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Dec 30

WILL 2020 BEGIN WITH A DECLINE?

The stock market has been inching higher in slow holiday trading touching new all-time highs in the process. However, as previously mentioned in these weekly updates, a number of key strategic and tactical supply and demand indicators have been negatively diverging with the price for some time now. What this means is the residual bid under the stock market remains strong enough to power the price to new all-time highs, but the bid continues to weaken as the price is inching higher. I suspect the price may hold up through the next two market days, and may even attempt new all-time highs as 2019 comes to an end, but the first days of 2020 may see some selling come into the market.

The stock market has experienced outsized gains during 2019, even in the face of what would have likely been too much disturbing news in a different era. Given the prodigious markup of equities year-to-date, it is likely investors are all too willing to wait another couple days before cashing out some of their profits, in order to avoid any tax consequences until next year. The negative divergence in a number of indicators, shown on the charts above as down sloping orange lines, suggests the first days of 2020 are likely setup for some profit taking. A stock market decline on profit taking would likely paint out an opportunity for us to put excess cash to work in a low risk circumstance, since the strategic big picture remains favorable for demand in the superior position to supply.

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 151, down a bit from last week, but still above the important red zone surrounding the 140 level.

As long as TATY continues to paint out BOTTOMS in, or near, the red zone surrounding the 140 level, then the price is likely to continue to attempt assaults on new all-time highs. However, investors should be alert to the possibility that the post-holiday period may experience a price decline to re-invigorate demand. A mild decline would likely only drive TATY into, or marginally below, the red zone. A price decline strong enough to drive TATY into the caution zone surrounding the 115 level, would be an early warning that the dynamics of the supply and demand balance for stocks may be shifting in favor of supply over demand. Obviously, any post-2019 decline strong enough to register TATY numbers in the caution zone may result in defensive actions being considered in portfolios.

As my late friend and mentor, Paul Desmond, would sometimes remark: “Low volatility begets high volatility, and high volatility begets low volatility”. For the most part 2019 has seen an exceptionally low volatility market, as the price has done a week after week slow grind higher. Paul Desmond’s comment may experience more currency than usual given that 2020 is an election year, and it has been many weeks now since the last “global crisis”, so investors should be aware the clock may be ticking on increased volatility in the year ahead.

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 resurging demand after sellers have exhausted their propensity to sell. SAMMY is a wonderful tool for locating low risk entries during, and after, significant declines. SAMMY is shown for information only, since it is of little value during persistent rallies. However, investors should also be aware that SAMMY is negatively diverging with the price, as indicated by the down sloping orange line on the SAMMY chart. So in conclusion for this section, negative indicator divergences exists at both the strategic and tactical levels, which implies the potential for some post-holiday market weakness.

THE BOTTOM LINE

A number of key supply and demand indicators have developed negative divergences to the price of the S&P-500, which has continued to touch new all-time highs. We are suspicious that investors may want to claim some of their hard earned profit early in the new year, postponing taxes on their gains into 2020. The negative divergences, and the potential for profit taking early in 2020, may be a setup for a decline early in 2020. Unless objective evidence to the contrary were to arrive, we will treat any price decline early in 2020 as a low risk opportunity to put excess cash to work in equities. We have market tested tools for identifying low risk opportunities to be buyers of stock, so if our conditions are met vis-à-vis our proprietary indicators, then we will be buyers.

“Low volatility begets high volatility, and high volatility begets low volatility”, so investors should be aware that 2020 may experience a significant increase in market volatility relative to 2019.

All of us at Optimist Capital wish 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.

Jupiter Lighthouse
Oct 14

Long Time Sideways — Marginal Gains

During the recent mini-correction, the price of the S&P-500 briefly dropped below its 2018 high. So, investors have been able to collect dividends, but make only marginal gains from the appreciation of their equities for months. I expect this may continue for as long as it takes to build out a major top, or evidence of substantially rejuvenated demand appears.

