The recovery rally from the March 23 low has resolved itself into a range bounded by 3200 on the low side, and 3279 on the top over the last three weeks. So, it appears that the resolution of the bull versus bear market question is now likely to happen in August. Historically September and October have well-earned reputations as the weakest months over the last hundred years or so, but in recent years the seasonal declines normally associated with September and October have begun in August. Regardless of the looming negative seasonal pattern, the price range of the S&P-500 has become so narrow as to make it almost impossible for a breakout to new recovery rally highs, or a break down into confirmation of a continuing bear market, possibly of a very large degree, to not happen sooner rather than later.
The impotent bears have managed to drive the price close to support at 3200 several times, but alas each of the declines have been met with strong and persistent buying. It is almost as if the powers that be have decided that 3200 is an important level to be defended at any cost. I have watched the S&P-500 futures tick by tick for decades, and never have I seen such motivated bidding defending a support level, as has occurred at every support level since the March 23 low. The bidders enter the market quickly and in size, and once in begin drive the price briskly higher. The more skeptical among us may admit to some suspicions that the Fed, or its surrogates, are at work overtly supporting the price, and by implication the economy. Watching this happen day after day reminds me again of the observation by the late Marty Zweig: “Don’t fight the tape, and don’t fight the Fed”!
However, on the contrary, neither have the bulls proven that they can remain in charge of the market, even though they have managed to push the resistance level marginally higher to 3279, where they have been over taken by the bears. Given that the effects of the economic impact of the virus on the system have been somewhat mitigated by emergency measures like the additional $600 a week unemployment benefit, we shall soon see just how badly the nearly 33% drop in annualized GDP has damaged the economy, because emergency relief measures are beginning to expire, and as of this writing have not been renewed, or replaced with newer measures.
The majority party, for the time being, seems to have become divided among its members, so the usual slow plodding nature of legislation may become even slower, just as emergency relief is expiring. An economy already sporting unusually high unemployment numbers, may become even more economically vulnerable, in like manner as older Americans with high risk factors are more vulnerable to the virus. With the highest unemployment since the Great Depression, one wonders how long it may be before payments in arrears for cars, mortgages and rentals negatively impact even previously financially healthy sectors of the economy.
The disconnect between the stock market and the economy is likely to narrow in the days ahead, but will the Administration, the Congress, and the Fed’s stock market “sugar” high caused by spiking the economy with prodigious amounts of debt fade, or will the highly touted “V” shaped economic recovery actually arrive? Slowly spreading debt defaults, both public and private, tend to accelerate in recessions, and a case can be made that defaults are on the cusp of rising, sooner rather than later, especially if the majority party remains at odds with itself. The size of this potential economic bomb has always been huge, but what has not been well known is the length of the burning fuse.
In any case, the narrowing range of the S&P-500 is likely to give us more illumination about the progress, or lack thereof, of the stock market in the days immediately ahead, and very likely before the traditional start of the election season, which is Labor Day.
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 still at an oversold level at 128, and with a developing negative divergence with the price shown as the down sloping bold sky blue line. Please note how this divergence began before the February all-time high in the S&P-500, and has continued through the end of this past week, which just happened to be the last day of July. TATY continues to paint out objective numbers, which appear to be warning that not all is well with the recovery rally, even though the price would have investors believe that all is well, because the Administration, the Congress and the Fed has investor’s backs. They may very well intend to have investors backs, but the statistical outlier nature of today’s massive and growing levels of corporate and national debt, in addition to unprecedented economic, political, and medical circumstances may test the limits of the Fed’s powers, as never before post the Great Depression.
Risk managers must now take into account more political, medical and economic uncertainties, both at home and abroad, than at any other time that I can remember. And, business as usual is anything but usual these days as corporations have gorged themselves on debt, just like the Federal government, and unfortunately many state and local governments.
THE BOTTOM LINE
The recovery rally has now resolved itself into a narrow range bounded by S&P-500 3200 and 3279 (See Screenshot-144). This implies another step toward confirming a new bull market, or an ongoing bear market, will likely happen sooner rather than later in the days ahead, and very likely prior to Labor Day, the traditional kick off to the election season. Given the nature of the unprecedented uncertainties, both foreign and domestic, we will continue a preservation of capital strategy, until evidence to the contrary arrives to compel us to redeploy a strategy of maximizing returns with as little risks as possible. If a new bull market was born on March 23, then it will likely endure for many months, or even years. So there will be many opportunities to make money with less risks going forward.
If a bear market, very likely of a large degree, is still in force, then the penalties for not respecting its potential for wealth destruction may be applied swiftly and relentlessly. Given the potential for the severity of the penalty of the latter, we will respect the negative potential, until better and more definitive evidence arrives vis-à-vis the balance of supply and demand, and our revised assessment of risks versus reward in an era of unprecedented uncertainties.
Please stay safe!
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