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Gregory H. Adams Update

Apr 29

New All-Time Closing Highs

For weeks now these updates have been saying that objective measures of the balance of supply and demand were favorable, which implied a renewed assault on new all-time highs by the S&P-500 was very likely. This past week new closing highs were touched. The rally appears a bit fatigued, but the balance of supply and demand remains favorable toward demand over supply. These conditions imply that more new all-time highs continue to be likely, but without additional demand being added to the equation, perhaps coming from institutions being caught under-invested, any additional rally may occur in ragged fits and jerks with an upward bias?

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

TATY was little changed this past week, but she did manage to close higher. This big picture strategic indicator in weekly format continues to signal a favorable balance of demand over supply. As long as this indicator forms bottoms in, or around, the red zone surrounding the 140 level the rally will likely remain intact. A “big chill” type event causing TATY to plunge into the caution zone surrounding the 115-125 level would be a warning that conditions were moving in favor of rising risks to accumulated profits, and a more prudent equity asset allocation may need to be revisited, given the history of the behavior of this indicator over the last few decades. TATY is shown in the first chart above in yellow with the S&P-500 overlaid in red and blue candle chart format.

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

Sammy is a daily format tactical indicator with an enviable record of telling investors that the risk/reward ratio is favorable for putting excess cash to work, or initiating an intermediate trade to enhance performance. The indicator is shown above in candle format in the second chart by itself, and in the third chart with the VOO exchange traded fund overlaid. VOO is an extraordinarily low cost ETF, which tries to replicate the performance of the S&P-500. SAMMY did not flash any buy signals this past week, but investors should note that the price touched new highs, but SAMMY did not confirm setting up a very minor negative divergence. Should this negative divergence remain, or grow stronger, then it would be logical to expect some increasing volatility in the days ahead.

THE BOTTOM LINE

A series of supply and demand based indicators, which include derivative modules and NYSE data in their calculations, continue to signal that demand remains in the superior position to supply in the stock market. As long as this condition persists, investors should expect more attempts to assault new all-time highs.

The law of supply and demand is the absolute bedrock upon which all of the capitalistic system rests! Objective measurement of the balance of supply and demand is an essential requirement for appropriate, and effective management of risks, when attempting to navigate the uncertainties of the stock market.

 

DISCLAIMER: Alpha Wealth Strategies, LLC (AWS), and/ or 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. Alpha Wealth Strategies, LLC, and/or 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.” AWS and 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 Alpha Wealth Strategies, LLC and/or Optimist Capital LLC.

Apr 22

A BIT FATIGUED?

The stock market marked time this past week in a tight price range approximately one percent below the S&P-500 all-time high at 2941. There are number of ways in which this current situation could resolve itself, but the two most important, and opposed, are a short covering powerful rally to new all-time highs, or the rally continues to show signs of fatigue, and then eventually rolls over into a downtrend, which may be destined to test the December 24, 2018 low first, or in the worst case, as the final leg down in a very large bear market. For now the probabilities remain favorable toward more rally, but that is subject to change.

TATY  —   A FAMILY OF WEEKLY SUPPLY AND DEMAND STRATEGIC INDICATORS

TATY recently made a bottom in the red zone surrounding the 140 level and has now resumed its rally. When this indicator is making bottoms in the red zone it is an objective measure of the strength of the underlying demand for stocks. This condition can linger for months, and it’s history suggests that this condition must change toward weakness before the danger of the stock market forming a major top becomes a significant concern. However, this does not rule out periodic episodes of short term volatility occurring. These kinds of episodes tend to never gain enough strength to push the indicator into the caution zone surrounding the 115-125 level. If such a decline in the indicator does occur, then it is objective evidence that the balance of supply and demand under the market is weakening, and investors must be vigilant for additional signals that a major top may be forming. The indicator is shown above in the first chart in yellow with the S&P-500 overlaid in red and blue candle format.

SAMMY   —   A FAMILY OF DAILY SUPPLY AND DEMAND TACTICAL INDICATORS

SAMMY gave an unconfirmed buy signal in late March, which has now worked out just fine. However, in an abundance of caution to limit client exposure to unnecessary risks, I do not take SAMMY buy signals unconfirmed by other indicators such as the premium/discount to value indicator. SAMMY applied in conjunction with the premium/discount to value indicator tends to give investors buy signals, which are extraordinarily low in risks, and appropriate for adding excess cash into the market, or participation in intermediate trades to enhance overall performance with as little exposure to risks as possible. While most professional futures traders would take SAMMY unconfirmed buy setups without hesitation, adding the premium/discount to value filter is more appropriate for risk adverse client accounts. Alexander and I are risk adverse money managers, and risk management is job one at Optimist Capital LLC. SAMMY is shown in the second chart above without the S&P-500 overlaid, and below with the S&P-500 super-imposed.

