THE BOTTOM LINE
The weight of the evidence is favorable toward there being enough demand over supply for an assault on new all-time highs. However, sentiment surveys have reached excessively bullish extremes last experienced when the price was making significant tops in the past, the most recent being the September 2-3 then all-time high, and both strategic and tactical indicators have entered ranges, which in the past have also coincided with the formation of significant tops. So, while the price may march on to new highs, it is doing so with more and more danger flags being hoisted up the flag pole. Taken as a whole, a tipping point may be reached late, or soon, but in the interim we shall take all the tactical trades, which the stock market may be willing to give us without violating prudent risk management.
In the days, possibly weeks ahead, the best situation would be for TATY to complete a “Big Chill” warning by stalling out in, or near, the red zone surrounding the 140 level, while coincidentally SAMMY develops a negative divergence with the rally in the price, accompanied by evidence of a bullish extreme in sentiment having been reached, and continuing in place. A confirmation by Lowry Research measures of supply and demand would be icing on the cake. Lowry current measures of supply and demand remain favorable toward demand over supply.
The stock market rarely allows for all the stars to come into alignment before the price takes the path of least resistance, but the more evidence of a top under construction the better. So we will remain vigilant as the market deals us more cards. On the contrary, should evidence arrive that demand is continuing to strengthen as supply continues to decline, then we will react appropriately to take advantage of the developing less uncertain, and less risky market environment.
Evidence of the stock market having begun a new bull market at the March 23 low lasting months, or years, would likely emerge as TATY beginning to form bottoms in the red zone and peaks near the 160 level (See Taty Tops below 2003-2007), as the indicator oscillates between the two zones until the arrival once again of a new “Big Chill” warning, which would be the first evidence the new bull trend may be becoming exhausted. Obviously, these events would be months, or years, in the future, but history suggests the pattern of behavior basis our supply and demand indicators would likely repeat as they have for decades, because human emotions and psychology tend to repeat as they manifest themselves in the markets.
The prudent path vis-à-vis risk management is not always the most profitable, but at then end of the day managing risks is what this game is all about. So for the time being we are going to treat the current situation as just another, and perhaps weaker, leg up in an aging bull market, and not a young and vigorous new bull market, which began at the March 23 low. To treat this rally as a new bull market would be to ignore the giddy euphoria now prevalent, and the lagging strength in families of both strategic and tactical supply and demand indicators represented by TATY and SAMMY, which have never returned to the strength they enjoyed prior to February high, even though the price has rallied to new all-time highs. Prudent risk management requires the implication of new all-time highs in the face of evidence of less strength powering the rally to be taken into account. These conditions are subject to change, but for now they are what they are. And, what they are is evidence of a continuing aged bull market, perhaps the oldest on record depending on some debatable technicalities best left to resolved, because of some differences of opinions between market analysts.
According to a recent Investor’s Intelligence survey, bullish sentiment has reached into the historically extreme range, and a different report from NAAIM shows that professional investors are not only fully invested, but are over 100% invested to the tune of 106%, which means professional investors are employing margin and/or leverage in client accounts. They may be right, but the theory of contrary investing says that when investors are all on the optimistic side of the market there is no one left to buy, or on the contrary, when they are all pessimistic there is no one left to sell. So, given the current evidence of a historic extreme, or near historic extreme in euphoria, investors should be made aware of some of the history of these blunt sentiment instruments related to the theory of contrary investing, given that objective measures of supply and demand remain favorable toward demand, even though supply remains stubborn to decline.
Overly bullish, or bearish, surveys of investor sentiment have a number of issues, like for example do professional investors with huge books of business actually answer the survey questions truthfully, but the issues revolving around the actual survey questions, and their timing, tend to become less important, as the readings approach historic extremes, as is the current case. Metrics associated with the calculation of the balance of supply and demand tend to be much more accurate, because the market itself generates the inputs into the supply and demand formulas, derived from the millions of investors buying and selling multi-billions of shares daily. So one set of measurements are a snapshot in time based on responses to a survey, and the other based entirely on how investors act on their beliefs in the market place with their capital. So, for me sentiment surveys only rise to the level of secondary information, which at times of extremes may be useful, but never as reliable as the metrics actually generated by buyers and sellers.
