THE BOTTOM LINE
The financial media has proclaimed the end of the highest headline inflation in over four decades and the end of a shallow and historically brief bear market. They may be right, but a quick check of history suggests “not so fast” may be a wiser course of action. The choice is clear, chase a bear rally into a potential trap, or treat the rally as a potential threat to one’s wealth until the weight of the evidence proves the bull case. The experience of the post-2016 low (Snapshot-154, displayed as second chart under TATY section below) suggests that if a new leg up in an ongoing Great Bull market began at the S&P-500 3636 June low, then there will likely be multiple opportunities to scale back into the ongoing Great Bull market without risking getting caught in a well disguised and deceit filled bear trap. During such conundrums it is best to remember that preservation of capital and risk management is job one, as opposed to the hot pursuit of potentially very risky gain.
PUTTING A CONUNDRUM INTO CONTEXT
The stock market is often insidious in its role as master of disguise and deceit and this past week it was true to form as it pressed relentlessly higher after previously showing signs of fatigue as the financial media hailed the end of the worst inflation headline news in over four decades. Truly we live in an instant gratification society as past experiences with inflation have proven it tends to be very difficult to defeat, especially when the labor market is tight and workers are demanding wages to keep pace with inflation, which is the key component of cost push inflation.
Since 1937 Lowry Research has done a very good job of keeping subscribers significantly invested in the “primary trend” during bull markets and defensively invested during bear markets having done seminal work on how major tops form in the equity market, and early on defined how bear markets end in exhausted sellers usually in the form of a series of 90% downside days followed by evidence of resurging demand in the form of 90% upside days. At the 3636 June low in the S&P-500 the evidence of a capitulation bottom in the stock market was less than conclusive and the rally to date, while powerful at times, remains in the overall weight of the evidence a rally in a bear market, which likely has more to go.
Bear rallies can and have in the past retraced a little less than 100% of the first legs down in new bear markets, and in the process caused optimism and bullish sentiment to soar, sometimes even to levels exceeding those registered at the all-time highs. Insidious yes, but also true as the 2000 top comes to mind (Snapshot 236), which peaked in early spring, but the top was tested closely again in the fall. If the current major top and subsequent bear market is of a very large “degree” as we suspect, then a powerful and persistent bear rally over a period of weeks would not be unusual, but rather perhaps should be expected. Yes, the bear market may have ended at the June low as many pundits are saying, but at this point the weight of the evidence still favors an ongoing rally in a bear market, which is likely to trap investors into a maelstrom, when the bear rally ends. This is what bear markets do.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in yellow with the S&P-500 overlaid. TATY finally managed to get into the red zone and finished the week at 144. This is important as for the first time during the bear market rally, TATY is positioned to generate a new “Big Chill” warning should it stall out in, or near the red zone in the days, possibly weeks ahead. However, if S&P-500 3636, the June low, was the terminus of the historically extraordinarily brief bear market, then TATY will likely continue to soar toward the blue zone surrounding the 160 level as the rally gathers participants and strength, and then TATY will begin to oscillate with bottoms in, or near the red zone and tops approaching the blue zone surrounding the 160 level.
For example, there was a correction which bottomed in February of 2016 at 16% off the then all-time high in the S&P-500, which was foreshadowed by a huge positive divergence in TATY (Snapshot-154 above), but the positive divergence is not marked on this older version of the chart). As sharp-eyed investors will notice TATY soared ahead of the price bottom and shot well above the red zone surrounding the 140 level, which kicked off the continuation of the Great Bull market. In the subsequent weeks and months TATY continued to paint out higher highs and higher lows with the highs eventually approaching the blue zone at the 160 level. So, if investors hesitated and missed the absolute bottom at the February 2016 low, they still had multiple opportunities to get into the resurgent bull market. There are reasons to believe the same applies to our current situation, and if another leg up in a continuing Great Bull market began at the June low, then investors will likely be given ample opportunities to re-enter the Great Bull market after it provides evidence that the rally is not a countertrend bear trap.
TATY (refer to TATY image above) shows the big positive divergence (up sloping magenta line), which preceded the S&P-500 3636 June low in the upper TATY panel and the lower panel TATY Premium/Discount indicator. As the countertrend rally begins to fatigue and expire, then I would expect negative divergences to develop in these two versions of TATY. If TATY stalls out in, or near the red zone then investors need to be alert to the probable expiration of the bear rally, but given the recent evidence of surging strength, which may be due to short covering, I would not be surprised to see this rally linger, perhaps even like the 2000 experience given the dramatic violation of the dark blue down sloping negative divergence line dating to last August.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in yellow with the S&P-500 overlaid in green and red candle chart format. SAMMY has confirmed the action in TATY by violating its magenta dashed down sloping negative divergence line and powering its way above its horizontal dashed red long term resistance line, albeit with a minor fade late this past week. I would expect SAMMY to confirm any new “Big Chill” warning in TATY by painting out simultaneously a negative divergence. Obviously, the current position of TATY and SAMMY implies that it may take days, possibly weeks, for negative divergences to develop to a “critical mass” situation.
STERLING — A REPRESENTATIVE OF A NEW FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INICATORS
STERLING is shown above in the upper panel, with the S&P-500 eMini futures contract in the lower panel. STERLING does a marvelous job of painting out divergences, both positive and negative at short to intermediate term tradable tops and bottoms. STERLING was building a nice negative divergence to the price until Friday’s gradual but persistent rally in the price, making the negative divergence too minor to be significant. It remains to be seen if the negative divergence is erased totally in the days ahead, or if Friday’s stealth rally was a one off.
Screenshot-941 shows the S&P-500 eMini futures contract approaching its previous broken support level now resistance according to the long-recognized chart analysis. The rally may pause at this resistance, but if it cuts right through it then the odds would swing in favor of a potential 2000 like bear rally outcome.
Screenshot-942 shows the S&P-500 cash index, which has now exceeded a 50% retracement of the initial bear leg down, and the price accelerating toward the 62% Fibonacci retracement level. An upside breach of the 62% level would imply a potential assault on new all-time highs, or a threat thereof as in the fall of 2000 (Snapshot-236 below).
Screenshot-944 (below) has been shown several times before and shows the bear market to date from the broken long term red uptrend line through Friday’s close. The most notable features are the brevity and shallowness of the bear market, if it ended at the S&P-500 3636 June low after only a 38% decline from the March 23, 2020 2190 low to the all-time high at 4818. Yes, the bear may be over, but this chart suggests this such an outcome was too brief and too shallow to be credible.
So, is the current state of the stock market an unusual one-off, or has this all been seen before? The chart “TATY Tops” suggests that this rally remains within the context bear rallies of the past, which have caused powerful and strong price gains only to drive TATY into the red zone, where bear rallies often go to die. The chart is expandable so make it full screen and find those rebound rallies just prior to 1998, post the 2000 top, and the rebounds following the 2007 top and how they failed when TATY stalled in, or near the red zone (red ovals). This bear rally is doing what bear rallies do, which is sow confusion and doubt to trap investors into believing the bull has returned. And, in this case if the bull is back, then the weight of the evidence will change to confirm it. However, a rising interest rate environment has very likely changed how this all plays out, and not in a favor of new all-time highs.
