumption of the previous record setting rally.

SAMMY   —   A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

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

SAMMY excels at identifying re-surging demand once sellers have exhausted their propensity to sell. Exhausted sellers are a necessary condition for the stock market forming a low risks bottom, but not a sufficient one. Stock market bottoms form when there is objective evidence of re-surging demand, after sellers have exhausted their desire to sell. During prolonged rallies SAMMY is virtually worthless. However, once the strategic indicator TATY bottoms, then begins to rally, and then establishes a positive divergence to a likely still declining price, SAMMY tends to become an extremely important indicator. SAMMY’s history is one of consistently alerting investors that buyers are returning to the market in size to scoop up perceived bargains. When this occurs SAMMY literally leaps higher, as if it were shot out of a cannon. This kind of indicator behavior tends to confirm that a low risks bottom has formed, or is likely to form in a matter of hours, or possibly days.

When SAMMY paints out evidence of re-surging demand, this is the signal for investors to complete their last round(s) of dollar cost averaging purchases of equities. Objective evidence of exhausted sellers followed shortly there after by evidence of re-surging demand usually results in the commencement of a new leg higher in the previous uptrend, or the establishment the first leg up in a new bull market, if the signal happens as a bear market is ending. A generally accepted definition of a bear market is a decline from top to bottom of twenty percent, or more.

Currently there is some evidence that sellers are on the road to exhausting their propensity to sell, but at this point it appears too soon for SAMMY to issue a buy signal given the lack of a positive TATY divergence with the still weakening price.

THE BOTTOM LINE

The most significant price decline vis-à-vis our indicators since August 2019, and the fall of 2018, is underway. We intend to use this weakness in the price to put excess cash to work, as our proprietary indicators uncover opportunities to dollar cost average into a potentially low risks position. Should a classic TATY/SAMMY buy signal be issued, all client accounts will be reviewed to see if they are candidates for an increase in equity exposure. Given the current stage of development of the correction, and the chart gymnastics required to be completed before a buy signal can be generated, a final round of dollar cost averaging may not be commenced for several more days.

I apologize for the length of this update. Given the infrequent low risks buying opportunities over the last several months, I want to use this current correction as a real time refresher course for clients of long standing, and as a teaching opportunity for new clients just beginning to learn about our approach to managing risks. Now that clients have two detailed templates about how this correction is likely to develop, complete, and then become a foundation for the next leg up of the previous rally, I intend to return to our more succinct format in the weeks to come.

 

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.

 

REFERENCES FROM ABOVE BELOW:

 

CLIENT AND RESEARCH CUSTOMER STOCK MARKET UPDATE FOR THE WEEK ENDING JANUARY 17, 2020

The stock market inched its way to new all-time highs this past week, as investors continue to exhibit an absolute conviction that good economic times are here to stay. Complacency, extreme bullish sentiment readings, and fear of missing out on the rally remain the order of the day. This situation reminds me of the old stock market cliché that says: “The stock market can remain irrational longer than you can remain liquid”. The status quo may continue, but in this business of managing financial risks to client wealth bullish extremes often appear toward the end of bull legs, and bearish extremes tend to appear near the end of bear legs.

Alexander and I are in the risk management business, and we do not attempt to forecast future movements of the price in the stock market. We will leave stock market predictions to those, which believe they have the requisite skill, talent and expertise, to be successful at that most difficult of arts. However, objectively measuring the ever changing balance of supply and demand in the equity market, and then setting those measurements into a historical reference is something we do routinely with proprietary indicators designed specifically to account for the ever changing balance of supply and demand created by countless transactions on the NYSE, and in the global derivative markets.

Human nature tends to repeat in the crucible of the stock market, and this makes comparison of objective measurements of human nature in action over time in the markets a worthwhile, and potentially profitable exercise. So today, very likely well in advance of a major stock market top, I’m going to briefly describe how the next major top will likely form vis-à-vis the tools we share with clients every week. I will bring you up to date on the current status of these supply and demand tools in the two sections to follow, and at the end of each section I’ll describe how these tools will likely configure their readings during a routine correction to re-invigorate demand, and/or how these tools will likely configure themselves as the next major top builds out. At this point, history suggests there will be at least one (or more) corrections prior to the formation of the next major top.

TATY   —   A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY is shown above in yellow with the S&P-500 cash index overlaid in red and blue candle chart format. TATY finished the week up a bit at a strong 154. However, TATY continues to paint out a negative divergence with the price, which is touching new all-time highs. Negative divergences almost always result in the price entering a correction, but not always. Demand can gather strength during negative divergences, which can erase the divergence, but these events tend to be rare. Once buyers fatigue sets in, which appears as the negative divergence, that fatigue tends to go to completion in the form of a correction to set up lower prices, which in turn stimulates investors to act on their latent desire to buy at what appears, in the light of recent history, to be bargain prices.

In environments of bullish extremes like currently, corrections may appear to come out of the blue, and may be quite uncomfortable and nasty, but fleeting. History suggests investors may encounter just such a price decline during the first quarter, or as the positive seasonal bias begins to wane around Easter. As long as the next significant price decline results in a corresponding bottom in the TATY indicator in, or close to, the red zone surrounding the 140 level, then we shall treat such a decline as a potential opportunity to put excess cash to work. A price decline with a corresponding configuration in the TATY indicator would strongly suggest a continuation of the bull trend, and possibly renewed assaults on new all-time highs.

However, a price decline strong enough to drive TATY readings into the caution zone surrounding the 115 level would be a warning to Alexander and I that the dynamics of the supply and demand balance may be changing enough to compel us to consider, or even take defensive action in client portfolios to protect accumulated profits, and/or protect client wealth from risks rising to levels, which may not be prudent for conservative investors. The chart gymnastics required for the supply and demand indicators to complete the requisite patterns would likely take weeks, so in the near term we shall investigate declines as opportunities to put excess to work with lower risk entries.

SAMMY   —   A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

SAMMY is shown above in the second chart alone, and in the third with the SPXL 3X S&P-500 ETF overlaid. The SPXL three times leveraged S&P-500 ETF is for reference only.

