THE BOTTOM LINE
There is creeping evidence of growing weakness in a number of Lowry Research, and our own measures of supply and demand for the stock market. Additionally, several measures of excess favored by an internationally famous bear on the market have reached levels eclipsing anything seen preceding the major tops of 2000 and 2007, and these objective measurements are a cause for concern, and may become cause for alarm, and/or a call to defensive action. However, as Keynes observed: “Markets can remain irrational longer than you can remain solvent”, so the issue becomes when will the growing evidence of a brewing storm in the stock market reach a level, which makes defensive action necessary in client portfolios? It is a critical question, especially given the literally oceans of global liquidity still flooding into the stock market, which no doubt skews the normal levels at which it necessarily becomes a call to action.
While no indicator is perfect in this business, we shall rely on our proven in the crucible of the market place supply and demand indicators to guide us through the financial mine field ahead. And, in the absence of new information to the contrary, we shall reserve any defensive action for the impending issuance of a new “Big Chill” warning, which may not catch the absolute top, but nonetheless perhaps a rebound close enough to “THE” top to preserve accumulated gains.
Lastly, we are on the cusp of a seasonally weak time of year on the stock market calendar, so Alexander and I request you pay particular attention to these weekly updates, and call us if you have questions. Investors should be prepared for rising volatility in both the stock and bond markets, which may have likely already begun in the commodity markets, the recent collapse in the price of lumber comes to mind.
RECORD VALUATION & SENTIMENT EXTREMES
The Dow and S&P-500 crept to marginal new all-time highs this past week, as numerous measures of valuation and bullish sentiment also set new records, and some by much more than marginal amounts according to an internationally famous bear on the market. Some of these measures set new record highs in 2000 prior to the 2000-2003 bear market, which were in turn eclipsed in 2007 prior to the worst decline in the stock market since the Great Depression. And, now these measures are once again setting much more than marginal new record highs, which implies that a top of a larger “degree” than 2000 and 2007 may likely be forming in the popular stock indexes. The case is also being made this potentially large degree top may resolve into a rolling top, as it appears not all the popular stock indexes will likely top out simultaneously.
These measurements of extremes in valuation and bullish sentiment have names like the Rydex Total Bull/Bear Ratio, and the Rydex Leveraged Bull/Bear Ratio, both of which are displaying charts with parabolic movements higher, while dwarfing all prior extremes. The widely watched Price to Sales Ratio, which is clocking in at more than three to one, also displays a chart going parabolic. The Wilshire 5000 index as a percentage of U. S. GDP now exceeds 200%, and is also displaying a parabolic move higher. Initial Public Offerings (IPO) has exceeded its 2020 record in only six months! And, then there is something we know about here in Florida and Palm Beach, as the Home Price to Rent Ratio has now exceeded the record set just before the 2007 real estate, and stock market meltdown into the March 2009 bottom. Finally, and under the radar to most American investors, the spike in the China High-Yield Index, which is nearing a level last seen prior to the U. S. 2020 quickest decline to down 20%, then on to down 38% in history. The bearish analyst makes an attention getting and cogent case, but then there is that annoying quote from Keynes: “Markets can remain irrational longer than you can remain solvent”, which begs the question: When will these obvious financial excesses finally bite investors in a global financial system flooded with liquidity?
As if the litany of excessive measures emanating from our famous international bear was not enough, our friends at Lowry Research are also recording some degradation in their measures of supply and demand, most prominent of which is the recent crossing of the Lowry Selling Pressure Index above the Lowry Buying Power Index. These two representative powers of supply and demand have remained essentially deadlocked for the last several days with neither able to separate itself meaningfully from the other. Obviously, this situation also casts a shadow on the continued longevity of the bull trend, but here again how big of a shadow?
Tops are processes, often long drawn out processes, and bottoms by contrast tend to be panic driven events. Fortunately, we are not dependent solely on these measures in order to reach a decision about when defense may be appropriate in portfolios, as we have our own supply and demand indicators, which also contain modules to account for the contribution of derivatives in the balance of supply and demand.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in Snapshot-287 in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week higher at 147 above the red zone, and obviously did not complete the first step in issuing a new “Big Chill” warning during the nearly two week sideways consolidation.
TATY is neither oscillating with bottoms in, or near the red zone, and tops near the blue zone beginning at the 160 level, which would be suggestive of a powerful and continuing move higher in the bull trend, nor is it indicating impending potential weakness by declining into the caution zone surrounding the 115-125 level. However, sharp eyed investors will observe TATY is sporting a very short term negative divergence (not shown) with the new all-time high price touched this past week. This suggests that an observation made in last week’s update remains viable, which is marginal new all-time highs may be followed by sharp declines. I am suspicious of a wobbling movement higher, as opposed to a breakaway sprint given the weakness in some Lowry Research indicators. In the absence of a TATY “Big Chill” warning being issued, the financial excesses listed in the second paragraph above may remain in place, but not yet a triggered catalyst for a market reversal, obviously a situation, which is subject to change.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in Screenshot-262 in yellow with the S&P-500 overlaid in red and blue weekly candle chart format. SAMMY still shows the negative divergence which developed prior to the February 2020 then all-time high with a dashed down sloping magenta line. It also shows the longer term negative divergence in place since the 2020 high with a dashed orange line, which continues to fail to confirm the on going new all-time highs in the price.
Shorter term, the negative divergence preceding the decline into the July 16 low is still shown on the chart as a down sloping magenta line. A recent negative divergence with this past week’s new all-time high is shown with an orange solid line, which implies the new all-time high may likely yield to another sharp decline of unknown duration. And, finally I’ve drawn a horizontal dashed yellow line on the SAMMY chart, which may turn out to be a level to watch, if and when all the negatives mentioned in this update may finally begin to have some serious traction. If the level shown by this yellow horizontal dashed line is violated on a closing basis, then there would likely be something afoot, which may contribute to a compelling case for defensive measures in client portfolios. Such an event would be supplemental, and secondary, to the primary information issued by a completed “Big Chill” warning.
Please be safe!