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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.

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