SAMMY has one purpose in life, which is to identify re-surging demand after sellers have exhausted their propensity to sell. Exhausted sellers are a necessary condition for a significant stock market bottom, but not a sufficient condition. To complete a bottoming process there has to be evidence of exhausted sellers, which is followed in a reasonable amount of time by evidence of re-surging demand. When both conditions are met, the probability of a new bull leg developing is extremely high. SAMMY is virtually worthless once it has signaled re-surging demand. So for now with a rally underway for weeks, SAMMY is shown for information only, and is of little value. However, as the next significant bottom forms, SAMMY will likely become critically important to us as a risk management tool for getting clients significantly more invested in stocks. At that next significant bottom I expect SAMMY to leap higher while painting out a bar on its chart completely above the previous bar. SAMMY looks like it has been shot out of a cannon when investors return in size, even as the price often is making new lows.

THE BOTTOM LINE

Timing the market is not part of anything we do at Optimist Capital, as we are strictly risk managers. However, in this update days, weeks, or possibly months before the next significant event in the stock market, we have described to our clients what we will do to manage the risks to your wealth, and how we will do it using objective market generated information from the NYSE, and the derivative markets. Opinions are subjective, and rife in this business, and tend to cause confusion, so all our actions are the result of taking into account what the markets are telling us about themselves through the objective information they generate. That information is then put into a strategic plan, which is implemented with the application of a tactical plan. This approach has been shown over time to allow us to grow wealth while minimizing risks. So now our clients know likely well in advance of us taking any actions what we will do, and how we will do it, in order to grow your wealth with the least risks possible.

Jan 27

OF PILOTS AND MARKETS

Once upon a time just out of Georgia Tech, I had the good fortune to have a former Navy pilot as one of my flight instructors. Dick Aycock taught would be pilots to carefully prepare for every flight, and to know their aircraft so well that emergency procedures could be executed immediately should they become necessary. Another Navy pilot turned NASA Astronaut once said: “that landing on the moon was the second biggest thrill of his life”. A reporter asked what could possibly top landing on the moon? The Astronaut replied: “landing on the pitching deck of an aircraft carrier at night in high seas”! Dick Aycock had been a carrier pilot, and his dedication to being prepared in the air, and to strict adherence to proper flight procedures and training, later landed him a job as the chief pilot for Flowers Industries fleet of corporate jets. Flowers Industries (FLO NYSE) is the largest baking enterprise in the United States.

I remember Dick taking me through emergency procedures over and over in Cherokee 140 Fox Lima, and Cherokee 5225 Tango, while teaching me to believe the instruments in front of me instead of the sensations my body was telling me. He often said that as a species evolution had not prepared us to operate in three dimensions, as our two dimension evolved brains would lie to us, when that vertical dimension was added to the mix. So hours of training “under the hood” with no view allowed of the horizon outside the aircraft did dramatically illustrate the necessity of believing the instrument panel, and not the sensations coming from my two dimension evolved body.

This kind of intense training can be, and has been, the difference between life and death for many pilots. Young John Kennedy flying to Martha’s Vineyard in a Cherokee Arrow comes to mind, as haze obscured the horizon, and too few hours “under the hood”, and/or lack of instruction to turn on the on board auto-pilot had a tragic result in the sea for the young Kennedy, his beautiful wife, and her best friend. When a pilot cannot see even the propeller of his, or her, aircraft due to weather, then belief in one’s instruments can be the difference between screaming out of the sky nose down, and inverted at cruise power, or keeping the wings level while maintaining your clearance altitude, and approved heading from ATC (Air Traffic Control).

The phrase often repeated among pilots telling stories in a hanger somewhere is that there are bold pilots, and there are old pilots, but there are no old bold pilots! Navigating the risks of piloting an aircraft in crowded skies subject to sudden changes in the weather is not unlike navigating the risks to increasing wealth in the financial markets. Both are done best, and with the least risks, when preparation, training, discipline, experience and belief in one’s proven instruments are constantly applied to the challenge.

TATY   —   A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY is shown in the first chart above in yellow with the S&P-500 cash index overlaid in red and blue candle chart format.

The often mentioned lengthy negative divergence in the TATY indicator (down sloping orange line on the chart) appears to have finally begun to exert enough pressure on the price to result in some weakness. At this point the price decline is only marginal, and TATY remains above the red zone having finished the week at 146. Recent price dips have been brief, and mostly of the intraday variety. So, it remains to be seen if this past week’s sharp decline in the price, and in several supply and demand indicators, are the beginning of a multi-day, or multi-week decline, or just another brief and fleeting dip in the price before another attempt to assault new all-time highs. So what are we to do? For the answer, please read on.

Alexander and I will do what all successful pilots do, which is to apply our preparation, training, discipline, experience and belief in our instruments to maximize the risk adjusted return for our clients. So what does that look like applied to current conditions? For new clients coming over to us from other money managers heavily in cash, we will begin to carefully dollar cost average some of the excess cash into equities, but not in an aggressive fashion, until there is some evidence that the price is declining from a premium to value, on the way to approaching a significant discount to value. History has demonstrated that making new purchases of equities only when there is objective evidence of the price being at a discount to value exposes client wealth to minimal risks, while increasing the odds significantly that a new purchase will eventually be profitable.

The deeper the discount to value as shown on the premium/discount to value indicator in the lower panel of the TATY chart the better. In the near term I’d like to see TATY make a bottom in, or near, the red zone surrounding the 140 level, while the premium/discount indicator in the lower panel declines below the red line at minus eight, and then rallies above the green line at minus three. Should TATY complete these kinds of chart gymnastics while the price is still touching lows for its current decline, then we would be compelled to consider aggressively putting excess cash to work, subject to evidence of resurging demand from our family of tactical indicators.

SAMMY   —   A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

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

SAMMY does a remarkable job of detecting resurging demand after sellers have exhausted their propensity to sell. Exhausted sellers are a necessary condition for a stock market bottom, but not a sufficient one. In order to complete a bottom there must be objective evidence of resurging demand shortly after evidence that the sellers have exhausted their desire to sell. SAMMY has a history of having the appearance of being “shot out of a cannon” when buyers return in size to scoop up perceived “bargains”.