SAMMY is currently showing some signs of fatigue just below the S&P-500 all-time high at 2941. This suggests that the current leg up may not have enough fuel left in the tank to touch new all-time highs before this leg gives way to a period of consolidation to rejuvenate demand. However, as long as any such period of weakness avoids pushing TATY into the caution zone surrounding the 115-125 level, then any new buy signals issued by SAMMY, which are confirmed by the premium/discount to value indicator, would be evidence that the next leg up may generate enough strength to set new all-time highs in the S&P-500. Touching new all-time highs may set off a chain reaction of short covering by institutions caught leaning the wrong way with their asset allocation to equities. Given these realities, I’d take any confirmed SAMMY buy signals in client accounts, both to put excess cash to work, and to use as a likely intermediate term trade to enhance overall performance.

Please notice that this potential trade depends solely on objective market generated evidence, and not some “expert” opinion being expressed in the financial media. I make client investment decisions based only on information generated by the market itself, and the market in this case means both NYSE based data, and modules of data taken from the derivatives markets. Incredible percentages of overall dollars devoted to risk management these days are done in the derivatives markets. This is important information affecting the overall balance of supply and demand most analysts totally ignore at their client’s peril.

THE BOTTOM LINE

The price of the S&P-500 rests about one percent below all-time highs, and an assault on new all-time highs remains a favorable probability. However, the stock market may need to digest some of its recent gains before another attempt on new all-time highs occurs, because according to the SAMMY indicator the current push up is beginning to look a bit fatigued. Current conditions suggest investors should remain invested toward the upper end of their equity asset allocation.

 

DISCLAIMER: Alpha Wealth Strategies, LLC (AWS), and/ or 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. Alpha Wealth Strategies, LLC, and/or 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.” AWS and 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 Alpha Wealth Strategies, LLC and/or Optimist Capital LLC.

Apr 15

Giddy Yet?

Last week’s update mentioned that breaking the negative divergence in the supply and demand strategic indicator named TATY boded well for an attempt to assault new all-time highs. The rally of this past week had the S&P-500 cash index approach within one percent of the all-time S&P-500 high at 2941. So for the time being the balance of supply and demand, as measured by a series of indicators, remains favorable. This suggests that investors should remain invested toward the maximum of their equity asset allocation, as an assault on new all-time highs remains a significant probability.

However, I am concerned that sentiment has become quite extreme in the positive according to a number of publications. The theory behind this observation is that when everyone is bullish there are no investors left to push prices higher. I have issues with sentiment indicators, which are beyond the scope of this brief update, so for the time being let us just say that expressing an opinion in a survey of professional investors is not the same as acting on one’s opinion in size with real money.

My proprietary indicators are attempts to track what investors are actually doing in real accounts, with real money, which drives the balance of supply and demand for stocks. So sentiment is not even a secondary indicator in my world, but sometimes they may be helpful, even as the blunt and crude instruments, which they tend to be. As an aside, we were visited this past week by a trust representative making an overture to us to manage some trust accounts. In the course of our conversation, he mentioned that he had attended a recent conference of over three hundred hedge fund managers here in Palm Beach, where all the presentations were very bullish in nature. Evidence of an extreme in bullish sentiment, or evidence that these very bright women and men are right about the stock market? For an answer, let us see what the market told us about itself this past week by checking in with TATY and SAMMY below.

TATY  —  A BIG PICTURE FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY, shown in the first chart above in yellow overlaid with the S&P-500 in blue and red candle chart format, shows that the break of the lengthy negative divergence in the tops of the indicator (aqua descending line on the chart) continued this past week. Both the price, and the underlying balance of supply and demand, suggest an assault on new all-time highs remains a favorable probability. And, as last week’s update suggested, perhaps sooner rather than later?

Long time readers of these updates know that since TATY is a weekly generated and plotted indicator, its most effective format, then it would take weeks for it to complete the normal gymnastics required for the indicator to signal that a major top was in the process of forming. These kinds of signals have been very accurate since the 1990’s, and probably before, if the data existed in eSignal format for me to calculate it. While no indicator is perfect, TATY has an outstanding record of signaling that risks have risen to levels consistent with prudent investors optioning for the risks of lost opportunity from scaling back equity exposure over the more cogent and dangerous risks of being trapped in a vicious, and often relentless, bear market for stocks. For now, the weight of the evidence remains favorable toward an asset allocation slanted in favor of stocks according to a series of strategic supply and demand indicators.

SAMMY  —   A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

SAMMY is shown above in daily format alone, and with the SPXL 3X leveraged exchange traded fund (ETF) overlaid in the chart below. Please note that SPXL is a potent trading instrument best applied by experienced and highly skilled professional traders. I use the non-leveraged Vanguard VOO ETF in conservative and risk adverse client accounts, which is generally accepted as a more appropriate choice.

SAMMY has proven effective at locating low risk entries for putting excess cash to work, and for intermediate trades whose purpose is to maximize overall performance with as little relative risks as possible. I prefer to use SAMMY with the premium/discount to value indicator as a filter to expose client accounts only to the lowest relative risk intermediate trades possible. The added premium/discount to value filter results in fewer trades, but also trades with lower relative risks. Alexander and I are risk adverse managers, so risk management is always job one with us.

