I am suspicious that the events of the coming days will prove, once again, the futility of assigning reasons for stock market movements to the news. The news this past week was about as bad as it gets in what passes for peace time America, as investigations into the current occupant of 1600 Pennsylvania Avenue, and members of his administration, continue to expand. Turkey is attacking a dependable U.S. ally in Syria. ISIS is doing a jail break, which will likely lead to its reconstitution as a serious terrorist threat. Brexit is upside down again this weekend, the inverted yield curve is in the news again, and multiple choice on so many bad news items, that even the news anchors are complaining that their heads are spinning from all the breaking news coming at them. And, then the stock market appears to be positioned to assault new all-time highs — go figure.
So here is the truth, bull markets really do climb a “wall of worry”, and until the bull psychology changes, then the stock market will likely attempt to make new all-time highs, and ignore all the bad news in the process. Oh, and for all you following the political front, presidential “Teflon” will likely continue to exercise its magic, as even hard evidence of presidential wrong doing will not likely gain much traction. However, the on going bull trend is showing signs of fatigue, so the movement to new all=time highs, if it happens, will likely be in a stumbling fits and jerks type action, as opposed to bold, strong and continuous, as formerly when the bull trend was young. Bull trends do eventually die, often as a casualty of rising inflation, and/or rising interest rates, both of which are currently not present. As I once observed to Paul Desmond in a 2015 Lowry Capital investment committee meeting: “I cannot find in the financial record where low, and/or declining interest rates killed a bull market”.
Investors would do well to monitor the balance of supply and demand for stocks, and resist forming investment decisions based on the possible impact of the events being covered by the evening news. The former has the potential to increase your wealth, and the latter is a demonstrated exercise in futility.
TATY — A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in the first chart in yellow with the S&P-500 cash index overlaid in red and blue candle chart format. TATY finished the week at 149 above the red zone, but with its negative divergence still intact. The negative divergence is shown on the chart as a down sloping orange line. Should the price touch new all-time highs, and the negative divergence remain in place, then given the obvious fatigue in the bull trend, and the growing length of the negative divergence, then Alexander and I will need to make some decisions about trimming some profitable positions, and/or adjust our asset allocation to reflect rising risks in the equity market.
A transition to a bear market still appears weeks, if not months, down the road, but the growing negative divergence implies the upside maybe limited until a decline strong enough to push the premium/discount indicator into deep discount range arrives. This would be objective evidence that the weak hands, and/or would be sellers, were being purged from the stock market. Obviously, a purge of sellers would lower risks to putting cash to work in equities.
SAMMY — A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above alone, and below with the SPXL 3X leveraged ETF overlaid. The SPXL is for reference only.
SAMMY recently issued a buy signal, which we did not take, because it was not confirmed by a deep discount in the premium/discount indicator. SAMMY tends to generate highly accurate buy signals, and has again, but Alexander and I are conservative risk managers, so we tend to take only the best of the best signals, which in this case means those confirmed by a deep discount in the premium/discount indicator, which in turn tend to find areas of value, where the sellers have exhausted their propensity to sell.
SAMMY has had a significant run higher, and now appears ready to take a breather before issuing another buy signal. This implies perhaps a drift lower in the short term, which will likely be followed by another buy signal. Depending on the level when the next buy signal is issued, a renewed assault on all-time highs may follow, especially if the next buy signal is confirmed by the premium/discount indicator.
THE BOTTOM LINE
The evening news is not the friend of investors. On the contrary, news tends to confuse investors. The current balance of supply and demand for stocks implies another probable assault on new all-time highs, but with a likely limited upside beyond marginal highs. Unless objective evidence of strong demand over weak supply arrives in the days ahead, then Alexander and I will give some serious consideration to harvesting some accumulated profits with an eye toward re-investing in a more favorable risk/reward situation.
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