Human beings are inclined toward repetitive behavior, and this causes the sequence of events described above to result in low risks buying opportunities over and over again. However, please note this sequence is NOT time based, but rather it is discount to value based. We do not know how to “time” the market, but by combining a statistically valid strategic risk evaluation, and an objective discount to value determination, with the successful identification of exhausted sellers, and then resurging demand, the risks associated with the new purchase of equities can be minimized, regardless of valuation, or the current level of the market as measured by the S&P-500.

THE BOTTOM LINE

Both the price, and a series of supply and demand indicators, are showing evidence of weakness. It is much too soon to determine, if this is the beginning of a multi-day, or multi-week, bout of weakness; or just another fleeting decline before another attempt to assault new all-time highs. However, in either case, we are putting some excess cash to work in new accounts heavy in cash, and will aggressively put excess cash to work in accounts already reasonably invested, which have a bit of excess cash, if the stock market serves up an opportunity to put excess to work with a minimum of risks, as measured by our proprietary indicators. Obviously, the days ahead should yield an answer to the question of fleeting decline, or a significant low risks opportunity to put excess cash to work.

 

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.

Jan 21

OBJECTIVELY MANAGING RISKS

The stock market inched its way to new all-time highs this past week, as investors continue to exhibit an absolute conviction that good economic times are here to stay. Complacency, extreme bullish sentiment readings, and fear of missing out on the rally remain the order of the day. This situation reminds me of the old stock market cliché that says: “The stock market can remain irrational longer than you can remain liquid”. The status quo may continue, but in this business of managing financial risks to client wealth bullish extremes often appear toward the end of bull legs, and bearish extremes tend to appear near the end of bear legs.

Alexander and I are in the risk management business, and we do not attempt to forecast future movements of the price in the stock market. We will leave stock market predictions to those, which believe they have the requisite skill, talent and expertise, to be successful at that most difficult of arts. However, objectively measuring the ever changing balance of supply and demand in the equity market, and then setting those measurements into a historical reference is something we do routinely with proprietary indicators designed specifically to account for the ever changing balance of supply and demand created by countless transactions on the NYSE, and in the global derivative markets.

Human nature tends to repeat in the crucible of the stock market, and this makes comparison of objective measurements of human nature in action over time in the markets a worthwhile, and potentially profitable exercise. So today, very likely well in advance of a major stock market top, I’m going to briefly describe how the next major top will likely form vis-à-vis the tools we share with clients every week. I will bring you up to date on the current status of these supply and demand tools in the two sections to follow, and at the end of each section I’ll describe how these tools will likely configure their readings during a routine correction to re-invigorate demand, and/or how these tools will likely configure themselves as the next major top builds out. At this point, history suggests there will be at least one (or more) corrections prior to the formation of the next major top.

TATY   —   A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY is shown above in yellow with the S&P-500 cash index overlaid in red and blue candle chart format. TATY finished the week up a bit at a strong 154. However, TATY continues to paint out a negative divergence with the price, which is touching new all-time highs. Negative divergences almost always result in the price entering a correction, but not always. Demand can gather strength during negative divergences, which can erase the divergence, but these events tend to be rare. Once buyers fatigue sets in, which appears as the negative divergence, that fatigue tends to go to completion in the form of a correction to set up lower prices, which in turn stimulates investors to act on their latent desire to buy at what appears, in the light of recent history, to be bargain prices.

In environments of bullish extremes like currently, corrections may appear to come out of the blue, and may be quite uncomfortable and nasty, but fleeting. History suggests investors may encounter just such a price decline during the first quarter, or as the positive seasonal bias begins to wane around Easter. As long as the next significant price decline results in a corresponding bottom in the TATY indicator in, or close to, the red zone surrounding the 140 level, then we shall treat such a decline as a potential opportunity to put excess cash to work. A price decline with a corresponding configuration in the TATY indicator would strongly suggest a continuation of the bull trend, and possibly renewed assaults on new all-time highs.

However, a price decline strong enough to drive TATY readings into the caution zone surrounding the 115 level would be a warning to Alexander and I that the dynamics of the supply and demand balance may be changing enough to compel us to consider, or even take defensive action in client portfolios to protect accumulated profits, and/or protect client wealth from risks rising to levels, which may not be prudent for conservative investors. The chart gymnastics required for the supply and demand indicators to complete the requisite patterns would likely take weeks, so in the near term we shall investigate declines as opportunities to put excess to work with lower risk entries.

 

SAMMY   —   A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

SAMMY is shown above in the second chart alone, and below with the SPXL 3X S&P-500 ETF overlaid. The SPXL three times leveraged S&P-500 ETF is for reference only, certain quirks related to its derivative construction can result in tracking errors with its S&P-500 benchmark over time.

SAMMY has one purpose in life, which is to identify re-surging demand after sellers have exhausted their propensity to sell. Exhausted sellers are a necessary condition for a significant stock market bottom, but not a sufficient condition. To complete a bottoming process there has to be evidence of exhausted sellers, which is followed in a reasonable amount of time by evidence of re-surging demand. When both conditions are met, the probability of a new bull leg developing is extremely high. SAMMY is virtually worthless once it has signaled re-surging demand. So for now with a rally underway for weeks, SAMMY is shown for information only, and is of little value. However, as the next significant bottom forms, SAMMY will likely become critically important to us as a risk management tool for getting clients significantly more invested in stocks. At that next significant bottom I expect SAMMY to leap higher while painting out a bar on its chart completely above the previous bar. SAMMY looks like it has been shot out of a cannon when investors return in size, even as the price often is making new lows.

THE BOTTOM LINE

Timing the market is not part of anything we do at Optimist Capital, as we are strictly risk managers. However, in this update days, weeks, or possibly months before the next significant event in the stock market, we have described to our clients what we will do to manage the risks to your wealth, and how we will do it using objective market generated information from the NYSE, and the derivative markets. Opinions are subjective, and rife in this business, and tend to cause confusion, so all our actions are the result of taking into account what the markets are telling us about themselves through the objective information they generate. That information is then put into a strategic plan, which is implemented with the application of a tactical plan. This approach has been shown over time to allow us to grow wealth while minimizing risks. So now our clients know likely well in advance of us taking any actions what we will do, and how we will do it, in order to grow your wealth with the least risks possible.

