THE BOTTOM LINE
A bear stock market likely began at the February all-time high, which is painting out the first leg down in a likely multi-month decline. However, this newly minted bear has not yet been confirmed by a “BIG CHILL” warning, which implies that a renewed assault on new all-time highs cannot be ruled out — yet. The swift selloff paused at an important rising support line and has mounted a recovery rally. How the recovery rally continues to develop will be extremely important to monitor and correctly diagnose given the extremely oversold conditions from which the rally is emerging. The bears expect an immediate collapse of what we are treating as a countertrend rally and they may be right, a study of the average length of recovery rallies in big bear trends notwithstanding. In this kind of volatile environment nimble traders are more likely to be rewarded than buy and hold investors.
The treasury bond market is likely to play a key role going forward as during the stock market decline the treasury bond market sold off along with stocks signaling a growing lack of confidence in investing in the United States. Some finance professionals even questioned if the bids under the treasury bond market were sufficient going forward to absorb the growing supply of T-bonds being offered in order to finance our spiraling national debt. Ironically the response of the Congress was to vote to begin the legislative process to add an estimated 4-5 trillion dollars more to the national debt of 36 trillion, counterintuitive would be a gross understatement.
If allies like Japan, which owns the second largest amount of our T-bonds, continue to sell their holding of our T-bond during periods of global financial distress, then who is left to make up the difference? These weekly updates have often mentioned that being the world’s reserve currency has allowed us to finance our ever increasing debt, but the flip side of that situation is a potential financial crisis we have not experienced in modern times, the potential resolution of which could be a crashing stock market, a recession or stagnant economy and sharply rising interest rates, which the Fed could do little to counter with monetary policy. In short, the end of the relatively “free financial lunch” we have enjoyed for decades.
The stock and treasury bond markets have arrived at a potential tipping point, which is testing both markets’ ability to find bids to restrain their declines in an increasingly uncertain environment. Investors should prepare for a potentially wide swinging very rough ride with preservation of wealth as their primary objective.
GLOBAL UNCERTAINTY AND THE TREASURY TIPPING POINT
Recent updates have included admonitions for investors to expect continuing episodes of volatility in the stock market and one such event manifested itself in the extreme this past week as global stock and bond markets were roiled by the application of historic tariffs to virtually all imports coming into the United States, which were broader in scope and larger than the markets expected.
The treasury bond market normally rallies in “a flight to safety” when uncertainty causes distress in the stock market but this time T-bonds sold off sharply together with stocks as allies like Japan, the second largest holder of our debt, sold our T-bonds into the chaos. The price of T-bonds declined sharply (interest rates rose) as global markets began to understand the implications of the potential impact of the tariffs. Some on Wall Street became alarmed that bids under T-bonds may collapse triggering a major debt market crisis while stocks were already in a meltdown. The free fall was halted and then reversed when the news of a 90 day pause in the application of some of the new tariffs was announced, but by then confidence in the dollar remaining the world’s reserve currency had been damaged, uncertainty remained and the rebound rally in stocks began to reverse course late in the week leaving stocks still lower than when the tariff episode began.
The rally which emerged after some of the tariffs were paused has the look of a rebound or bear market rally as opposed to a new bull leg emerging off a bottom formed during the climax of a mature bear market. The attached exhibits will suggest the probabilities of what may be coming in the days and weeks to come.
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 108 after plunging through the caution zone surrounding the 115-125 level without pausing. The green zone surrounds the 89-100 level, which is a deeply oversold level from which violent rallies can originate and TATY began to reverse after plunging into this green zone. This completes the first requirement for a new “BIG CHILL” warning and should TATY continue to rally and then stall out in or near the red zone surrounding the 140 level, then a new “BIG CHILL” warning will have been completed, which would confirm that a bear market had begun at the February all-time high in the S&P-500.
The Premium/Discount indicator in the lower panel also plunged into deep discount levels and should it turn back up into the minus five, then minus three level then a sustainable rebound or countertrend rally may linger for days or weeks. Alternatively, the possibility of a test of the plunge low may happen as a cohort of our supply and demand indicators positively diverge as the price attempts to form a bottom. I should note that the bears expect the melt down plunge to continue next week and they may be right. However, experience has taught me, I once did a study for the late Paul Desmond at Lowry Research on this topic, that rebound rallies in big bear trends tend to last eight to thirteen weeks before they rollover and resume their bear plunge. So, while the bears may be right the study suggested bear markets are powerful, violent and can linger for weeks causing investors to falsely conclude the bear market has ended, when in truth it may be just getting underway.
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. SAMMY plunged into deeply oversold single digit levels as the price was in free fall. SAMMY is trying to turn up but remains a long way below overhead resistance represented by the down sloping red and magenta lines, which rejected the rally attempt preceding the plunge leg of the decline, which began after the February all-time high. If the current rebound rally attempt lingers, then it will be important to watch the price carefully as SAMMY approaches overhead resistant represented by those red and magenta down sloping lines. Obviously, as suggested by the study I did at Lowry Research, a recovery back to overhead resistance could require days or weeks.
STERLING —- A REPRESENTATIVE OF A FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS
STERLING is shown in Screenshot-125 in the upper panel with the S&P-500 eMini futures contract shown in the lower panel. STERLING is basically neutral with no divergence in place. If the plunge low is tested, then I would expect STERLING may give us a nice positive divergence in advance of the terminus of this first leg down off the all-time high.
