THE BOTTOM LINE
Growing negative divergences in both strategic and tactical indicators are suggesting that the stock market rally may be in need of a rest to reinvigorate demand at the least, and that any developing price weakness must be monitored carefully for signs of acceleration lower, or on the contrary deceleration morphing into a bottoming process, and then a new buy signal, which would likely lead to another leg higher in an aged and fatigued bull trend. In the interim we will be taking any tactical trades, which have low risk profiles.
Ebb & Flow
The stock market is experiencing a decline in volume, which is normal during the holidays. The price has traded in a narrow range with intermittent attempts to touch new all-time highs for seven weeks now. As the price settled into this seven week range the negative divergences mentioned numerous times in these weekly updates have continued to become more established. While negative divergences between the rising price and declining supply and demand indicators almost always exists prior to significant bouts of weakness in the price, not all negative divergences result in corrections, or bear markets.
In the current case long term demand as measured by Lowry Research remains firm suggesting any short term price weakness may find support sooner rather than later, and that the bull market continues to generate metrics, which suggests it is likely too soon to anticipate the demise of the bull trend. However, Lowry metrics of short term demand, and our supply and demand indicators are both suggesting that some price weakness, or an outright correction, may be brewing.
If some price weakness does develop in the days ahead, then we will be monitoring it closely for signs of deceleration, and then for signs of bottoming. If buy signals are then generated we will likely increase our asset allocation to equities in anticipation of yet another potential assault on new all-time highs. The tricky thing about “routine” corrections in mature bull trends is that they have a nasty history of morphing into bear markets. And, at this point there has been no confirmation in our indicators that a new bull market was born at the March 23 low, so until that happens we will treat any weakness in the price as a correction with the potential to morph into something worse.
The odds are beginning to favor some short term weakness in the price, which may be a buying opportunity during a correction, or a situation with the potential to morph into something more dangerous to investor wealth. Given that the weight of the evidence favors an aged and fatigued bull trend, then any weakness in the price must be viewed with a jaundiced eye toward the weakness having the potential to become more serious, and perhaps dangerous to investor wealth.
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 136 during a “Big Chill” warning, having dipped into the caution zone surrounding the 115-125 level previously, and then being turned back at the red zone beginning at the 140 level.
Please observe how TATY painted out a negative divergence for a month prior to the February high, which then gave way to the swiftest decline to 20% down from an all-time high in history. That decline finally bottomed on March 23 after a decline of 38.4% in only 27 days. The current negative divergence has been in place for seven weeks by comparison. Both negative divergences are shown on the TATY chart by down sloping magenta lines. Given that the current negative divergence is being painted out in an environment of record bullish extreme measures, and historically high valuations, we are compelled to treat this situation as evidence of an aged bull trend as opposed to a new and vigorous bull market born at the March 23 low.
If a new bull market was born at the March 23 low, then the TATY indicator is very likely to confirm the new bull as it has in the past by beginning to oscillate while painting out lows in the red zone surrounding the 140-144 level and peaking at, or close to the blue zone at the 160 level. At this point negative divergences in strategic and tactical indicators continue to suggest equity investors are riding an aged and increasingly fatigued bull trend.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in Screenshot-190 (weekly) and Screenshot-191 (Daily) below in yellow with the S&P-500 overlaid in red and blue candle chart format.
The negative divergence, which appeared in the TATY indicator prior to the February then all-time high also appeared in the SAMMY tactical supply and demand indicator, and is shown in Screenshot-190 with a down sloping dashed magenta line. Neither TATY nor SAMMY were able to lead the price higher post the March 23 low, which as discussed in these updates many times is both abnormal and atypical for these two indicators. Additionally, as the price continued to touch new post March 23 low rally highs, SAMMY began to encounter resistance, which is shown by the horizontal magenta line on Screenshot-190. This resistance was only recently bested, but even so SAMMY still continues to lag the price, which is shown by the yawning negative divergence with a down sloping orange line. This means that although the price enjoys enough demand to power to new all-time highs, the forces being measured by TATY and SAMMY, which are powering the price higher are significantly less vis-à-vis these two indicators than at the February all-time high. This objective market generated evidence supports the case for an aged and fatigued bull trend.
Screenshot-191 (Daily format) shows that although SAMMY did finally rally above its own resistance back in early November, it has recently began to weaken again as the price has tried to assault new all-time highs. If a new bull market began at the March 23 low, with all the strength and power that new bull markets tend to generate, then a case could be made that the power normally generated in new bull trends would be more evident in these two indicators. Yes, anything related to market measurements are subject to change, but for the time being we are inclined to take these market generated measurements at face value, which is suggesting the stock market is likely in need of a rest to reinvigorate demand, and any weakness in the price confirmed by weakening indicators must be monitored carefully for acceleration lower, or deceleration morphing into a bottoming process followed by a renewed buy signal.
Alexander and I wish all of you Happy Holidays, and a safe and prosperous New Year!