Last week’s update mentioned that breaking the negative divergence in the supply and demand strategic indicator named TATY boded well for an attempt to assault new all-time highs. The rally of this past week had the S&P-500 cash index approach within one percent of the all-time S&P-500 high at 2941. So for the time being the balance of supply and demand, as measured by a series of indicators, remains favorable. This suggests that investors should remain invested toward the maximum of their equity asset allocation, as an assault on new all-time highs remains a significant probability.
However, I am concerned that sentiment has become quite extreme in the positive according to a number of publications. The theory behind this observation is that when everyone is bullish there are no investors left to push prices higher. I have issues with sentiment indicators, which are beyond the scope of this brief update, so for the time being let us just say that expressing an opinion in a survey of professional investors is not the same as acting on one’s opinion in size with real money.
My proprietary indicators are attempts to track what investors are actually doing in real accounts, with real money, which drives the balance of supply and demand for stocks. So sentiment is not even a secondary indicator in my world, but sometimes they may be helpful, even as the blunt and crude instruments, which they tend to be. As an aside, we were visited this past week by a trust representative making an overture to us to manage some trust accounts. In the course of our conversation, he mentioned that he had attended a recent conference of over three hundred hedge fund managers here in Palm Beach, where all the presentations were very bullish in nature. Evidence of an extreme in bullish sentiment, or evidence that these very bright women and men are right about the stock market? For an answer, let us see what the market told us about itself this past week by checking in with TATY and SAMMY below.
TATY — A BIG PICTURE FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY, shown in the first chart above in yellow overlaid with the S&P-500 in blue and red candle chart format, shows that the break of the lengthy negative divergence in the tops of the indicator (aqua descending line on the chart) continued this past week. Both the price, and the underlying balance of supply and demand, suggest an assault on new all-time highs remains a favorable probability. And, as last week’s update suggested, perhaps sooner rather than later?
Long time readers of these updates know that since TATY is a weekly generated and plotted indicator, its most effective format, then it would take weeks for it to complete the normal gymnastics required for the indicator to signal that a major top was in the process of forming. These kinds of signals have been very accurate since the 1990’s, and probably before, if the data existed in eSignal format for me to calculate it. While no indicator is perfect, TATY has an outstanding record of signaling that risks have risen to levels consistent with prudent investors optioning for the risks of lost opportunity from scaling back equity exposure over the more cogent and dangerous risks of being trapped in a vicious, and often relentless, bear market for stocks. For now, the weight of the evidence remains favorable toward an asset allocation slanted in favor of stocks according to a series of strategic supply and demand indicators.
SAMMY — A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in daily format alone, and with the SPXL 3X leveraged exchange traded fund (ETF) overlaid in the chart below. Please note that SPXL is a potent trading instrument best applied by experienced and highly skilled professional traders. I use the non-leveraged Vanguard VOO ETF in conservative and risk adverse client accounts, which is generally accepted as a more appropriate choice.
SAMMY has proven effective at locating low risk entries for putting excess cash to work, and for intermediate trades whose purpose is to maximize overall performance with as little relative risks as possible. I prefer to use SAMMY with the premium/discount to value indicator as a filter to expose client accounts only to the lowest relative risk intermediate trades possible. The added premium/discount to value filter results in fewer trades, but also trades with lower relative risks. Alexander and I are risk adverse managers, so risk management is always job one with us.
You will notice that even though the last two trade setups shown above for SAMMY (shown by the vertical blue lines on the chart) worked out just fine with SPXL, I did not take these trades in client accounts, because they failed to be confirmed by the premium/discount indicator. While this may be viewed as a lost opportunity due to an over abundance of caution, investors pay us to manage their risks, and proper risk management in our world always requires the application of confirming signals from other indicators. At some point we may offer a more aggressive ETF product for qualified investors wanting to put an appropriate portion of their wealth in a more aggressive strategy in addition to those already offered, since this family of tactical indicators have tended to be extremely accurate. However, this notion must be thoroughly tested with my own funds before being offered to clients, if ever.
SAMMY matched its recent high this past week, as the price pressed on to a higher high. If this persists, or if SAMMY actually rolls over into a negative divergence as the price continues higher, then the environment of giddy extremes in optimistic sentiment may become a “tell” that an intermediate top may be forming, intermediate as opposed to a major top at this point.
THE BOTTOM LINE
An assault on new all-time highs remains a favorable probability, albeit in an environment trending toward extreme optimistic sentiment.
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