You will notice that even though the last two trade setups shown above for SAMMY (shown by the vertical blue lines on the chart) worked out just fine with SPXL, I did not take these trades in client accounts, because they failed to be confirmed by the premium/discount indicator. While this may be viewed as a lost opportunity due to an over abundance of caution, investors pay us to manage their risks, and proper risk management in our world always requires the application of confirming signals from other indicators. At some point we may offer a more aggressive ETF product for qualified investors wanting to put an appropriate portion of their wealth in a more aggressive strategy in addition to those already offered, since this family of tactical indicators have tended to be extremely accurate. However, this notion must be thoroughly tested with my own funds before being offered to clients, if ever.

SAMMY matched its recent high this past week, as the price pressed on to a higher high. If this persists, or if SAMMY actually rolls over into a negative divergence as the price continues higher, then the environment of giddy extremes in optimistic sentiment may become a “tell” that an intermediate top may be forming, intermediate as opposed to a major top at this point.

THE BOTTOM LINE

An assault on new all-time highs remains a favorable probability, albeit in an environment trending toward extreme optimistic sentiment.

 

DISCLAIMER: Alpha Wealth Strategies, LLC (AWS), and/ or 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. Alpha Wealth Strategies, LLC, and/or 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.” AWS and 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 Alpha Wealth Strategies, LLC and/or Optimist Capital LLC.

Apr 8

The Burden Of Proof Is On The Bulls

Our weekly updates have been observing that objective measurements of supply and demand for stocks favored demand over supply, and that continues to be the case. The evening news continues to provide the ongoing bull trend in stocks with a “wall of worry” to climb, and so far the bull trend has demonstrated enough strength to keep the uptrend moving toward new all-time highs at S&P-500 2941. However, the lingering question of extending bull market, or a bear trap in the making remains an open one.

TATY  —  A STRATEGIC FAMILY OF INDICATORS

These updates have been monitoring a developing negative divergence in the tops of TATY, a strategic supply and demand indicator. The negative divergence, depicted by the down sloping aqua line on the first chart above, has been in place for weeks until Friday, when the downtrend was broken by the late week rally. New all-time highs, which seemed a long way away back on December 24, are now only marginally above Friday’s close. When a bull trend is moving higher it manifest itself by painting out bottoms in the TATY indicator in, or close to, the red zone surrounding the 140 level. As you can see on the chart the March price weakness did cause the indicator to dip into the red zone before it recovered to break the multi-week negative divergence. However, this minor price weakness was insufficient to push the premium/discount indicator into the acceptable discount range to confirm the corresponding SAMMY tactical buy signal.

Breaking the negative divergence bodes well for the rally, and suggests the prior all-time high at S&P-500 2941 may be assaulted sooner rather than later. However, as previously observed the rally has now reached into the danger zone, where the burden of proof is squarely upon the bulls to prove they are in charge of the stock market. On the contrary, should the bulls falter, then weeks of sideway congestion, or an outright decline may emerge to the surprise of many analysts. The break of the negative divergence is hard evidence that for the time being the advantage remains with the bulls. However, the failure to push the premium/discount indicator into the significant discount to value range suggests an assault on new all-time highs may run a bit short of the fuel needed to sustain a rally much above the all-time highs. Like the bear trap question, the extent of any new run to all-time highs remains an open question.

SAMMY  —  A TACTICAL FAMILY OF INDICATORS

When the strategic indicator, TATY, is signaling that the big picture is displaying a favorable balance of demand over supply, then the tactical indicator, SAMMY, has been shown to be effective at locating low risk opportunities to put excess cash to work, or to enter intermediate term trades in an effort to increase overall performance with relatively low risks. SAMMY signals alone have been proving that they can locate low risk entries for long intermediate trades, but I prefer to use this indicator with confirming indicators like the premium/discount indicator in order to keep client risk exposure to a minimum. I’ve shown the last two SAMMY entry setups in the chart above and below, Above (without the price overlaid), and Below (with the price of SPXL overlaid and scaled on the left side).

The last two trade setups in SAMMY worked out fine with SPXL, but would have struggled to be as meaningful using the non-leveraged VOO ETF. I suspect that the last two declines in price, which were insufficient to push the premium/discount indicator into discount zone, accounts for the tepid move higher had VOO been employed instead of SPXL. This is why we shall use VOO with SAMMY only when the SAMMY setup is also confirmed with a corresponding move into the discount zone by the premium/discount indicator. Yes those kinds of trades will be fewer in number, but also result in client accounts being exposed to very low relative risks during intermediate trades.

 

The Bottom Line

 

The probability of an assault on new all-time highs increased this past week as the developing negative divergence in the TATY indicator was broken, signaling renewed demand for stocks. However, the burden of proof remains on the bulls, as the price enters an obvious danger zone marginally below the all-time S&P-500 high at 2941.

 

DISCLAIMER: Alpha Wealth Strategies, LLC (AWS), and/ or 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. Alpha Wealth Strategies, LLC, and/or 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.” AWS and 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 Alpha Wealth Strategies, LLC and/or Optimist Capital LLC.