 

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.

Jan 13

COMPLACENCY TURNING INTO DESPERATION?

Following the dark days of 1940 and the retreat to the beaches of Dunkirk, the Battle Of Britain, and the Nazi bombings during the “Blitz”, Winston Churchill and the American High Command decided to undertake a campaign to drive the Nazis from the strategically important oil fields of North Africa being protected by the Africa Corps under the command of General Erwin Rommel. These landings in Africa would be preparation, and a testing ground, for the invasion of Europe to come later, and not too soon enough to satisfy Marshall Joseph Stalin, who was losing soldiers and civilians by the millions to three Nazi Army groups laying siege to Leningrad (St. Petersburg), Moscow and the Ukraine. British troops led by General Bernard Montgomery, and green American troops under the new command of General George Patton were eventually successful in driving the Nazis from North Africa. After a long series of retreats and setbacks the British people finally had a major victory to celebrate. Prime Minister Winston Churchill, careful to not raise expectations too high, addressed the nation on the significance of the victory in North Africa. Churchill said: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”.

Churchill’s quote came to my mind this past week, when it was reported that a certain well known stock market pundit had observed that he was surprised not that the S&P night session futures sold off sharply when the Iran ballistic missile strike on military installations housing American troops in Iraq was announced, but that the sell off almost instantly found buyers, and the buying spilled over into the NYSE opening the next morning. The pundit said the buying appeared to be in “desperation”.

Anecdotally stock market complacency, desperation buying, and buying out of fear of missing out often happen near the ends of legs in bull trends. These observations tend to be instruments too blunt to apply successfully to make trades, but these kinds of events do tend to precede the (temporary) exhaustion of demand, as the last buyers to be convinced throw in the towel, and buy out of a sense of frustration and desperation. Churchill knew there were many more months of war ahead, but he also knew the Allied victory in Africa was a turning point, “the end of the beginning”. The arrival of buyers out of desperation may also not be the end of this long bull run, but a prudent investor would take such an observation, made by a well known figure, as a “straw in the wind” to be alert for more, and better objective evidence that the stock market may be in need of taking a breather sometime in the first quarter?

TATY   —   A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY is shown in the first chart above in yellow with the S&P-500 cash index overlaid in red and blue candle format.

TATY finished the week at a modestly strong 152, but with the weeks long negative divergence (see down sloping orange line on the chart) still in place, even though the stock market touched new all-time highs again. A negative divergence can disappear due to improving demand, but most often a negative divergence in this strategic indicator will foreshadow at least a modest decline, or correction, in the price. The longer the negative divergence remains in place, the higher the odds that buyers fatigue will set in and a normal correction to re-invigorate demand may appear, perhaps to the disappointment of those buying out of desperation? For now all we know for sure is the price has been sustained by weaker demand according to the TATY measurement of supply and demand, but still enough residual demand to power the price to touch new all-time highs.

A decline causing TATY to make a BOTTOM in, or near, the red zone surrounding the 140 level would likely be followed by additional attempts to assault new all-time highs. On the other hand, a decline strong enough to force the TATY indicator into the caution zone surrounding the 115 level may signal a change in the balance of demand over supply enough to cause Alexander and I to make a decision regarding the need to take defensive actions in client portfolios. A “Big Chill” warning would be an early warning that the supply and demand dynamic may be changing in favor of rising risks to client wealth requiring defensive action. Such an event would likely take weeks to develop, so for the time being periods of market weakness will be evaluated as opportunities to put excess cash to work.

SAMMY   —   A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

SAMMY excels at identifying re-surging demand after sellers have exhausted their desire to sell. Otherwise, it is of little value during prolonged bull trends, so it is shown above alone, and in the below with SPXL 3X S&P-500 ETF overlaid. The SPXL is for reference purposes only.

THE BOTTOM LINE

Strategic indicators suggest the record setting bull run has more to go, perhaps much more to go, but like breathing in and out for you and me, bull trends do not go up in a straight line. There will be declines to re-invigorate demand, and the recent appearance of buyers out of desperation may be a straw in the wind that the stock market may need to catch its breath in the form of a modest decline, or correction. The more objective reason for the expectation that the market may be nearing a period of weakness is the weeks long negative divergence in the strategic indicator TATY. Negative divergences in the TATY indicator almost always result in some market weakness. Fortunately, most of our accounts are invested, and enjoying their increase in wealth. We shall investigate any periods of weakness as opportunities to put excess cash to work in equities, as long as periods of weakness do not trigger a “Big Chill” warning.

 

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.

Jan 6

Pragmatist Versus Manager

Decades ago one of my Georgia Tech professors was making a point about managing a business, when he related the following anecdote after a class mate described himself as a “pragmatist”.

A certain school system was searching for a replacement for its retiring superintendent. A member of the board lobbied for a well-known and popular candidate already employed by the school system, which had an outstanding record as a pragmatic problem solver. Another candidate with a strong resume’ as a management professional was eventually passed over, but was then hired by a competing school system known to be having serious problems. My professor then asked the class whom they would have hired. After some discussion, the class served up the answer the professor said should be obvious.

Management Science teaches POC, which translates as the three management functions: Plan, Organize and Control. The professor went on to say that the pragmatist encountered few difficulties early on in his tenure, as his predecessor had planned well, and had retired with his school system in very good shape. However, as time passed the pragmatist began to be over run with problems to solve, because he was a particularly poor planner.

The passed over candidate encountered immediate, and serious, difficulties early on at the competing school system, as his predecessor had left under pressure from his board for poor performance. However, as time passed the professionally trained manager was able to implement his plans for the system’s future, re-organize his staff and teachers with very talented and dedicated people. And, he brought the initial chaos under control with procedures designed to gain and maintain management control system wide. The professor finished by saying that pragmatists will always have plenty of problems to solve, but professionally trained managers are responsible for planning, organizing and controlling organizations in a manner, which minimizes problems.