The bottom line on investor surveys is that most of the time they are of only marginal value at best, but when they reach levels of historic extremes their relevance becomes much more important. For example, in late 2017 just prior to the 2018 major top (Screenshot-182) the Investor’s Intelligence report reached an extreme, and the NAAIM Exposure Index soared to over 100% showing that professionals were using leverage to get into the bull market. And, currently Investor’s Intelligence is in the overly optimistic range, and once again the NAAIM Exposure Index has reached over the 100% invested level, because professionals are once again using leverage to boost equity exposure to 106% invested. So, both these blunt market instruments have again reached extremes, making the odds of a significant market top more probable in the days, possibly weeks ahead, as opposed to months or years.
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 137 just below the red zone beginning at the 140 level.
TATY has trigged a “Big Chill” watch by dipping into the caution zone surrounding the 115-125 level, and is now approaching the red zone surrounding the 140 level. All major tops, and rebound tops during bear trends, since the 1990s have occurred as TATY completed the market gymnastics required for a “Big Chill Warning”. Please see the exhibit from a talk I gave at St. Simons Island in 2014 labeled “Taty Tops” below for examples of the “Big Chill Warning” at work in real time. Especially notice how the counter-trend rally peaks during the bear markets also obeyed the “Big Chill” warning. And, now take a look at how TATY formed bottoms in, or near the red zone during strong bull trends, and peaks in the zone surrounding the 160 level. If the March 23 low was the beginning of a new bull market, then it would be reasonable to expect TATY to NOT stall out in the red zone potentially signaling a nasty correction, and then continue on to begin to oscillate in a range bounded by the red zone on the bottom with tops forming near the blue line at the 160 level, as it did after the 2003 low and 2007 top.
Given the current readings of extreme bullish sentiment in the Investor’s Intelligence survey, and the NAAIM Exposure Index, it would be wise for investors be on alert for the potential arrival of conditions favorable for a significant top. However, those conditions are not yet all in place, and sentiment surveys having reached an extreme can remain that way for weeks, so a reasonable time line for all the necessary conditions to come into alignment would be from now until the first, or possibly second quarter of 2021. And, in the interim the potential, and probability for, new all-time highs remains favorable.
Recognizing a major top as it is forming is among one of the most challenging exercises in market analysis, as euphoria tends to dissipate slowly and in a nebulous and gossamer like manner compared to the more intense emotion of fear coming to a panic driven peak at bottoms. Obviously measuring fading euphoria objectively is a much more difficult challenge than measuring fear as it spikes to a climax. So, the drill now given the arrival of bullish sentiment extremes is to monitor TATY for exhaustion as it approaches the red zone, and tactical indicators like SAMMY for the formation of a negative divergence as the price hangs out in the zone surrounding new all-time highs.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in Screenshot-179 in weekly format, and below in Screenshot-181 in daily format. The now familiar negative divergence, which formed prior to the February then all-time high is shown again as a down sloping dashed magenta line as a point of reference in Screenshot-179, and in Screenshot-181 as SAMMY diverged dramatically and negatively prior to the September 2-3 then all-time high, shown as two down sloping dashed magenta lines on the daily chart of SAMMY. This was a time when investors were giddy with euphoria, and willing to pay fat prices to get cash into the stock market.
SAMMY has a history of developing significant, even dramatic, negative divergences to the price as the price is touching rally highs, and beginning to form a significant top. This happened at the then February all-time high on the weekly chart basis, and then again at the September 2-3 then all-time high on a daily chart basis, as sentiment at that time was also registering a bullish extreme on the Investor’s Intelligence survey. SAMMY does not always develop negative divergences with the price at significant daily, or weekly chart tops, but when it does the odds that an important top is at hand rises dramatically.
Market analysis is an exercise where the more puzzle pieces that come into place the better the probable outcome of the analysis. The market never makes itself easy to analyze, but with the right tools, and experience, it can be done successfully more often than unsuccessfully. For the time being all we can say is SAMMY has never recovered the strength it had at the February then all-time high, but it has recently generated enough strength to likely power the price to assault new all-time highs, because it has broken out above previous resistance represented by the horizontal magenta line shown on Screenshot-179, albeit SAMMY remains well below the level it achieved in January just before the February top.
Please stay safe!