Apr 1

Inverted Yield Curve

The stock market traded in a narrow range this past week as the yield curve inverted, which many on Wall Street view as a harbinger of a looming recession. Others on Wall Street sometime observe that the history of inverted yield curves is one of predicting eight of the last five recessions! An inverted yield curve is defined as long term interest rates falling below short term rates, which suggests deflationary pressures down the road, which most translate as a recession looming a few months into the future. I am in the business of objective measurements of the strength, or weakness, in the supply and demand for stocks vis-à-vis decades of history, as predicting the future is almost always an exercise in futility, which can be very expensive in the arena of the stock market.

TATY – THE BIG PICTURE STRATEGIC INDICATOR

Last week’s update mentioned that there was a subtle, but growing negative divergence in the tops of TATY, shown by the down sloping aqua line on the chart above. TATY is a strategic indicator, whose measurements of supply and demand are helpful in determining, if the investment environment is favorable, or if rising risks are beginning to cast a shadow resulting in an unfavorable environment for stocks. Obviously during periods when supply is outstripping demand, a prudent investor would want to scale back their exposure to stocks, and conversely during favorable periods an investor would want to be invested to the maximum exposure allowed by their appropriate asset allocation. Asset allocation guidelines are determined by a number of factors like age, risk tolerance, and so on. At the moment there is a persistent negative divergence growing in this indicator, which is understandable given the age of the bull trend. However, this negative divergence has not yet reached a critical level, but it is far enough along to signal the potential for a more volatile investment environment ahead.

So when will TATY flash a warning that risks have grown to a level, which would compel prudent investors to consider scaling back their equity exposure to the stock market? The wispy and gossamer like euphoria attendant at major tops is often pierced by a sharp break in the stock market, which is then followed by a last gasp rally back toward the highs. This kind of price break can happen at any price level, but in terms of the indicator it shows up as a break into the caution zone surrounding the 115-125 level. I call this the “Big Chill”, as giddy and often highly leveraged investors get touched up enough to give them a good dose of sobriety. Having been chastened by the sharp price break, these usually institutional investors trading in huge size become more cautious on the next rally. This shows up in the indicator as a rally, which is unable to levitate itself at its previous rate resulting in a weak rally in the indicator, which is destined to fail in, or near the red zone surrounding the 140 level. At this point prudent investors should take the warning that a major top may have formed, and then scale back their exposure to equities to “sleep at night” levels. Is this indicator perfect? Well certainly not, no indicator is perfect, but this one is the most consistently accurate major top indicator I’ve found in decades of searching. And, please notice that the ”Big Chill” can occur at any price level, but the indicator tends to do its same gymnastics over and over unchanged, which is its significant value.

Risk management is all about determining where the tipping point is on an objective scale of risks monitoring the lost opportunity costs of not being in stocks, versus where the market may be on the risk scale of being trapped in a devastating bear market for equities. Successful investing is all about risk management, and TATY has an outstanding record of defining when it is time to risk the costs of lost opportunity over the more significant and compelling costs of being trapped in a big bear. In an arena where “perfect” is not an option, I’ll take an outstanding record of accuracy every time. Obviously, currently no “Big Chill” event has occurred, but the growing negative divergence is a sign the next one may happen sooner rather than later?

SAMMY —  THE FAMILY OF NEXT GENERATION TACTICAL INDICATORS

SAMMY, a representative for a next generation family of supply and demand indicators, is shown above with SPXL, and below with SPXL and 3x Leverage overlaid. SAMMY excels at helping execute intermediate trades, which tend to occur 5-8 times a year, sometimes more, depending on a number of factors. I’ve determined that taking more of these intermediate types of trades makes sense in an environment of the lowest income tax rates in decades. SAMMY will likely signal more tactical trades than we actually take, because I never trade just on one indicator alone, no matter how accurate. I have confirming criteria, which must be present to complete the process necessary to execute SAMMY trades. The confirming criteria circulates around the premium/discount indicator signaling a fleeting discount to “value” exists in addition to SAMMY issuing a signal.

SAMMY issued two buy signals recently, which would have worked out fine for SPXL, but not so much for VOO, the non-leveraged S&P-500 ETF, which is more appropriate for risk adverse clients (SPXL is only traded in my personal account, and some family accounts). The slower moving VOO is best employed for client trades, when both SAMMY, and the premium/discount indicator flash daily, or even better, weekly signals. In any case, I’m glad to see SAMMY continue to issue extremely accurate signals, which any professional futures trader would execute immediately, I want to see a high level of accuracy, even if the signal is not confirmed by other indicators, and so far so good. Over time I would expect this next generation family of indicators, confirmed by other indicators, to potentially be an important factor in significantly enhancing client wealth within reasonable risk tolerances.

THE BOTTOM LINE

The bull trend is showing signs of fatigue, which has not reached a critical level according to an array of supply and demand indicators. So, for the time being we will hold our current longs, and look to add to them, if presented with a low risk entry to put excess cash to work. Note to clients with legacy stock holdings, I’ve trimmed laggard stock and mutual positions into strength recently in order to take advantage of better opportunities as they may appear.

 

DISCLAIMER: Alpha Wealth Strategies, LLC (AWS), and/ or 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. Alpha Wealth Strategies, LLC, and/or 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.” AWS and 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 Alpha Wealth Strategies, LLC and/or Optimist Capital LLC.

