THE BOTTOM LINE
Markets tend to discount the future, so perception IS reality more than what is known. Steepening and persistent negative divergences in a cohort of supply and demand indicators, and completion of the first step toward a new “Big Chill” warning, are suggesting that a period of weakness may be needed to re-invigorate demand, and if the S&P-500’s long term uptrend support line were to be breached, then another shallow dip to re-invigorate demand may turn into a correction, or a new bear market now that there is a growing perception that stocks may have a looming competitor in terms of rising interest rates.
It is evident from the increasingly dramatic shifts and cohort of supply and demand indicators that at least a change in character in the stock market has happened over the last seven weeks, and will likely continue into the new year. Therefore, investors should expect markets to remain volatile as the calendar turns into the early months of 2022.
Hibernation Over?
Weeks ago, the stock market began a decay process, which has accelerated over the last seven weeks, as the price started to become range bound, and numerous supply and demand indicators began to negatively diverge with the price. The change in the balance of the forces of supply and demand has become more apparent graphically this past volatile week, as negative divergences steepened after TATY’s recent plunge into the caution zone. However, even as the evidence of change is growing the price has still been able to maintain its bull trend by remaining above its long term trendline (Screenshot-486 above).
These weekly updates have been giving the benefit of the doubt to the bulls for months, because even though episodes of brewing weakness in our indicators did indeed often result in episodes of fleeting price weakness, which in turn resulted in re-invigorated demand, there was no competitive and viable alternative to stocks with nominal interest rates remaining near zero. However, with growing evidence of global inflation has come declarations of impending changes in monetary policy by some central banks, including our own Fed.
Markets discount the future, so perception is reality in the markets, and price changes are powered more by what may be than by what is known. And, now the perception is tilting toward interest rates having bottomed, and beginning a long term rise perhaps even for decades, as is the usual tendency for interest rate cycles. So, what investors will be able to witness in our proprietary indicators going forward is the balance of the forces of supply and demand adjusting to reflect this growing new perception of the future long before there is any actual change in rates by the Fed, and/or other central banks.
So, let’s look at how potentially higher interest rates are already impacting our proprietary supply and demand indicators.
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 after failing at the red zone surrounding the 140 level.
TATY has completed the first step in a new “Big Chill” warning by having previously plunged into the caution zone surrounding the 115-125 level, which has historically tended to quell the “bull fever”, which is attendant with seemingly never-ending bull runs. If TATY cannot gather enough strength to maintain itself above the red zone, then the final step in the completion of a “Big Chill” warning will come to pass. The completion of a “Big Chill” warning would be a big “tell” that risks may be rising too much for comfort, and we may be compelled to take defensive actions in client portfolios.
The arrival of a new “Big Chill” warning coincident with a downside breach of the S&P-500’s long time uptrend support line (Screenshot-486 top of page) would be cause for immediate consideration of defensive actions in equity portfolios. When bull trends are strong TATY tends to levitate above the red zone as shown by the green ellipse on the “TATY Trend” chart shown above. When risks have become dangerous, then TATY tends to be repelled at the red zone either as a significant correction, or new bear market gets underway, and/or as big counter-trend rallies begin to weaken and expire during bear markets as shown in the (TATY Tops below) chart shown above.
Negative divergences in TATY, shown as down sloping magenta lines, steepened this past week both on the primary upper panel, and on the Premium/Discount chart shown in the lower panel. Lowry Research indicators remain mixed, but the most recent update was not available as this update was being written.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format. SAMMY continues to be negatively diverging (down sloping magenta dashed lines) as the price attempts to make new all-time highs. The negative divergence steepened this past week, which is a sign of fading strength in the balance of supply and demand.
STERLING — A REPRESENTATIVE PROTOTYPE OF A NEW FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS
A daily version of STERLING is shown above and is telling the same story as TATY and SAMMY, which is fading strength in the balance of supply and demand as the price struggles to make new all-time highs. STERLING also implies a break of the S&P-500’s long time uptrend line (Screenshot-486 top of page) would grade out as a clarion call to consider defense in portfolios.
STERLING is shown above as a weekly chart, which also shows the steep negative divergence with the price. If the S&P-500 can maintain its uptrend line, then all these indicators will have done is to warn of a pause, which will likely re-invigorate demand. It is too soon to know if the perception of growing inflation and rising rates will trigger anything more than a minor adjustment by institutions to client asset allocations to equities, but the growing steepness of the negative divergences with the price, in a host of indicators, suggests continuing volatility into the new year.
Please stay safe!
Happy Holidays!
