THE BOTTOM LINE
The recovery rally off the April low has now reclaimed over 80% of the previous decline making new all-time highs a rising probability. However, negative divergences in two of our key indicators are suggesting that an assault on a new all-time price may not happen without rising volatility and potentially violent price movements, and that the recovery rally may fail short of new all-time highs after days, or weeks of struggle to go higher.
In this post-truth world, the credit markets still deal in hard facts and the reality of debt, which must be repaid, or restructured in advance of finally being repaid, or entering into default. The Friday Moody’s downgrade of the debt of the United States currently estimated at 36 trillion dollars and potentially rising by another 5 trillion will cast a shadow on the continuance of the dollar remaining the world’s reserve currency with serious implications for global equity and bond markets. The risks implied are only some of the global risks currently afoot, so it is multiple choice on what may eventually trigger a bear market resulting in losses in the range of recent bear markets of 50% to 80%, or more. However, bull markets are always followed by bear markets “of like degree”, so constant vigilance and risk management is required in order to maintain and grow accumulated wealth.
FLY IN THE OINTMENT
For weeks now the bears have been beating the drum for a crash into the onset of a great bear stock market to balance the ongoing great bull market, which began at one of various ancient dates depending on the methodology being applied. Dates like black Monday October 19, 1987, the August 1982 low ending a sixteen-year sideways bear market, the 1973-4 recession, or any of the lows shown on the quarterly S&P-500 chart shown above in Screenshot-163. At some point the bears will be right, because bull markets really are followed by bear markets of like “degree”, and given the 50 to 80% declines registered by more recent bear markets of lesser degree the effort required to avoid these periodic declines is not an academic exercise, especially if one is already of retirement age.
However, our response to the “immediate crash sequence kicking off a great bear market” case has been consistent and correct in saying that in the absence of a “BIG CHILL” warning a crash sequence kicking off a great bear market was unlikely, because the bull fever of “buy the dips” must first be broken before the bear case of “sell the rallies” can emerge, and then begin to spread as anxiety gives way to fear, which eventually resolves into sheer panic as a hard bottom finally begins to emerge out of the rampant panic, chaos and volatility. Human behavior is repetitive and this is just how bull and bear markets play out in the real world of freely traded markets.
The rebound rally following the post April 2nd “Liberation Day” tariff swoon has now recovered more than 80% of the decline, and appears to be positioned to assault new all-time highs. There was no “BIG CHILL” warning before the fleeting S&P-500 swoon and a new one has not yet been issued. However, the swoon did crash TATY all the way past the yellow caution zone surrounding the 115-125 level and into the green zone surrounding the 89-100 level, which is a rare event that has a history of finding a quick pathway to do some buying having injected some panic into a market grown complacent. This kind of event “burns through” the pool of would-be sellers at a high rate leaving in place a firm enough foundation to support a strong recovery rally. Yeah, one must sometimes think upside down to excel in this business. Anyway, a quick trip into the green zone and now the bull appears poised again to assault new all-time highs.
TATY —- A REPRESETATIVE 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 and finished the week marginally above the red zone surrounding the 140 level. If a new leg up in the great bull market has begun, then TATY will begin to oscillate with tops above the red zone and bottoms in, or only marginally below the red zone. TATY plunged all the way into the green zone surrounding the 89-100 level, which is almost always a zone so oversold that it represents a buying area for traders and speculators. Technically the plunge past the yellow caution zone surrounding the 115-125 level does complete the first step toward the issuance of a new “BIG CHILL” warning, so now it will be imperative to see if TATY gathers strength, or grows fatigued and then fails in or near the red zone to complete a “BIG CHILL” warning, at which time the bear case would rise in probability as a potential outcome. As has been stated many times in these weekly updates these potential outcomes will take some time to be completed, perhaps all of the summer and into the fall, which would then align with a seasonally weak period of the stock market calendar.
The TATY Premium/Discount indicator in the lower panel of the chart once again did a marvelous job of objectively identifying a deeply discounted price suitable for traders and speculators to take advantage of for their short to intermediate trading. The zero line in this chart separates zones of prices at a premium from discounted prices. So, zero always represents a neutral price level in this chart and for those with the requisite courage a plunge below the minus eight level represents an increasingly attractive discounted price. However, it gets even better because the Premium/Discount indicator is prone to turn up in advance of the final price bottom giving traders a “heads up” to prepare their buying strategy. So, by the time the indicator recovers into the green minus five to minus three level the price has likely made bottom, or has perhaps even turned up. This subset indicator of TATY has been deadly accurate down through the years, although that is no guarantee of future performance.
SAMMY —- A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in yellow/blue with the S&P-500 eMini futures contract overlaid in red and green candle chart format. So, now comes the “fly in the ointment” for the bulls. SAMMY is lagging the price recovery and is still in negative divergence to the rising price having failed to soar above the two dashed red and magenta lines dating back to last summer. SAMMY continues to cast a shadow on the bull case by maintaining this huge negative divergence, a divergence created by the market itself and is not a product of someone’s biased opinion. This situation suggests perhaps a substantial coming struggle and volatility as the price approaches new all-time highs, and depending on the emergence of a new “BIG CHILL” warning perhaps some potential relief for the long-suffering bears.
The Friday Moody’s credit downgrade of the debt of the United States, 36 trillion dollars headed for perhaps for an increase of another 5 trillion, and the potential for loss of our status as the world’s reserve currency could adversely affect our key supply and demand indicators to levels, which may move them in a direction more favorable for the bear case. However, a movement in that direction would likely require days, or potentially weeks. At the end of the day SAMMY correctly warned us that not all was well with the rally into the all-time high price for the S&P-500, and that warning will remain in place until SAMMY gains enough strength to compete with TATY by making new recovery rally highs. Please note, the issue with the credit downgrade is for illustrative purposes, and because of the dangerous post-truth world in which we live it is multiple choice on what may eventually cause a great bear stock market sequence to commence.
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 is painting out a negative divergence (down sloping dashed magenta line) to the still rallying price (rising green dashed line). This is important if STERLING is signaling fatigue in the price rally while short of new all-time highs. And, it is important if STERLING eventually plays a role in TATY failing in, or near the red zone, which would complete a “BIG CHILL” warning. So, STERLING may be an early signal that a very tricky situation may be brewing under all the euphoria that new all-time highs may be looming just ahead in the stock market. Obviously, this indicator will require constant vigilance and observation in the days ahead.
