Once upon a time just out of Georgia Tech, I had the good fortune to have a former Navy pilot as one of my flight instructors. Dick Aycock taught would be pilots to carefully prepare for every flight, and to know their aircraft so well that emergency procedures could be executed immediately should they become necessary. Another Navy pilot turned NASA Astronaut once said: “that landing on the moon was the second biggest thrill of his life”. A reporter asked what could possibly top landing on the moon? The Astronaut replied: “landing on the pitching deck of an aircraft carrier at night in high seas”! Dick Aycock had been a carrier pilot, and his dedication to being prepared in the air, and to strict adherence to proper flight procedures and training, later landed him a job as the chief pilot for Flowers Industries fleet of corporate jets. Flowers Industries (FLO NYSE) is the largest baking enterprise in the United States.
I remember Dick taking me through emergency procedures over and over in Cherokee 140 Fox Lima, and Cherokee 5225 Tango, while teaching me to believe the instruments in front of me instead of the sensations my body was telling me. He often said that as a species evolution had not prepared us to operate in three dimensions, as our two dimension evolved brains would lie to us, when that vertical dimension was added to the mix. So hours of training “under the hood” with no view allowed of the horizon outside the aircraft did dramatically illustrate the necessity of believing the instrument panel, and not the sensations coming from my two dimension evolved body.
This kind of intense training can be, and has been, the difference between life and death for many pilots. Young John Kennedy flying to Martha’s Vineyard in a Cherokee Arrow comes to mind, as haze obscured the horizon, and too few hours “under the hood”, and/or lack of instruction to turn on the on board auto-pilot had a tragic result in the sea for the young Kennedy, his beautiful wife, and her best friend. When a pilot cannot see even the propeller of his, or her, aircraft due to weather, then belief in one’s instruments can be the difference between screaming out of the sky nose down, and inverted at cruise power, or keeping the wings level while maintaining your clearance altitude, and approved heading from ATC (Air Traffic Control).
The phrase often repeated among pilots telling stories in a hanger somewhere is that there are bold pilots, and there are old pilots, but there are no old bold pilots! Navigating the risks of piloting an aircraft in crowded skies subject to sudden changes in the weather is not unlike navigating the risks to increasing wealth in the financial markets. Both are done best, and with the least risks, when preparation, training, discipline, experience and belief in one’s proven instruments are constantly applied to the challenge.
TATY — A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown in the first chart above in yellow with the S&P-500 cash index overlaid in red and blue candle chart format.
The often mentioned lengthy negative divergence in the TATY indicator (down sloping orange line on the chart) appears to have finally begun to exert enough pressure on the price to result in some weakness. At this point the price decline is only marginal, and TATY remains above the red zone having finished the week at 146. Recent price dips have been brief, and mostly of the intraday variety. So, it remains to be seen if this past week’s sharp decline in the price, and in several supply and demand indicators, are the beginning of a multi-day, or multi-week decline, or just another brief and fleeting dip in the price before another attempt to assault new all-time highs. So what are we to do? For the answer, please read on.
Alexander and I will do what all successful pilots do, which is to apply our preparation, training, discipline, experience and belief in our instruments to maximize the risk adjusted return for our clients. So what does that look like applied to current conditions? For new clients coming over to us from other money managers heavily in cash, we will begin to carefully dollar cost average some of the excess cash into equities, but not in an aggressive fashion, until there is some evidence that the price is declining from a premium to value, on the way to approaching a significant discount to value. History has demonstrated that making new purchases of equities only when there is objective evidence of the price being at a discount to value exposes client wealth to minimal risks, while increasing the odds significantly that a new purchase will eventually be profitable.
The deeper the discount to value as shown on the premium/discount to value indicator in the lower panel of the TATY chart the better. In the near term I’d like to see TATY make a bottom in, or near, the red zone surrounding the 140 level, while the premium/discount indicator in the lower panel declines below the red line at minus eight, and then rallies above the green line at minus three. Should TATY complete these kinds of chart gymnastics while the price is still touching lows for its current decline, then we would be compelled to consider aggressively putting excess cash to work, subject to evidence of resurging demand from our family of tactical indicators.
SAMMY — A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above alone, and below with the SPXL 3X leveraged S&P-500 ETF overlaid in the third chart. THE SPXL is for reference only.
SAMMY does a remarkable job of detecting resurging demand after sellers have exhausted their propensity to sell. Exhausted sellers are a necessary condition for a stock market bottom, but not a sufficient one. In order to complete a bottom there must be objective evidence of resurging demand shortly after evidence that the sellers have exhausted their desire to sell. SAMMY has a history of having the appearance of being “shot out of a cannon” when buyers return in size to scoop up perceived “bargains”.
Human beings are inclined toward repetitive behavior, and this causes the sequence of events described above to result in low risks buying opportunities over and over again. However, please note this sequence is NOT time based, but rather it is discount to value based. We do not know how to “time” the market, but by combining a statistically valid strategic risk evaluation, and an objective discount to value determination, with the successful identification of exhausted sellers, and then resurging demand, the risks associated with the new purchase of equities can be minimized, regardless of valuation, or the current level of the market as measured by the S&P-500.
THE BOTTOM LINE
Both the price, and a series of supply and demand indicators, are showing evidence of weakness. It is much too soon to determine, if this is the beginning of a multi-day, or multi-week, bout of weakness; or just another fleeting decline before another attempt to assault new all-time highs. However, in either case, we are putting some excess cash to work in new accounts heavy in cash, and will aggressively put excess cash to work in accounts already reasonably invested, which have a bit of excess cash, if the stock market serves up an opportunity to put excess to work with a minimum of risks, as measured by our proprietary indicators. Obviously, the days ahead should yield an answer to the question of fleeting decline, or a significant low risks opportunity to put excess cash to work.
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