THE BOTTOM LINE
This update reviewed some of the elements constituting the bear case vis-a-vis our proprietary supply and demand indicators. Now a brief word about rising interest rates, which seem to be an ongoing conversation in the abstract in the media. The bond market is one of the few bastions in our post-truth world, where facts and hard truths still drive decisions. While the Congress and the Administration seem to be determined to increase the national debt well above the current thirty-six trillion dollars, the bond market sent a message this past week, when an auction of 20-year bonds did not go as well as planned, something some analysts took to be “a canary in the coal mine” warning to the political establishment.
Our debt has to be financed by the sale of treasury bills and bonds and traditionally the market for our T-bills and T-bonds has enjoyed oversubscription and strong bidding. The prodigious and growing level of our debt is only one undersubscribed or weakly bid T-bond auction away from being front page news globally with a consequence of sharply rising interest rates, which would exacerbate an already seriously difficult situation. And, for which the Fed has few tools available to limit a potentially spiraling crisis. So, in addition to reading the comments above, please be aware that a blow up in the bond market could be the trigger for the most extreme bear case being made by some of the most outspoken bears. Those green eye shade guys and gals operating in the bond market are no nonsense types dealing in debt instruments which must be repaid, restructured and then repaid, or defaulted upon.
This week all three of our key supply and demand indicators have graded out as negative, so the last thing the equity market needs is any sign of distress in the bond market, because it appears the bonds are now driving the financial bus.
ENCOURAGEMENT FOR THE LONG SUFFERING BEARS
The bears have been making the case for “excesses everywhere one looks” and they are right about a long list of market measurements at excessive, or even record levels from bullish sentiment to valuations, yet the price has continued to relentlessly march higher setting all-time records in the process. Recent updates have stated over and over that bull markets do not end until the group psychology of “buy the dips” morphs into “sell the rallies”. We have also explained many times how our indicators measure and identify this ongoing process of breaking the back of the “bull fever”, which is one of the forces driving prices to touch new all-time highs. We have also stated from time to time when the bull is found belly up it is often with the dagger of rising interest rates piercing his heart, or the anticipation thereof. Slowly all of these factors have been coming together needing only confirmation by way of the completion of a “BIG CHILL” warning to start the roll over into a decline, which may gather momentum at some point.
It is still early, but recent market behavior may be beginning to signal that the psychological transition from “buy the dips” to “sell the rallies” may be getting under way. If the stock market is starting this transition, the issue of what “degree” of bear market is likely to follow what can legitimately be described as a great bull market for the ages looking at the perspective contained in Screenshot-170 above. By way of comparison the bear markets of 2000-2003 and 2007-2009 were of lesser “degree” than what is likely to follow the current great bull market, which some date to the 1960s or even earlier, and depending upon the index registered losses of approximately 60-80% plus off their highs. So, the exercise now, and always is, to manage the risks implied by whatever emerges going forward. It may take some time before we get confirmation that investor psychology has shifted in favor of the bears, but unless a cohort of our supply and demand indicators soon gather strength, then the weeks ahead find may investors experiencing some very uncomfortable volatility in both directions.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week below the red zone surrounding the 140 level at 133. If a new leg up in an ongoing bull market started at the April 7th low, then TATY will begin to form bottoms in, or near the red zone surrounding the 140 level and tops approaching, or above the blue zone surrounding the 160 level. Failing to stay in, or above the red zone this past week should raise some concerns for the bulls, because TATY has already completed the initial requirement for a new “BIG CHILL” warning by plunging below the caution zone surrounding the 115-125 level all the way down into the green zone surrounding the 89-100 level, a zone so oversold that strong rebound rallies often quickly follow. We will give this rebound rally some time to play out, but TATY having been rejected this past week at the red zone is not good news for the bulls, and may be an early sign that the bear case may finally be gaining some traction.
SAMMY —- A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in yellow with the S&P-500 eMini futures contract overlaid in red and green candle chart format. Last week’s update described SAMMY as “the fly in the ointment” for the bull case given its long-standing negative divergence and its inability to follow TATY higher and by being rejected at the two down sloping dashed magenta and red negative divergence lines. This week that rejection became more pronounced as SAMMY declined deeper into the oversold zone. This warning dates to last summer and has been deadly accurate in suggesting that not all was well with the equity market. SAMMY is the best evidence currently for the bear case. SAMMY would need to soar higher and then overcome the overhead resistance represented by the magenta and red lines to confirm the bulls are still in charge, which would appear to be a very heavy lift at the moment. SAMMY is quite oversold but there is nothing to say SAMMY could not weaken further or just bounce around in the deeply oversold zone indefinitely.
STERLING — A REPRESENTATIVE OF A FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS
STERLING is shown above in the upper panel with the S&P-500 eMini futures contract shown in the lower panel. STERLING returned to form over the past few weeks by developing a negative divergence (dashed magenta down sloping line) to the rising price (dashed green up sloping line). This negative divergence in the indicator did correctly foreshadow the decline of this past week. Hopefully STERLING will build out a positive divergence to the declining price as the current budding leg down approaches a low, so until then the path of least resistance would appear to be lower.
So, these three key indicators are all graded out in the negative, which implies rising volatility and the path of least resistance being lower for the price, but not in a straight line of course.