So what is the point of sharing this classroom anecdote?  Alexander and I are charged with the fiduciary responsibility of maintaining, and growing, your wealth with as little risks as possible. As part of our responsibility we must plan ahead for financial developments of the negative kind, which may adversely affect your portfolio. Over the past many weeks we have been mentioning the possibility that 2020 may be a year of increasing volatility, and the attendant risks and opportunities inherent in an environment of rising market volatility. Well 2020 is upon us, and so far the environment is one not of volatility, but complacency on an epic scale.

Weeks on end of a creeping bull trend and (marginal) new all-time highs has seemed to inoculate investors from even the suggestion that financial risks still exist. In fact, this re-enforcement of the bull belief system is understandable after the completion of a decade without a recession, and the longest equity bull run on record. After a decade of this record setting bull trend is the stock market finally ready to put on a demonstration the late Paul Desmond’s observation that “low volatility begets high volatility, and high volatility begets low volatility”? The current complacency of professional investors would seem to suggest extraordinary vigilance will likely be a prudent plan in 2020.

We are not in the predicting business, as we prefer to leave that most difficult of arts to those, which claim to have that talent. However, we expect our proprietary market tools to perform successfully during a continuing bull trend with attendant low volatility, if the stock market serves up that kind of environment in 2020. Or, even better performance would be likely, if the market turns bearish with a vengeance, as there will likely be opportunities to buy at discounts to value, as a newly minted bear would destroy the wealth of buy and hold investors. You see we believe in planning and organizing in advance, so we can be in control before the market serves up its next big move, bull or bear!

TATY   —   A REPRESENATIVE 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 149 down a bit more from last week in spite of the price touching new all-time highs. The negative divergences (down sloping orange lines on the TATY chart) mentioned over the last several updates remains in place, which suggests the bid under that market remains strong enough for the price to attempt assaults on new all-time highs, even as demand continues to wane. However, with TATY just now entering the red zone surrounding the 140 level, the bid under the price may still have enough residual strength to drive the price toward another all-time high, but do not count on it, before a decline strong enough to re-invigorate demand arrives.

As long as TATY continues to make BOTTOMS in, or near, the red zone, then the price is likely to continue attempts to assault new all-time highs. A decline in the TATY indicator strong enough to paint numbers into the caution zone surrounding the 115 level would likely be an early warning that supply was beginning to overtake demand. Such an event would likely take weeks to develop, and would cause Alexander and I to consider having to make defensive adjustments to portfolios. A TATY decline in the neighborhood of the red zone, which is followed by a SAMMY tactical buy signal would be investigated as a possible buying opportunity, subject to objective confirming evidence.

SAMMY   —   A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

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

SAMMY excels at identifying resurging demand after sellers have exhausted their propensity to sell. However, during sustained rallies SAMMY is of little value. It is shown in this update for information only.

THE BOTTOM LINE

The new year 2020 has arrived with evidence that professional investors are very complacent about the prospects for the continuation of the record setting bull market in stocks. Complacency has resulted in disappointing results in the past, and may again given the longevity of the recovery post-2009. However, complacency is a very blunt market tool, which requires confirmation from other more accurate indicators to confirm danger to investor wealth may be on the rise.

We have several new accounts mostly in cash coming over to us. We shall get these accounts invested as low risks opportunities are identified by our proprietary indicators. Recent declines have been shallow and intra-day fleeting, which makes putting excess cash to work in a low risks circumstance very challenging. However, with the advent of this new year there have also been some increasing signs that volatility may be on the increase, and may become a more significant factor as the positive seasonal from roughly Halloween to Easter begins to wane, as the calendar marches toward Easter?

Alexander and I wish all of you a very Happy and Prosperous New Year!

 

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.

Dec 23

DOUBLE SHOT OF MY BABY’S LOVE & FREE FALLIN

This past week as the stock market slowly squeezed out one new all-time high after another, and the people’s House voted in favor of impeaching the current occupant of 1600 Pennsylvania Avenue, I found myself remembering how this long bull run had begun back in March of 2009. Some of my market savvy colleagues may take technical issue with the beginning date, as they may prefer to characterize this bull run leg as commencing later following the bottom of one of the corrections along the way, because there have been some serious stock market dips post the 2009 bottom.

For example, there is no question that the correction, which began in 2015, made a significant bottom in February of 2016, and the February 5, 2018 crash like decline, which wiped out the XIV Volatility ETF, was really nasty as well. Especially, if you were long any of those XIV derivative instruments, when Credit Suisse hung those owning the exotic XIV product out to dry. However, this weekly update is targeted at retail clients simply to keep them informed as to what we are doing with their wealth and why. So, pros and clients wishing to talk shop can drop by our office across the breezeway from Carmine’s anytime, and we can talk stock market for as long as you want, and perhaps longer than you want, such is our passion for what we do.

Let us just keep this simple and say that this historic economic recovery, and the coincidental bull run, began from that biblical S&P-500 low of 666 in March of 2009. And, for those wishing to know a reason, what follows works as well as any explanation from a historical point of view, and may be an echo of the period of real prosperity following World War II. You see the stock market has enjoyed a “Double Shot Of Love” (The Swinging Medallions) compliments of the Fed and the Congress, when the “Free Fallin’ (Tom Petty) bear market of 2007-2009 accelerated after the collapse of Bear Sterns, and Lehman Brothers, in the fall of 2008.

The dis-inflationary trend existing before the events of late 2008 became an outright deflation, as the equity bear market took on some of the aspects of a panic. In response to the growing crisis, the Fed liquified the system in an extraordinary effort to prevent a cascading failure of the banking system. The Fed continued to spike the banking system with liquidity for months after. Capital goes where it is treated best, and a significant percentage of the re-liquification funding flowed into the stock market, a process taking years. When it was all done, the debt to GDP ratio had reached its second highest level in history. The debt taken on as a consequence of winning WWII remains the record high debt to GDP ratio.