Recent updates have discussed the very different emotional processes at work, as the stock market builds out major tops, and on the contrary low risk tradable bottoms.  So, no need to repeat that explanation about gossamer like euphoria dissipating during major tops, and primal fear compelling a “flight or fight” reflex among investors, with their wealth at risks, during the formation of low risk tradable bottoms. However, it is worthwhile to observe that human beings tend to repeat our behavior over and over, so these very different emotional responses will likely continue to be exploitable for as long as we can objectively measure their never ending circuits.

Last week’s update warned investors that the metrics surrounding the recent price decline implied perhaps an incomplete purge of weak hands, and/or nervous potential sellers. Sellers did re-appear, and once again the sellers failed to drive our premium/discount to value indicator into deep discount range. However, by Friday the sellers disappeared, and the stock market appears to have begun yet another attempt to assault new all-time highs. Objective measures of the balance of supply and demand continue to show demand remains in the superior position to supply, which in turn suggests this budding assault on new all-time highs remains a viable probability.

The view from 35,000 feet continues to suggest a fatigued stock market rally, but one which may have enough residual strength in its balance of demand over supply to undertake another assault on new all-time highs. Should objective measures of supply and demand begin to suggest fatigue may be turning into exhausted buyers, and in turn supply overtaking demand, then we will be compelled to take defensive action to protect accumulated gains, and/or client wealth. Major top building can be a very time consuming process, so this slow creeping range may continue to drift higher in the weeks ahead, but recently the signs of buyers fatigue have continued to grow. Clients would do well to brace themselves for an increasingly volatile market environment as the calendar turns toward the election, and all the related attendant uncertainty.

TATY   —   A REPRESENTATIVE 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 the 150 level, and well above the red zone surrounding the 140 level. However, the negative divergence, shown on the chart by the down sloping orange line, remains in place. Should the price assault new all-time highs, and the negative divergence remain, then stocks could remain vulnerable to another correction, and possibly a much stronger decline than the recent mini-correction.

The signs of fatigue, which may progress to signs of buyers exhaustion remain, but for the time being have not reached levels requiring defensive action in client portfolios. However, the signs of fatigue have chilled my desire to add new money, or excess cash, into the equity market, unless the stock market serves up a substantial discount to value situation followed by a clear low risk tradable buy signal. These conditions were not met during the recent mini-correction.

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 leveraged ETF overlaid in the third chart. The SPXL is for reference only.

SAMMY excels at finding low risk tradable bottoms in the stock market. And, when used in conjunction with the premium/discount to value indicator, it has a record of providing superb low risk purchase entries for putting idle cash to work in the stock market. However, we have chosen to ignore recent buy signals flashed by this indicator, because the premium/discount to value indicator failed to offer us a substantial enough discount for us to feel comfortable feeding cash into the stock market so close to new all-time highs. Obviously the bull run is not young and dynamic, but aged and showing signs of fatigue, so we have elected to take only the most promising buy signals, even though SAMMY has an enviable record of accuracy as a low risk buy signal indicator.

THE BOTTOM LINE

If we are compelled to become defensive by our proprietary supply and demand indicators, then we will take action to bank some accumulated profits, and/or protect client wealth. On the contrary, if our criteria for a low risk purchase to put excess cash to work is met, then we will act on the signals. Otherwise, we are comfortable holding equities previously purchased at their current levels of asset allocation. We will put new cash to work for clients migrating to Optimist Capital from other money managers, when our indicators suggests a low risk purchase entry has arrived.

Clients should brace for increasing volatility as the election looms closer. However, our outlook is our proprietary supply and demand indicators will provide our clients with opportunities to increase their wealth at a faster rate as volatility increases, as opposed to being penalized by the attendant corrections following the completion of a major top, or in the extreme a new outright bear market lasting weeks, months or years. The volatility associated with significant corrections, or bear markets, is the enemy of buy and hold investors. And, the friend of investors armed with effective supply and demand based indicators making their purchases only during conditions, where fear has made available steep discounts to value.

 

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.