Regards,

Gregory H. Adams

Senior Portfolio Manager

Mar 25

Intermediate Trade?

I’ve returned from my conference with a group of professional investors in Tampa. The presenters shared their best ideas, and supported them with hard evidence generated by the markets themselves. As long time clients know I disdain opinions, even my own, in favor of making investment decisions based upon objective evidence, which is generated only by the markets. Everything else is just confusing, and often contradictory, noise. My thanks to all the presenters for sharing their work.

Recent updates have made the case that investors should be prepared to experience rising volatility as the calendar turns toward the election. This is not just a casual observation made because an election looms on the horizon. There are subtle changes afoot in a number of supply and demand indicators, which are hinting that the long period of relatively low volatility is beginning to give way to a more volatile investment environment. Interestingly enough, one presenter at my conference this weekend added some detail as to why this may be the case using metrics from his own discipline.

The supply and demand indicator, TATY, shown above in yellow, has begun to display signs of waning strength in the demand powering the stock market. TATY is a strategic indicator, which provides measurements that are key in determining, if the investment environment favors significant exposure to equities in a client’s portfolio, or if market risks have risen to danger levels, which would compel a prudent investor to scale back their equity exposure. This indicator is always shown in these updates in weekly chart format, as this is the most accurate format for this “big picture” indicator.

This week you will notice that I’ve drawn an aqua colored line across the tops of TATY, which on the chart appears as a downward sloping line indicating that this measurement of supply and demand for equities is signaling a creeping shift toward supply over demand. This change has not yet reached critical levels, but if this trend continues, then an assault on new all-time highs may become increasingly more difficult. Please remember an excursion in this indicator into the caution zone surrounding the 115-125 level followed by a laboring, and failing, rally back toward the red zone surrounding the 140 level would trigger a bear market warning signal. Obviously such a development may take several weeks given that TATY is a weekly generated indicator. TATY recorded its lowest close Friday at 141, since this leg of the rally began back on December 26, 2018.

Strong bull trends tend to paint out bottoms in this indicator in, or near the red zone, and tops around the pale blue line shown at the 160 level. So for now the developing negative divergence between the price, and the declining tops of the indicator, are not critical. However, should the divergence continue to linger, and grow even more negative, then investors counting on a continuing strong bull trend would likely be compelled to consider taking profits on intermediate long trades sooner rather than later. Obviously, should the indicator actually dial up a bear warning, then prudent investors may be compelled to option for the risks implied by scaling back their equity exposure, potential lost opportunity risks, to the more urgent, and perhaps more compelling, risk analysis that a devastating bear trend may be at hand, or potentially resuming from the initial leg down dating to the fall of 2018. This situation is often referred to as a bull trap.

SAMMY is a representative of a family of next generation tactical supply and demand indicators, and is shown above in daily chart format. I consider a less than weekly chart format to contain so much noise as to render some of their value diminished. However, intermediate range trading requires than investors have accurate indicators, which retain much of their effectiveness in a daily format. Modern markets have become dominated by large institutions doing trading strategies powered by computerized trading algorithms and derivatives. And, this environment moves much too quickly for decisions based only on weekly indicators, regardless of their record of market noise reduction. SAMMY has proven this family of indicators can be effective at early detection of institutions reversing their positions at BOTTOMS.

Derivatives are often created with leveraged instruments, so even deep pocket institutions must quickly reverse their losing positions, as their size does not give them immunity to how leverage quickly escalates their losses. And, institutions tend to act like fish in a school of fish, which amazingly all change direction quickly and at the same time. My next generation supply and demand indicators are an attempt to make these leveraged and maximum sized institutional position reversals stand out graphically, so that we can benefit early from detecting a change in an intermediate trend as it is happening.

However, most indicators are failures at effectively identifying tops, and the SAMMY family of indicators share that weakness. In all my decades of studying the major topping process, I have failed to find any indicator better than TATY at identifying, when the euphoric and gossamer like environment at tops, has turned so dangerous that the risk/reward ratio compels prudent investors to scale back equity exposure. Until we reach those kinds of objectively measurable conditions, the application of tactical trading tools like SAMMY holds out the possibility of enhancing overall performance within reasonable risk tolerances. SAMMY is shown above in daily format in the second chart alone, then in the third below with SPXL, a 3X leveraged S&P-500 ETF, overlaid and finally with some visual aids included.

Although the previous intermediate trade setup in early March failed to match all our criteria for execution, SAMMY did clearly show the critical shift when large institutions reverse positions. You will note that the “body” of the indicator went “depasser”, a French word for “overshoot”, when it painted completely below the lower red Bollinger Band (also see vertical blue line). This is a surrogate for an exhausted sellers alert, which was then followed by signs of resurgent demand, as the next whole “body of the candle bar painted completely above the lower Bollinger Band. As Paul Desmond often observed: “Exhausted sellers alone cannot confirm a bottom, there must also be evidence of resurgent demand”. This new indicator provided evidence of both, even though our premium/discount to “value” indicator never reached into the discount zone. This dichotomy makes me wonder if the failure to go into discount to “value” contributed to the brevity of the following rally, which has now begun to be reversed with Friday’s sharp swoon?