Deficit spending during times of commodity shortages and strong industrial and consumer demand results in inflation, a big problem the late Paul Volker, Fed chairman from 1979 to 1987, was fighting as deficit spending contributed to the already rampant inflation. This was a period before industry had the sophisticated high powered computers guiding corporations today. These days “just in time inventory” has made stock piles of basic materials for manufacturing a much smaller factor. Back then the order of the day was too many dollars chasing too few goods, which bid up the price of everything. And, we were not energy independent back then making our economy vulnerable to instability in the Middle East, as the oil cartels held us hostage. So, in that era deficit spending, which added liquidity to the banking system, tended to flow not into equities, but rather into goods and services, which in turn created galloping inflation. Volker responded by jacking up interest rates sharply, which eventually collapsed the inflationary spiral. This situation is the polar opposite of conditions today where inflation, so far, has been a non-factor resulting in too many dollars in the liquified monetary system finding a home in the equity market.

The first shot of liquidity came in the form of the massive Federal bail out of the banking system during, and following, the Great Recession of 2007-2009. And, as that infusion of excess liquidity had just about run its stimulus effect along came the 2016 election, and the second shot of stimulus hit the monetary system in the form of a massive tax cut mostly for the wealthy. This “second shot of my baby’s love” rang in with a price tag of around a trillion dollars in deficit financing. Fortunately, this second shot entered the financial system, when the United States is essentially oil independent, and the application of high powered computers with just in time inventory programs has virtually eliminated the bottlenecks of the past, which caused artificial shortages of key materials, which in turn contributed to excess liquidity bidding up the price of goods and services, and so on. The United States, and its trading partners around the world,  have been able to avoid the consequences of massive, and exponentially growing deficits, because low inflation has contributed to a continuing low interest rate environment. Alas, in economics one can postpone paying the piper, but eventually the piper must be paid.

I got a newsletter teaser this week from an outfit promoting its research. Inside the teaser was a bullet point which caught my eye. The point was that due to the creeping bull market touching new all-time highs almost daily, fund managers were responding by putting all their cash into the equity market. The teaser made a big point that although this may not be a signal that top tick had been touched in the bull market, it was nonetheless a big negative historically, as a sign that a major top may be brewing. The theory is when the financial houses, and fund managers are all in, where is the cash going to come from to power the equity market higher? This is a very good question, and the premise it is based on is sound. Unfortunately, it is a very big financial world out there containing multiple pools of asset classes, which are in flux every day. These global factors make measuring the actual availability of cash to power one market versus another a very difficult calculation. However, the observation that historically low cash on hand at funds is a warning shot that volatility may begin to rise right on schedule ahead of the election.

The bottom line on this history lesson is that the impact of deficit spending in the Volker era on the economy is very different than our current era of massive deficit spending. That difference is that in the Volker era the penalty for fiscal malfeasance was almost immediate in terms of rapidly rising interest rates. These days for all the factors previously mentioned, and more, the penalty in terms of rising interest rates has not yet occurred. In the Volker era it took Treasury rates in the high teens to quell inflation. In the current era I’ve seen numbers in print, which have made the case that a return to nominal interest rates in the five to six percent range would result in most of the revenue from the income tax being consumed by debt service. This enormous potential financial vulnerability brings to mind that radio call from Apollo 13, “Houston we have a problem”.

Alexander and I are in the risk management business. We measure and assess the risks to client wealth daily, and all our investment decisions are powered by our assessment of the trade off between risks and rewards. Recently a new client coming over to us mostly in cash wondered why we had not invested all his account, because obviously the popular indexes were touching new all time highs. This daily re-enforcement that all is well had given the new client a fear of missing out on the rally.

Yes our indicators continue to reflect an environment of demand being in the superior position to supply, yes the stock market is creeping higher almost daily, but remains less than 300 S&P 500 points above its 2018 high. Yes interest rates remain historically low, but the vulnerability (economic penalty) to even a marginal rise in rates has maybe never been greater. So the need for risk management and maintaining our discipline remains critical. In our world this means that we must buy equities for clients as the risk/reward becomes favorable. Buying equities when they carry a fat premium to value is an invitation for the client to have to wait months to get back even, should the market experience only a minor correction. When the market is touching new highs it is easy to forget that bull markets move higher in very small steps, but corrections take the express elevator down quickly wiping out months of slow appreciation. The former is driven by fluffy, and gossamer like optimism, and the latter by fear, and fear is a primal and powerful emotion relative to optimism.

When times are good it is well to remember that eventually the piper must always be paid!

TATY   —   A REPRESENATIVE 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 format. TATY finished the week at 154 with the previously mentioned negative divergence still in place. More often than not negative divergences in this indicator, which continue to linger, do result in some price weakness. TATY is telling us that while the price of the S&P-500 is touching new highs the power of the bids driving the price higher is fading. If the bid under the market continues to weaken according to TATY, then at some point the bid becomes too weak to sustain the rally, and of course a period of decline follows to re-invigorate demand. This is as normal for markets as breathing in and out is for you and I. The current negative divergence may disappear due to strengthening demand, but usually the market has to put on a bit of a “sale” to re-invigorate demand, so for now we will continue exercise patience, until there is a sign that equities are going on “sale”.

As long as TATY continues to paint out BOTTOMS in, or close to, the red zone surrounding the 140 level the probabilities favor assaults on new all-time highs. A TATY decline into the caution zone surrounding the 115 level would be a first warning that the dynamics of the supply and demand balance may be changing in favor of supply over demand. The appearance of a “Big Chill” warning would be hard evidence that Alexander and I need to begin defensive operations in client portfolios. The sequence of events necessary for the issuance of a “Big Chill” warning would likely take weeks to develop.

SAMMY   —   A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

SAMMY is shown above in the second chart alone, and below with the SPXL 3X leveraged S&P-500 ETF overlaid. SAMMY has an superb record of identifying re-surging demand after evidence has arrived that sellers have spent their fury, and exhausted their propensity to sell. SAMMY is key for us to decide to be aggressive buyers after sellers have driven the price of equities into deep discount to “value”. These favorable conditions identified by the TATY strategic family of indicators in combination with the SAMMY family of tactical indicators almost always result in low risks purchases in the equity markets.

