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RANGE BOUND TRADING

This update is delayed in being published due to Hurricane Dorian. Fortunately, the storm turned out to be a non-event for those of us here in Palm Beach, but devastating for our friends in the Bahamas.

The stock market entered a period of correction during late July and August, which is about one month shy of the statistically worst month of the calendar September, and a couple months shy of the statistically second worst month of October. A case can be made that the July-August correction may linger into September, or even October, given the range bound nature of the price chart as August drew to a close.

After the Dow 800 point plunge, the stock market began a recovery rally, which failed short of the 62% retracement level as measured against the S&P-500, our surrogate index for “the market”. And, ever since then the S&P-500 has traded in a range below the 62% retracement level. The rule of thumb about trading ranges is that the range is often resolved by the price exiting the range in the same direction as it entered, which in the current case would be a price decline. I’ve attached a daily chart of the S&P-500 (Second Chart) to show where the range ended this past week.

TATY   —   A REPRESENATIVE 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 ended the week at 142 in the red zone after painting out a bottom marginally below the red zone. TATY has obviously weakened, but is demonstrating enough strength to suggest the price may still assault new all-time highs once the correction has run its course, and the previous rally resumes. Given that TATY has just painted out a bottom, it may be that the correction has already ended, but if it has it did so without completing a SAMMY buy signal, or a series of positive divergences in several indicators, which are not shown. I would characterize this as being atypical of how tradeable bottoms form, which leaves me suspicious that the correction may be incomplete.

The premium/discount indicator in the lower panel of the TATY chart is beginning to develop a positive divergence by turning up from the red line at minus eight toward the green line at minus three. Ideally during the formation of  a tradable bottom the price is making new lows for the correction as the premium/discount indicator is positively diverging and accelerating higher toward the zero line. What we have now is an attempt to develop a positive divergence, but the attempt appears to be early in development. This suggests the completion of the rule of thumb, often in evidence in trading ranges, is yet to be completed by a breakdown in the price to new lows. If the correction is already complete without checking the boxes for the necessary and sufficient requirements for tradable bottoms, then any rally which may follow may be viewed with a jaundiced eye, and as a possible trap.

SAMMY   —   A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

SAMMY is shown above, and below with the SPXL 3X leveraged S&P-500 ETF overlaid. The SPXL is for reference purposes only.

SAMMY has NOT issued any new buy signals, as evidence of resurging demand has not been registered to date in our objective measurements of supply and demand. Our buy signals require first objective evidence of exhausted sellers, which is then followed by evidence of resurging demand. In the current case we have neither, which suggests another leg down in the correction may be required to complete the necessary and sufficient conditions for a SAMMY buy signal, supplemented and confirmed by a positive strategic outlook, and positive divergence, vis-à-vis the TATY family of indicators.

THE BOTTOM LINE

There is some evidence that the recent correction may have ended without our necessary and sufficient conditions for a tradable stock market bottom having been met. If this is the case, then I will have missed an opportunity to put excess cash to work. However, Alexander and I are risk managers first, which means we are always careful to not expose our clients to unnecessary risks. In the current situation, our necessary and sufficient conditions for a low risk purchase have not been met, so we will stand aside until they are.

The stock market is only marginally below all-time highs, which suggests any rallies from here may be short on potential given the record length of the post 2009 economic recovery, the general lack of value in the stock market, the inverted yield curve, the looming uncertainties created by the approaching election in the United States, and the new uncertainties revolving around the No Deal Brexit situation in England and the EU. Without all our criteria for new purchases having been met, we will forego any new purchases of stocks, or ETFs, until the market comes to us, and then checks off all our purchase requirements as having been met.  Especially, since the rule of thumb, born of decades of experience, suggests the current trading range will likely be resolved by a breakdown in the price to new lows for the ongoing correction  —  Happy September-October, the statistically worst months on the stock market calendar.

 

DISCLAIMER: Optimist Capital LLC, does not guarantee the accuracy and completeness of this report, nor is any liability assumed for any loss that may result from reliance by any person upon such information. The information and opinions contained herein are subject to change without notice and are for general information only. The data used for this report is from sources deemed to be reliable, but is not guaranteed for accuracy. Past performance is not a guide or guarantee of future performance. Optimist Capital LLC, and any third-party data providers, shall not have any liability for any loss sustained by anyone who relied on this publication’s contents, which is provided “as is.” Optimist Capital LLC disclaim any and all express or implied warranties, including, but not limited to, any warranties of merchantability, suitability or fitness for a particular purpose or use. Our data and opinions may not be updated as views or information change. Using any graph, chart, formula or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such device. The information contained in this report may not be published, broadcast, re-written, or otherwise distributed without prior written consent from Optimist Capital LLC.

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