Currently, SAMMY has not yet painted a whole “body” candle below the lower Bollinger Band, but such a “depasser” event would be an early warning to be on the alert for a new intermediate trade buying opportunity. I’ll not repeat here all the steps we would like to see for a new intermediate trade opportunity setup, but I’ve included below a previous update outlining these steps. The steps have not changed, as when they appear the odds of executing an intermediate, or longer term, low risk trade entry are substantial.

THE BOTTOM LINE

The bottom line is the potential for a more volatile investing environment is beginning to be confirmed by objective measures of the balance of supply and demand. Such a change in the environment will likely result in opportunities to initiate intermediate trades to enhance overall performance with relatively reasonable levels of risks. However, investors will need to adjust to a more volatile investing environment, as after months of relatively low volatility the shift to volatility may become uncomfortable for some clients, but not for Alexander and I, because for us more volatility equals more frequent opportunities.

Mar 19

Finding Opportunity In The Danger Zone

Last week’s update recognized that a low risk buying opportunity may have been developing, and outlined the tactics to be employed in the event the budding opportunity actually materialized. There were three elements required to trigger a purchase of enough VOO, the low maintenance cost Vanguard S&P-500 ETF, to soak up any excess cash on hand in client accounts. Unfortunately, the brief decline failed to reach even the most minimal price target, and also failed to produce enough selling pressure to push the premium/discount indicator into the discount to “value” zone. However, the next generation supply and demand tactical indicator, “SAMMY”, was triggered, and the rally of the past week followed the signal higher. The S&P-500 now rest only four percent below its all-time high at 2941, but is still in the resistance zone mentioned frequently in these weekly market updates.

So far the rally has continued to do what it had to do to confirm the balance of supply and demand remains sufficient to sustain the price by painting out higher highs, and higher lows both in the price, and an array of indicators. TATY, a supply and demand indicator (See Attachment Above), touched new highs this past week, and continues to find support in the red zone surrounding the 140 level. It would likely take an excursion of the indicator into, or near, the caution zone surrounding the 115-125 level, followed by a failing rally back toward the red zone, to signal the stock market balance of supply and demand was at peril of not being able to continue to sustain this leg higher.

 

TATY is a weekly plotted indicator, its most accurate format, so obviously any developments in the negative may take some time to paint out another bear warning. TATY has an outstanding record of warning, when the ratio of risks to reward have risen to levels, which must compel prudent investors to consider scaling back some exposure to equities. The odds are TATY may become critical in determining, if the aging bull trend still lives, or if a large bear market began in October 2018, and the current rally is a form of a “Siren’s Song” imbedded in a huge bear trap for unsophisticated investors? Obviously the stock market has arrived at an extremely important juncture, which will demand critical strategic analysis followed by the application of successful, and likely courageous tactics to enhance, or protect client wealth as the case may turn out to be.

So, the bottom line is that the rally dating from the December 24 low is not yet signaling that it is at peril of rolling over into a resumption of a larger bear market. However, the lack of a substantial consolidation (digestion) of the recent sharp gains may imply a short covering type melt up in the price, as under-invested money managers rush to chase the re-emerging bull trend, could be tardy in developing due to the current overbought conditions. Resistance zones, danger zones if you will, are often tested before being bested. So, the question of a new leg up in an ongoing bull market, or a bear trap before resumption of a larger bear market dating to October 2018, remains an open one awaiting more clues.

Investors should be prepared for an increasingly volatile market environment from now until the election. Bull, or bear market, matters not to Alexander and I, as our records are evidence that we have the requisite proprietary tools, experience, conviction and courage necessary to overcome the challenges implied by a bull or bear, but a bear would provide the most opportunities, because of the attendant frequent excursions of the price into the zone of discount to “value”. Buying “value” at a substantial discount is almost always a winning strategy!

Investors in our ETF Model likely earned a dividend Friday on our VOO positions purchased last year at this time, as the VOO ETF usually goes ex-div around the 15th of the quarter. And, all client positions have now qualified for long term capital gains treatment on our VOO purchase. I expect to maintain some core position in VOO for as long as the strategic (big) picture remains favorable. However, given the lowest income tax rates in my lifetime, due diligence requires me to take advantage of more intermediate trading opportunities than in the past. These kinds of trades, properly planned and executed with our next generation tactical indicators, have the potential to significantly enhance overall performance without creating unreasonable tax consequences.

I’ll be speaking on the topic of major tops in the stock market, and next generation supply and demand indicators, to a group of professional investors in Tampa this coming weekend. I’m looking forward to visiting with friends and colleagues of long standing during this seminar.

Mar 4

Test For The Bull Case

The rally off the December 24 low has cleared some math resistance, but is now encountering significant resistance, which has been mentioned previously in these weekly updates, just below the level where the October rally failed at S&P-500 2888. The rally is beginning to appear fatigued, so some further weakness would not be a surprise.