SAMMY exists to register resurgent demand as it is happening, and as such is virtually worthless for any other purpose. However, investors will notice that SAMMY is also sporting a negative divergence to the price of the SPXL ETF. And, like the negative divergence in the TATY indicator, it may disappear if demand strengthens. However, it almost always takes some decline in the price to re-invigorate demand enough to erase the negative divergence. We are prepared to be buyers as long as TATY signals the strategic big picture remains favorable for demand over supply, and SAMMY then flashes a buy signal once evidence that a significant price decline has ended.

THE BOTTOM LINE

Today’s update walked investors through a comparative between the situation existing in the Volker inflation era and today’s interest rate environment. The conditions vis-à-vis the implications for the impact of rising interest rates on the economy, and by inference the stock market, could not be any more different. In the Volker era it took huge moves in rates to quell raging inflation. Today a relatively modest increase in nominal rates has the potential to deliver a very dangerous blow not only to the economy of the United States, but globally due to the massive debt accumulated by our nation, and others. The United States in particular is vulnerable to decisions by China, which owns massive amounts of our Treasury bonds (debt). The looming election, and the risks attached to the Congress’ fiscal malpractice, make risk management a paramount concern for our client portfolios.

Anecdotal information about low cash balances in funds may mean the fuel required to drive equity prices higher could be beginning to run low. We shall watch our proprietary indicators carefully for evidence that the bull trend is moving from fatigued to something more serious. And finally, if conditions worsen and volatility increases sharply and dramatically, then the environment for “buy and hold” investors will become predatory, and extremely dangerous to the wealth of buy and hold investors. However, such an environment is actually a boon to those nimble few, which are prepared to navigate the acceleration in price change attendant with bear markets. Alexander and I believe that increased volatility equals increased opportunity to exceed the performance of the popular stock indexes, and the potential to increase the wealth of our clients significantly.

Finally, Happy Holidays to all!

 

Regards, 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.

Dec 16

Facts Versus Beliefs

My late father, Haywood Adams, was a member of what Tom Brokaw wrote about as “The Greatest Generation”. Daddy once admonished me to “never attempt to argue facts with a person’s beliefs, because their beliefs will always trump your facts”. Daddy, having grown up poor and seriously under-educated in rural Ochlocknee (Georgia) during the Great Depression, was nonetheless admired for his wisdom. Webster’s Dictionary once defined wisdom as “applied knowledge”, and Haywood Adams excelled at the application of what he knew, which is why I suspect this quiet, and wise man, has three generations which also bear his name; Gregory Haywood, Caroline Haywood and Pace Haywood. I suppose it is natural this time of year for our minds to remember those, which have had a profound influence on our lives, and as the drama in the Congress played out this past week, I was reminded of Daddy’s observation. The real struggle in politics is always about power, and that struggle was on public display this past week in the people’s House as one party argued facts, and the other stridently argued their beliefs. So for only the third time in our country’s history the House has voted out Articles of Impeachment for a sitting president, and yet the stock market simultaneously touched new all-time highs in the popular indexes. And, the current balance of demand remains in the superior position to supply according to our proprietary indicators.

Financial institutions spend countless millions of dollars on research, when the stock market is actually driven by investors beliefs about future expectations, which are extremely difficult to ascertain. I once knew a professional money manager, which regularly attended the daily investment committee meetings I chaired. When I was hired away by another firm, I was disappointed that I would no longer have this long time pro in the meetings I would be chairing at my new firm. You see this gentleman had to be convinced by copious facts before he could become comfortable enough to buy, or sell, in size for clients, which almost invariably resulted in him buying close to tops, and selling close to bottoms. He was often a wonderful “tell” that a turn in the market may be at hand. He never really became comfortable with the notion, that the stock market discounts the future, and is driven not by the facts of what is known, but by beliefs about future expectations. The gentleman has lots of company in this challenging business of managing opportunities and risks for clients, which is too dominated by those excelling at relationship building, and other pros with the requisite experience, proprietary tools, and skills to produce superior risk adjusted returns not so much.

Daddy knew how to fight the Japanese during his four beach landings over four years of island hopping in the Pacific. He knew how to lead his men to drain and repair flood prone tropical runways while under enemy attack, so our war planes could land, which in many cases had already departed their carriers at sea. This was no small task, since there was no piping available for the drains, so he innovated by putting ordinance crews to work using primer cord to cut out the heads and bottoms of empty 55 gallon Avgas drums, and another crew to work welding the drums together into large pipes for the make shift drains.  He knew how to lead a small group of volunteers to get an artillery piece backed up a mountain with a bulldozer, and in place in time to take out a large Japanese rail gun hidden in an opposing mountain. The previous artillery crew had been wiped out, when the Japanese got off the first round. Having found the previous artillery crew’s over and short “book”, when the Japanese gun began to emerge from its protective tunnel, it was greeted with a round that found its mark. That operation, executed under the cover of darkness, earned him the Bronze Star, although he never talked about it. He never knew his observation that beliefs trump facts, would also be applicable as a key to understanding one of the nuances of successful investing. The wonderful thing about wisdom is it often plays well in multiple venues.

So what is the point of this bit of unique history, and what does it have to do with your investments? The answer is, as it has been for quite a while now, is to ignore the evening news regardless of how bad it may become, and ignore the rich valuation of the stock market, as long as the beliefs of investors continue to drive numbers in our proprietary supply and demand indicators, which show that demand remains stronger than supply. The law of supply and demand is the only absolute in this business of managing opportunities and risks, and supply and demand is driven by beliefs about the future, which will always tend to trump facts.

TATY   —   A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY is shown above in yellow with the S&P-500 index overlaid in red and blue candle chart format.

TATY finished the week well above the red zone surrounding the 144 level at 153. As long as TATY paints out BOTTOMS in, or near, the red zone the odds will remain favorable for additional attempts to assault new all-time highs. However, investors should note that the negative divergence (orange down sloping line) between the indicator and the price remains. Negative divergences can linger for weeks before the price responds in the negative, or alternatively negative divergences can simply disappear as a response to strengthening demand. The rally is overbought and extended, so a decline to re-invigorate demand would be plus in my view, and perhaps an opportunity to put excess cash to work in equities. Unless the divergence grows sharply more negative quickly, then investors may reasonably expect more assaults on new all-time highs.

