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Intermediate Trade?

I’ve returned from my conference with a group of professional investors in Tampa. The presenters shared their best ideas, and supported them with hard evidence generated by the markets themselves. As long time clients know I disdain opinions, even my own, in favor of making investment decisions based upon objective evidence, which is generated only by the markets. Everything else is just confusing, and often contradictory, noise. My thanks to all the presenters for sharing their work.

Recent updates have made the case that investors should be prepared to experience rising volatility as the calendar turns toward the election. This is not just a casual observation made because an election looms on the horizon. There are subtle changes afoot in a number of supply and demand indicators, which are hinting that the long period of relatively low volatility is beginning to give way to a more volatile investment environment. Interestingly enough, one presenter at my conference this weekend added some detail as to why this may be the case using metrics from his own discipline.

The supply and demand indicator, TATY, shown above in yellow, has begun to display signs of waning strength in the demand powering the stock market. TATY is a strategic indicator, which provides measurements that are key in determining, if the investment environment favors significant exposure to equities in a client’s portfolio, or if market risks have risen to danger levels, which would compel a prudent investor to scale back their equity exposure. This indicator is always shown in these updates in weekly chart format, as this is the most accurate format for this “big picture” indicator.

This week you will notice that I’ve drawn an aqua colored line across the tops of TATY, which on the chart appears as a downward sloping line indicating that this measurement of supply and demand for equities is signaling a creeping shift toward supply over demand. This change has not yet reached critical levels, but if this trend continues, then an assault on new all-time highs may become increasingly more difficult. Please remember an excursion in this indicator into the caution zone surrounding the 115-125 level followed by a laboring, and failing, rally back toward the red zone surrounding the 140 level would trigger a bear market warning signal. Obviously such a development may take several weeks given that TATY is a weekly generated indicator. TATY recorded its lowest close Friday at 141, since this leg of the rally began back on December 26, 2018.

Strong bull trends tend to paint out bottoms in this indicator in, or near the red zone, and tops around the pale blue line shown at the 160 level. So for now the developing negative divergence between the price, and the declining tops of the indicator, are not critical. However, should the divergence continue to linger, and grow even more negative, then investors counting on a continuing strong bull trend would likely be compelled to consider taking profits on intermediate long trades sooner rather than later. Obviously, should the indicator actually dial up a bear warning, then prudent investors may be compelled to option for the risks implied by scaling back their equity exposure, potential lost opportunity risks, to the more urgent, and perhaps more compelling, risk analysis that a devastating bear trend may be at hand, or potentially resuming from the initial leg down dating to the fall of 2018. This situation is often referred to as a bull trap.

SAMMY is a representative of a family of next generation tactical supply and demand indicators, and is shown above in daily chart format. I consider a less than weekly chart format to contain so much noise as to render some of their value diminished. However, intermediate range trading requires than investors have accurate indicators, which retain much of their effectiveness in a daily format. Modern markets have become dominated by large institutions doing trading strategies powered by computerized trading algorithms and derivatives. And, this environment moves much too quickly for decisions based only on weekly indicators, regardless of their record of market noise reduction. SAMMY has proven this family of indicators can be effective at early detection of institutions reversing their positions at BOTTOMS.

Derivatives are often created with leveraged instruments, so even deep pocket institutions must quickly reverse their losing positions, as their size does not give them immunity to how leverage quickly escalates their losses. And, institutions tend to act like fish in a school of fish, which amazingly all change direction quickly and at the same time. My next generation supply and demand indicators are an attempt to make these leveraged and maximum sized institutional position reversals stand out graphically, so that we can benefit early from detecting a change in an intermediate trend as it is happening.

However, most indicators are failures at effectively identifying tops, and the SAMMY family of indicators share that weakness. In all my decades of studying the major topping process, I have failed to find any indicator better than TATY at identifying, when the euphoric and gossamer like environment at tops, has turned so dangerous that the risk/reward ratio compels prudent investors to scale back equity exposure. Until we reach those kinds of objectively measurable conditions, the application of tactical trading tools like SAMMY holds out the possibility of enhancing overall performance within reasonable risk tolerances. SAMMY is shown above in daily format in the second chart alone, then in the third below with SPXL, a 3X leveraged S&P-500 ETF, overlaid and finally with some visual aids included.

Although the previous intermediate trade setup in early March failed to match all our criteria for execution, SAMMY did clearly show the critical shift when large institutions reverse positions. You will note that the “body” of the indicator went “depasser”, a French word for “overshoot”, when it painted completely below the lower red Bollinger Band (also see vertical blue line). This is a surrogate for an exhausted sellers alert, which was then followed by signs of resurgent demand, as the next whole “body of the candle bar painted completely above the lower Bollinger Band. As Paul Desmond often observed: “Exhausted sellers alone cannot confirm a bottom, there must also be evidence of resurgent demand”. This new indicator provided evidence of both, even though our premium/discount to “value” indicator never reached into the discount zone. This dichotomy makes me wonder if the failure to go into discount to “value” contributed to the brevity of the following rally, which has now begun to be reversed with Friday’s sharp swoon?

Currently, SAMMY has not yet painted a whole “body” candle below the lower Bollinger Band, but such a “depasser” event would be an early warning to be on the alert for a new intermediate trade buying opportunity. I’ll not repeat here all the steps we would like to see for a new intermediate trade opportunity setup, but I’ve included below a previous update outlining these steps. The steps have not changed, as when they appear the odds of executing an intermediate, or longer term, low risk trade entry are substantial.


The bottom line is the potential for a more volatile investing environment is beginning to be confirmed by objective measures of the balance of supply and demand. Such a change in the environment will likely result in opportunities to initiate intermediate trades to enhance overall performance with relatively reasonable levels of risks. However, investors will need to adjust to a more volatile investing environment, as after months of relatively low volatility the shift to volatility may become uncomfortable for some clients, but not for Alexander and I, because for us more volatility equals more frequent opportunities.

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