THE BOTTOM LINE
A number of supply and demand indicators, both our own and from Lowry Research, are suggesting spreading weakness in the underlying condition of the balance of supply and demand. At this point neither our own indicators, nor those of Lowry are suggesting an end of the bull market for equities. However, the spreading weakness is suggestive of a market vulnerable to increasing volatility, and possibly swings exhibiting greater amplitude and violence, conditions which may eventually trigger a “Big Chill” warning, which would compel us to investigate taking defensive measures in client portfolios.
Analysts I respect have recently turned more stridently bearish, but for the time being with interest rates still near zero, and offering little reward as an equity alternative, and lacking the historically accurate appearance of a “Big Chill” warning, the odds remain favorable for a more volatile, and perhaps more violent ride for equities in a struggle to touch new all-time highs. Favorable odds are not certainties, but investing with favorable odds is how to win the stock market game long term.
Waning Strength?
The S&P-500 managed to wobble higher this past week setting a new all-time high in the process. However, Lowry Research measures of supply and demand, as well as our own indicators, continue to paint a picture of marginal new highs being touched in the face of weakening indicators, and some negative divergences.
New bull trends eventually convince investors that the immediate future will resemble the recent past, as shallow and often brief dips in the price are immediately met with motivated bidders driving the price higher. As repetitions of this pattern persists, a belief develops among investors that that all pullbacks are buying opportunities. At some point this belief becomes absolute, and then a “fear of missing out” develops among the under invested in equities, which in turn join the “buy the dips” crowd, not because of prudent analysis, but because of the powerful psychology of missing out on a potentially huge opportunity. This stage in the psychology of bull markets often happens after the bull trend is quite mature. Bull markets tend to persist until the last bear gives up and joins “the crowd”, hence the cliché “the crowd is always wrong at the turn”, which cries out for the foot note that the crowd was right in between!
The psychological stages of a bull trend are difficult to identify in the daily hurly burly of the market place, which is why effective indicators are absolutely necessary to help identify the nebulous beginnings and ends of these various stages. One of the first indicators to cast a shadow on a bull trend is sharply rising interest rates, usually a by-product of inflation, the almost invisible thief of wealth. Rising interest rates according to most business schools offers a less risky alternative to equities, or so go goes the debatable theory. When bull markets go belly up rising rates are often accomplices in the murder. The current interest rate environment approaching zero, and excess global liquidity compliments of central banks, are often credited with driving the current bull market in equities.
So, where are we in the difficult to identify stages of the current bull market, and what will likely be the signs that the great bull run is nearing its demise? Last week we discussed the Paul Desmond “white paper” of how stocks in a bull market, like leaves as fall approaches, begin to peel away from the ongoing bull trend, until finally even the big cap survivors driving the cap weighted indexes higher begin to fall away as well. This causes the bull trend to become increasingly vulnerable, until it finally begins to falter. The underlying fragility often leads to a nasty decline, which tends to break the fever of the previous absolute belief in the bull trend.
Once shaken by the dramatic break in the market, the psychology of investors tends to turn from maximizing gains to protecting profits. If the bull psychology is sufficiently damaged, then investors begin to sell into any subsequent rally, especially if there exists an attractive less risky alternative, which often means bonds of a high quality. The phenomenon just described is why our TATY “Big Chill” warning tends to be highly effective at warning that a bull trend may be nearing a conclusion, and as a bonus TATY also tends to warn of the expiration of counter-trend bounces during bear markets.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in Snapshot-286 in yellow with the S&P-500 overlaid in red and blue candle chart format.
TATY declined to 141 this past week, and remains in the red zone, and has obviously not yet taken the first step toward a new “Big Chill” warning, which would be a decline into the caution zone surrounding the 115-125 level. Declines by TATY into the caution zone often correlate with a change in the bullish psychology of investors from absolute belief in a continuing bull trend to one of protecting accumulated profits. A decline strong enough to drive TATY into the caution zone is often enough to change investor psychology from giddy euphoria to a more sober and cautious assessment that risks may be approaching an unacceptable level.
There are numerous signs of some weakness developing in a number of Lowry Research indicators, negative divergences in some of our own tactical supply and demand indicators, but lacking a “Big Chill” warning I’m inclined to look for a volatile remainder of summer and into the fall, but not yet an end to the bull trend, given the lack of an attractive low risk alternative to equities, although Lowry rankings are showing the utilities group at, or near the top of Lowry rankings week after week. Investors looking for income appear to be inclined to find what they are looking for among the utility companies, which is often considered a defensive sector.
A sharp rise in interest rates coincidental with a plunge in TATY into the caution zone surrounding the 115-125 level would force us to re-evaluate our equity exposure to the market. No indicator is perfect, but I like the odds of navigating the transition from bull to bear market with TATY leading the way, once that transition begins to get underway, late or soon. There will certainly be another bear market, but at the moment there simply is not enough objective, and measurable evidence that defensive action is required. A pause on new purchases appears prudent, but all out defense appears a ways down the road just yet, subject to change of course.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in Screenshot-258 and below 260 in weekly and daily format respectively in yellow with the S&P-500 overlaid in red and blue candle chart format.
Screenshot-258 shows the negative divergence, which developed prior to the February 2020 then all-time high with a down sloping dashed magenta line. It also shows the budding negative divergence currently developing, also with a down sloping dashed magenta line, which was not reversed by the new all-time high in the price this past week. The down sloping dashed orange line illustrates the continuing weakness in this indicator, relative to the February 2020 all-time high. This implies the current all-time highs are being made with less force behind them than in 2020. This failure to confirm the new all-time price highs remains a source of aggravation and frustration.
Screenshot-260 is SAMMY again in daily format. It shows very clearly that SAMMY foreshadowed the decline into the July 16 bottom, and is once again developing a negative divergence to the price, which managed a new all-time high this past week. SAMMY, both weekly and daily versions, is suggesting confirmation with the weakness appearing in a number of Lowry Research measures of supply and demand. For the time being, we will be treating this situation as favorable to increasing volatility with a coincidental struggle to take the price continuously higher. The condition of a number of indicators are suggesting, in the absence of a “Big Chill” warning, that any marginal new all-time highs in the price may be followed by sharp declines, as summer turns into fall.
Please stay safe!