SAMMY   —   A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

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

SAMMY has an enviable record of identifying resurging demand after sellers have exhausted their propensity to sell. Please note that so far this tactical indicator is also displaying a negative divergence to the price. The negative divergence is shown on the chart as a down sloping orange line. The divergence may disappear, if demand grows stronger and supply weaker, but for the time being both the negative divergence in the family of strategic and tactical indicators need to watched carefully for signs that the divergence between the price and the indicators may be growing more critical.

THE BOTTOM LINE

Given the current balance favoring demand over supply, investors can reasonable expect more attempts to assault new all-time highs, unless the nominal negative divergence on both the tactical and strategic indicators grows more serious. As long as our supply and demand indicators continue to favor demand over supply, then investors may continue to ignore the cacophony of daily negative news, and the increasingly rich valuations of stocks, because investors are acting on their beliefs that the economic future is bright, and not the history and facts, which suggests growing threats with the potential to cast long shadows over the ongoing longest economic recovery on record.

All of us at Optimist Capital wish all of you Happy Holidays with family and friends.

 

Regards, 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.

Holiday Village
Dec 9

RUN AWAY BULL?

Last week’s update was on the topic of “the pause which refreshes”, and advised investors to not be surprised, if the stock market encountered some weakness in the range of 3 to 8% before assaulting new all-time highs. On Tuesday the Dow plunged over 400 points intraday, and appeared well on the way to a much needed consolidation, or brief correction. However, by Friday’s close the popular stock indexes had recovered to slightly below new all-time highs leaving those of us with some cash needing to be invested a bit frustrated that the very brief decline did not give us a classic buying setup vis-à-vis our proprietary indicators. We prefer to be buyers when measurable evidence of exhausted sellers is followed by resurging demand. And, which is also confirmed by measurable evidence that the price has been compressed below “value”, which in turn creates a very low risk buying opportunity.

In strong bull trends corrections tend to be shallow and brief, which has the effect of not allowing would be buyers an opportunity to join the bull party at a significant discount. Stock market psychology is a bit upside down in that rising prices tend to create more buyers, when in other disciplines it tends to take declining prices to attract larger pools of buyers. It is not unusual in the history of the equity markets for bull trends to accelerate as prices rise, and in some cases this acceleration phenomenon can sometimes result in what is known as blow off tops at very elevated valuations, as buyers finally exhaust themselves.

We are not in the predicting business, as we prefer to leave that very difficult exercise to those, which believe they have the ability to know the future. However, this past week’s almost instantaneous encounter with motivated buyers after such a shallow, and brief dip in the price, makes me inclined to take into account the possibility that this record setting bull trend may have a strong enough residual bid under it to power an acceleration higher, the news and rich valuation be damned? Please note that taking into account a possibility is not the same as stating the probabilities favor such an outcome.

Objective measures of the balance of supply and demand continue to favor demand over supply, so yes the probabilities continue to favor assaults on new all-time highs, but at this point the notion of an accelerating bull trend higher is just one of a number of possible pathways to new all-time highs.

TATY   —   A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY is shown above in the first chart in yellow with the S&P-500 overlaid in red and blue candle format.

TATY finished the week at 154, which is well above the red zone surrounding the 140 level. As long as this strategic indicator paints out BOTTOMS in, or close to, the red zone the bull trend is likely to continue to attempt new all-time highs. An excursion by this indicator into the caution zone surrounding the 115-125 level would be our first warning that the balance of supply and demand may be changing enough to cause supply to over take demand. If this condition was met, and then followed by the completion of a “Big Chill” warning setup, then Alexander and I would be compelled to consider taking defensive action to preserve accumulated profits, and/or protect client wealth from rising risks of a significant decline, or in the extreme a budding bear market.

Please note that the premium/discount indicator shown in the lower panel of the TATY chart was not driven much below the zero line by this past week’s shallow, and brief decline. Low risk buying opportunities are defined by the premium/discount indicator being driven below the minus eight level (red line) and then beginning a recovery back to the minus three level (green line), and then on to above the zero line. When this condition is met, and the SAMMY tactical indicator shows evidence of resurging demand, often a very low risk buying opportunity has arrived. As my former friend and mentor, Paul Desmond of Lowry Research, used to opine bottoms require evidence of exhausted sellers followed by evidence of resurging demand. In the current case Tuesday’s decline was so fleeting that it never painted out the required setup for us to deploy all the new cash coming into our firm.

SAMMY   —   A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

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

SAMMY is interesting this week. TATY failed to paint out the conditions we needed to be buyers, as the premium/discount indicator never got anywhere close to a significant discount to value, but SAMMY did register some evidence of resurging demand. And, as a counter-balance to the possibility of an acceleration higher, SAMMY developed a big negative divergence with the rallying price as the week wore on. Careful inspection of the SAMMY chart shows the SPXL ETF nearly touching a new high, like most of the popular stock indexes, but the SAMMY indicator is not even close to its previous high. This is called a negatively diverging indicator to the price. Investors want the price confirmed by indicators, not the indicators negatively diverging as SAMMY is in the current case.

This condition suggests Tuesday’s plunge may be just the first leg down in a “flat” or “irregular” correction, which needs another leg down to complete the correction at, or marginally below Tuesday’s low. Yes, it really is complicated in the short term, but not in terms of the big picture, which is the odds favor new all-time highs soon, or after the completion of another leg down in a shallow correction. Investors should be aware that if there is another leg down to come in an ongoing correction, then it is likely to be quite nasty, violent and fast. A nasty, violent and fast leg down would likely create the conditions we need for a low risk buying opportunity, so if between now and the end of the year the market literally looks as if it is “falling out of bed”, then please do not be concerned, as what is actually happening is opportunity disguised as a brief panic, perhaps in reaction to some news driven event. This kind of situation would likely purge any would be sellers from the investor mix, and give the buyers a chance to tighten their grip on the stock market.

THE BOTTOM LINE

While the road to new all-time highs may take some unexpected twists and turns, the balance of supply and demand still favors demand over supply, so the odds are favorable that the stock market is on the road to new all-time highs late, or soon.

 

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.