THE BOTTOM LINE
This past week’s late rally appears to be a bounce in a developing consolidation. If this bout of weakness is to be more than just a pause which refreshes, then the dashed blue and dashed red lines shown in Screenshot-284 must be breached before the S&P-500 closes above 6700, a new all-time high. A close above 6700 would be a signal that enough residual demand remains to extend the great bull market.
PAUSE TO REFRESH DEMAND OR IS IT MORE SERIOUS?
The stock market remains within striking distance of new all-time highs after a few days of weakness to digest recent gains. Even though valuations remain at historic nose bleed levels and euphoria is also rampant according to the ratio of call options to puts, the weakness of the last few days never produced much acceleration lower nor evidence of panic, as the selloff was orderly looking more like a consolidation rather than something, which may break the bull fever. The key remains rising interest rates on longer maturities, which appear to have finished their recent correction lower and now appear poised to rally. If rising rates do continue to rally, then investors will have a less risky alternative compared to excessively priced equities according to multiple valuation methodologies.
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 at a strong 150, but with a negative divergence still in place (down sloping magenta line) in both the indicator and the Premium/Discount indicator in the lower panel. This suggests the late week rally may only be a bounce and not a signal that the previous days long weakness is completely finished. However, with a strong reading of 150, TATY would require a much more substantial sell off before declining into the caution zone surrounding the 115-125 level, a required first step toward triggering a new “BIG CHILL” warning, which almost always precede a significant correction in stocks. In the absence of a “BIG CHILL” warning, then advantage bulls until one appears.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL AUPPLY AND DEMAND INDICATORS
SAMMY is shown above in yellow with the S&P-500 overlaid in red and green candle chart format. SAMMY improved marginally this past week but the multi-month negative divergence (down sloping magenta dashed line) dating to the summer of 2024 remains in place, which suggests the risks implied by historically high valuation and excessive euphoria are still a legitimate concern. SAMMY may be the lone off-key member of the choir but SAMMY has a superb history of accuracy, so in a rising interest rate environment SAMMY’s negative divergence cannot be discounted.
STERLING — A REPRESENTATIVE OF A FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS
STERLING is shown above in the upper panel with the S&P-500 eMini futures contract in the lower panel. Screenshot-284 shows multiple negative divergencies (down sloping colored lines) all of which did lead to some price weakness. The dashed down sloping blue line suggests the late week price rally may only be a bounce in an ongoing bout of weakness, which may have the potential to become more serious. Any rally failing below S&P-500 6700 has the potential to turn into a more serious correction. Should there be more weakness after the bounce, then the first signs of a correction, which may be the early steps toward the bear’s long awaited bear trend would be a breach first of the up sloping dashed blue line shown in Screenshot-285 BELOW quickly followed by a breach on a closing basis of the up sloping dashed red line.
Remember, parabolic markets tend to never end well, but when the bull excesses become unsustainable is always difficult to determine and this time is no different. However, rising interest rates offering near risk-free alternatives to equities in longer maturity treasuries may provide for pressure on equities.