The case has been made that the burden of proof is on the bulls, which must demonstrate the strength to paint out higher highs and higher lows both in the price, and in a series of supply and demand indicators. Now that the rally has reached a zone, where I expect some significant resistance, the bulls will face their most serious challenge to date. TATY, a supply and demand indicator (shown above in yellow with the S&P-500 overlaid in red and blue candle format), began to show signs of struggling this past week, as a minor consolidation in the price has worn on now for seven market days. A generally accepted principal of market analysis states that consolidations are eventually resolved by a resumption of the previous trend, which in the present case was a rally. If the rally does continue, but the indicators begin to  fade instead of confirming, then this leg of the rally will likely be at peril of giving way to at least a correction of the gains to date, or possibly a resumption of the larger bear market, if the rally has been just a counter trend rally as a part of a bigger bear market. Obviously, the bulls have some work to do, and investors must be alert to the possibility that the rally may fail below new all-time highs.

The odds still favor the bulls, but a serious test of the strength, or weakness, in the ever changing balance in supply and demand is now at hand. This expected test will be key in determining, if the bulls really are in control, and the next leg up in a big bull market is still underway. Or, if most financial advisors are about to allow their client’s portfolios to be trapped in a devastating leg down in a continuing large and powerful bear market. Unfortunately, most financial advisors do not even realize that their client’s wealth may be at significant risks late, or soon. I would prefer to see the re-appearance of the big bear market, as we have the experience and proprietary tools to take advantage of the numerous discounts to “value” generated by the violent vortex of a big bear trend, and swift velocity at which prices move during the panic and chaos. So a re-appearance of a big bear leg down would be an opportunity from our point of view, and not a dreaded disaster. Either bull or bear, from now until the next election will be a time for a high level of vigilance, and a time to trust our preparation, experience, and supply and demand tools.

The bottom line is the bulls are facing their most significant test since the December 24, 2018 low, and for the odds to continue to favor the bulls both the price, and a series of supply and demand indicators, must continue to paint out higher highs and higher lows. Probabilities are not static, and the expected test immediately ahead will likely move the probabilities on the risk scale. The challenges ahead can be turned into opportunities for those armed with the right experience and market analysis tools, and the courage to properly apply them for the benefit of our clients and their wealth.

 

Optimist Capital

Phone: 561-771-8077

Toll Free: 833-585-8285

Fax: 561-771-1145

www.optimistcap.com

Feb 25

Next Generation Supply And Demand Indicators

I am doing a presentation to a group of professional investors on March 23rd in Tampa. I will be speaking on how major tops form in the stock market, and I will also be introducing my next generation of supply and demand indicators. These prototype indicators have been under development of many months, and are now being put into service after extensive testing. The final version of this new family of indicators have been locating intermediate bottoms in the S&P-500 with extraordinary accuracy, but unfortunately have not demonstrated any improvement over existing indicators in terms of locating exhaustion tops.

I expect this new family of indicators to enhance our opportunities for profitable trades due to their high degree of accuracy in locating intermediate bottoms. To the best of my knowledge, no other analysts have combined NYSE based indicators with modules representing the supply and demand balance for derivatives, which is how I’ve approached the design of these entirely new indicators. Failure to account for the impact of the risk management component of overall supply and demand represented by derivatives would by definition fail to give an accurate picture of the total supply and demand dynamics for stocks. The bottom line for this section is clients are likely to see more trading in their accounts going forward in order to take advantage buy signals being generated by this new family of indicators. While we prefer long term gains due to preferential tax treatment, with tax rates now at historic lows, we expect very few clients will complain about us potentially generating some additional profits from short term gains.

Recent updates have made the case that the probabilities favored a resumption of the previous bull trend, which stalled in October of 2018, and was followed by the decline into the December 24 low. Our updates said that both the S&P-500, and a series of supply and demand indicators, must confirm the bull case by both painting out higher highs and higher lows. So far there have been no higher lows registered on the weekly charts, but on the daily charts, which are rarely posted on client updates, there have clearly been the requisite series of higher highs and higher lows on both the S&P-500, and the indicators. So for the time being, the bull is earning his stripes, and the bull case remains the higher probability. Clients are long index ETFs, and all our positions are profitable, so for now we will continue to hold all our long positions. Clients coming over from competitors, which have individual stock holdings, may see some selling into strength activity in order to roll off the holdings of our competitors strategies, and then get your accounts rolled over into our ETF strategy over time.

The bear case remains the lower probability, but it is still an active consideration until the S&P-500 clears first 2888, and then the previous all-time high at 2941. If the rally touches a new all-time high, and there is evidence of increasing strength in the balance of supply and demand, then prices may be marked up quickly, even in the face of high valuations, as under invested money managers scramble to get fully invested. Under invested money managers sitting out a rally are prone to be fired, so the price zone just above current levels may see some serious activity, if the bull case remains valid. However, I am not sanguine about the length of the negative divergence leading into the October-December decline, which seems too brief for a major top. And, the brevity of the October-December decline remains a troubling issue as well, because taken together the brief negative divergence, and the brevity of the decline, can be construed in some disciplines as just part of a larger bear market. The ongoing larger bear market theory remains a lower probability, but due diligence compels me to not discard it altogether just yet. The weeks ahead will likely prove one of these two probabilities, but for now prudence demands vigilance as winter turns to spring, and spring turns to summer.

