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Next Generation Supply And Demand Indicators

I am doing a presentation to a group of professional investors on March 23rd in Tampa. I will be speaking on how major tops form in the stock market, and I will also be introducing my next generation of supply and demand indicators. These prototype indicators have been under development of many months, and are now being put into service after extensive testing. The final version of this new family of indicators have been locating intermediate bottoms in the S&P-500 with extraordinary accuracy, but unfortunately have not demonstrated any improvement over existing indicators in terms of locating exhaustion tops.

I expect this new family of indicators to enhance our opportunities for profitable trades due to their high degree of accuracy in locating intermediate bottoms. To the best of my knowledge, no other analysts have combined NYSE based indicators with modules representing the supply and demand balance for derivatives, which is how I’ve approached the design of these entirely new indicators. Failure to account for the impact of the risk management component of overall supply and demand represented by derivatives would by definition fail to give an accurate picture of the total supply and demand dynamics for stocks. The bottom line for this section is clients are likely to see more trading in their accounts going forward in order to take advantage buy signals being generated by this new family of indicators. While we prefer long term gains due to preferential tax treatment, with tax rates now at historic lows, we expect very few clients will complain about us potentially generating some additional profits from short term gains.

Recent updates have made the case that the probabilities favored a resumption of the previous bull trend, which stalled in October of 2018, and was followed by the decline into the December 24 low. Our updates said that both the S&P-500, and a series of supply and demand indicators, must confirm the bull case by both painting out higher highs and higher lows. So far there have been no higher lows registered on the weekly charts, but on the daily charts, which are rarely posted on client updates, there have clearly been the requisite series of higher highs and higher lows on both the S&P-500, and the indicators. So for the time being, the bull is earning his stripes, and the bull case remains the higher probability. Clients are long index ETFs, and all our positions are profitable, so for now we will continue to hold all our long positions. Clients coming over from competitors, which have individual stock holdings, may see some selling into strength activity in order to roll off the holdings of our competitors strategies, and then get your accounts rolled over into our ETF strategy over time.

The bear case remains the lower probability, but it is still an active consideration until the S&P-500 clears first 2888, and then the previous all-time high at 2941. If the rally touches a new all-time high, and there is evidence of increasing strength in the balance of supply and demand, then prices may be marked up quickly, even in the face of high valuations, as under invested money managers scramble to get fully invested. Under invested money managers sitting out a rally are prone to be fired, so the price zone just above current levels may see some serious activity, if the bull case remains valid. However, I am not sanguine about the length of the negative divergence leading into the October-December decline, which seems too brief for a major top. And, the brevity of the October-December decline remains a troubling issue as well, because taken together the brief negative divergence, and the brevity of the decline, can be construed in some disciplines as just part of a larger bear market. The ongoing larger bear market theory remains a lower probability, but due diligence compels me to not discard it altogether just yet. The weeks ahead will likely prove one of these two probabilities, but for now prudence demands vigilance as winter turns to spring, and spring turns to summer.

 

The bottom line is the stock market is demanding to be treated as being in a renewed bull trend until evidence to the contrary arrives. This means the new indicators now coming into service are even more important than usual, because excess cash will need to be deployed, if the renewed bull trend continues to prove itself. And, deploying excess cash with tactical intermediate trades may potentially enhance overall performance.

 

TATY, a supply and demand indicator, is shown in yellow on the attached chart, and the S&P-500 is shown in red and blue candle format.

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