THE BOTTOM LINE
The nation, and the stock market, appear to be potentially on the cusp of critical changes for the balance of power, and the balance of supply and demand respectively. These shifts in the respective balances hold out the possibility of lasting long into the future, and possibly profoundly affecting our society, and our economy, for years to come. Investors should be prepared for the potential for increased volatility, as an important election looms immediately ahead.
CRITICAL DAYS AHEAD
The nation, and the stock market, appear to have arrived at a critical juncture.
The announcement last evening of the passing of the iconic Supreme Court Justice, Ruth Bader Ginsberg, will bring into play a potential tipping point in the direction of the Supreme Court for years, possibly decades to come. And, the September 3rd all-time high in the S&P-500 and NASDAQ followed by the current decline, of an unknown degree, is a potential tipping point not unlike the one looming in the Court. A storm of opposing political forces is now gathering with regard to the Court, and by implication the election, and the same may be observed in the struggle between the bulls and bears on Wall Street. Obviously, the potential for rising volatility in both the political arena, and the markets, appears to be a given, as these opposing forces in their respective venues collide with serious, and potentially critical implications, as the balance of power may shift for an extended length of time.
Our tactical and strategic supply and demand indicators did a superb job of warning us not to follow the stampeding herd into the near parabolic rally into the September 3rd S&P-500 top at 3588, in an environment of extreme bullish sentiment, and historically extreme high valuation. The all-time high at 3588 was followed by a sharp decline, a rebound, and then another decline on Friday to 3292, the low to date for the decline. The stock market now appears poised to either begin to stabilize, and then mount another attempt to assault new all-time highs, or on the contrary begin to violate consecutive support levels beginning with a close below S&P-500 3200, and then the more significant 3000 level.
A violation on a closing basis of 3200 would likely gain the attention of institutions, and a violation of 3000 may cause investors to become more inclined to lock up a profitable year by taking some risks off the table, during the run up to one of the most highly polarized election years in memory. Wall Street institutional traders are compensated significantly through year end bonuses based on performance, so if important support levels become under pressure by this budding decline, then the market would potentially become increasingly vulnerable to cascading selling on the part of institutions.
At this point there has not been a serious enough break down in families of both tactical, and strategic supply and demand indicators, to signal the bears have the strength to take the price much below current levels, but that is subject to change. So, we will be vigilantly monitoring our indicators for evidence that the supply and demand balance is shifting more in favor of the bulls, or the bears. At this point the bulls appear to have the balance in their favor, which means the bears must prove their case by actually violating 3200, and then 3000 on a closing basis.
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 an oversold 127 level, and has never regained enough strength after the March 23 low to return to its normal operating range, nor has it ever touched the red zone beginning at the 140 level. This atypical behavior remains a mystery, but may be a warning that not all is well with the rally post the March 23 low, in like manner as the negative divergences, which appeared in some strategic and tactical indicators prior to the February all-time high, and the September 3rd new all-time high in the S&P-500 and NASDAQ. I’ve left the negative divergence shown on the TATY chart as a bold down sloping magenta line in place, as a reminder that TATY continues to suggest the rally off the March 23 low may not be as healthy as the price may suggest.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in screenshot 153 in daily format in the upper panel, with the S&P-500 in the lower panel, and in weekly format in Screenshot-154 above as well. SAMMY is also shown yellow in Screenshot-155 (below) in daily format with the S&P-500 overlaid in red and blue candle chart format, and in weekly format in Screenshot-156 (also below). Screenshot-155 and 156 do not have the divergences shown on the charts in order to give clients, and research customers, a cleaner perspective of the nuances at work in the ever changing balance of supply and demand. For those of you, which are also Lowry Research subscribers, these indicators will not have the same appearance as Lowry exhibits due both to formatting differences, and the inclusion of modules to account for the contribution of derivatives to the overall balance of supply and demand in my indicators versus the data in the Lowry system, which is driven solely by NYSE, or NASDAQ metrics.
SAMMY and Cv ROLLINS (shown last week) are representatives of families of indicators, which are not often shown to keep these updates as simple and brief as possible. These families tend to extend the useful range over any one individual indicator, so even though they are rarely included in the weekly updates, they are important as ongoing cross checks for any one indicator. Screenshot-153 depicts the waning strength in the balance (red line) powering the price rally into the September 3rd all-time high, and conversely the waning strength in the selling as the price decline bottomed, and then began to bounce higher. The concern at the moment for the bear case is that as the price declined into it’s low to date on Friday, the SAMMY indicator only developed minor weakness, and did not break it’s leading uptrend. Obviously, this may change in the days ahead, but for the time being this positive divergence suggests we may be witnessing only a correction to re-invigorate demand, as opposed to a trend change from bull to bear market.
Please take a look at Screenshot-154, which is the weekly format for the same information in Screenshot-153. One can easily see the value of this family of indicators by looking first at the indicator’s behavior prior to the February high, which was an all-time high at the time. SAMMY was showing a significant negative divergence, which we incorrectly interpreted as foreshadowing a “Big Chill” type break in the market, and it’s overly bullish psychology. We did not sell on this warning due to reasons related to capital gains qualifications, and because “Big Chill” warnings over the decades have coincided with breaks prior to significant top, as opposed to coincident with big tops.
In the statistical outlier case which followed, the potential “Big Chill” warning turned swiftly into a “Big Freeze” situation, as the market plunged in the swiftest decline on record to down 20% from an all-time high. The negative divergence at the February high was still in place and more pronounced as the S&P-500 touched the new all-time high on September 3rd (shown on the TATY chart, but not on Screenshot-154). So, we have arrived at a new struggle to go lower, even as TATY and SAMMY weekly versions still have yawning negative divergences in place, not a comforting situation for the bulls.
Even though Screenshot-154 does not paint a comforting situation for the bulls, nor does it tilt the balance completely in favor of the bears given the story being told by the dotted red and green lines on the chart. Investors can instantly see that as the price touched a new low for the decline on Friday (dotted red line), SAMMY refused to break it’s uptrend (dotted green line)! Until SAMMY breaks it’s uptrend, the decline in the price remains unconfirmed by families of indicators. Yes, this situation is subject to change, hence the banner head line above: “CRITICAL DAYS IMMEDIATELY AHEAD”.
A series of supply and demand based indicators are suggesting that the burden of proof that a trend change at a significant degree from bull to bear remains on the bears. Should consecutive levels of support beginning at S&P-500 3200, and in quick succession 3000, be violated on a closing basis, and confirmed by break downs in a series of indicators, then the potential for an acceleration lower will likely exist, as the stock market signals it is likely changing trend from bull to bear market, and potentially at a significant degree of trend.
Screenshots-155 and 156 are being included as depictions of the information just covered above, but in an overlaid format without the trendlines in order to provide a more simplified look at the same phenomenon at work in terms of the changing balance of supply and demand. The story is the same, the days immediately ahead appear to be crucial both in the venue of politics, and the markets.
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