 

The bottom line is the stock market is demanding to be treated as being in a renewed bull trend until evidence to the contrary arrives. This means the new indicators now coming into service are even more important than usual, because excess cash will need to be deployed, if the renewed bull trend continues to prove itself. And, deploying excess cash with tactical intermediate trades may potentially enhance overall performance.

 

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

Feb 18

A Key Reversal Day Versus A Key S&P-500 Resistance (Danger) Zone

Our last several updates have covered the implications of the two most probable outcomes for the rally off the December 24, 2018 low. In more detail than usual for these brief updates, we made the case that December 24, 2018 was likely a key reversal date to keep in mind going forward, and nothing that has happened since changes any of those observations.

The notion of a key reversal day has now played out along the lines our updates anticipated. So now I want to review the importance of the S&P-500 resistance levels, which were discussed in recent updates, as those are looming as extremely important in terms of increasing client wealth, or protecting it as the market yields more clues about the strength, or weakness, of the underlying supply and demand for stocks going forward. This is NOT going to be some esoteric academic exercise, but a real financial world challenge to position client portfolios properly on the risk spectrum. Failure to execute this drill properly may significantly penalize client wealth in terms of lost opportunity costs, or expose clients to an assault on their accumulated profits, and/or wealth, as a faux rally rolls over into an accelerating, and progressively violent, bear market decline, as hordes of global investors attempt to rush to the safety of cash, when they realize they have been trapped in the recognition phase down in a big bear market.

The first chart above shows that the S&P-500 has now exceeded, by a good margin, the 62% Fibonacci retracement level of the October to December 2018 decline. This is a very positive development, and implies that the S&P-500 2888 resistance level just ahead may be tested next. I thought the rally may need to consolidate its gains before an assault on the S&P-500 2888 level, but with TATY, a supply and demand indicator (See Second Chart below), spiking to 152 this past week, the rally may have enough strength to begin an assault on the S&P-500 2888 level sooner rather than later? Regardless of the timing, the price is now entering what I consider a danger zone, where the bulls must continue to generate supply and demand numbers sufficient to power the rally higher. The probabilities have favored the bull case, and that will continue to be the true as long as both the price, and a series of supply and demand indicators, demonstrate the ability to paint out higher highs and higher lows.

So Gregory what are you going to do with my wealth? The probabilities continue to favor the bull case, so for now we will hold our current long positions, especially since many of those were purchased last year at this time, which means they are beginning to qualify for long term capital gains tax treatment. All my clients have profitable positions, so yes the tax treatment is an important consideration, even though nominal tax rates are now at historically low levels. However, probabilities are subject to change, and should they begin to move in a direction more favorable to the bear case, then prompt action will be required. Why? The next paragraph covers the extreme risks implied by a mature bear market perhaps on the cusp of a swiftly accelerating terminal decline.

I am content to leave market predictions to those, which think the have the tools and skill to be successful at that most risky of endeavors. However, consideration of the worst case for client wealth must always be taken into the calculus by Alexander and I, as a continuing exercise in client due diligence. The perceived danger zone represented roughly by S&P-500 2888 to the previous all-time high at 2941 is where the bull, or bear, case will very likely emerge as a reality. If the bulls continue to generate confirming supply and demand numbers, then the odds of an accelerating rally will increase sharply, as under-invested money managers chase the rally higher. Please note that valuations are meaningless in these situations, because under-invested professional investors are subject to being terminated by their firms for such an error, which are costly to clients in terms of lost opportunity. However, if the bulls fail to generate objective evidence that they are still in control of the market, then the odds will begin to gravitate toward the bear case, and the bear case in this situation represents huge potential risks to investor wealth.

If the danger zone gives way to the next leg down in a very big bear market, then the potential wealth penalty may be applied swiftly, and in unrelenting fashion. If the October to December 2018 decline was just the prologue in a big bear overture, then the next leg down will likely contain a violent vortex of volatility, as panic and mindless program selling become the order of the day. It matters not how good a leader a corporate CEO is, nor the strength of the franchise, nor the strength of the balance sheet when that corporation is a part of an index, which is being sold in size by panicked investors on the global exchanges, or in the futures market. When the program sellers launch their sell algorithms, then selling begets selling, and the selling continues until the bear trend finally exhaust itself. Such is how mature bear markets do business. Thankfully, for the time being the mature bear case remains a lower probability, but still an active probability subject to revision higher.

The bottom line is we got the “tell” of the December 24-26, 2018 key reversal date right, and now the bigger, and much important challenge, is to correctly solve of the resistance (danger) zone conundrum as well. To do so will require us to properly apply our proprietary tools, and all our experience, to a potentially very dangerous situation, and then to have the courage to act adroitly in the best financial interests of our clients. A difficult mission in all aspects, but especially the latter, as most in this challenging business are prone to fail the test of courage at critical moments due to lack of confidence in their methodology and/or preparation.