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THE NEWS IS AWFUL – SO EXPECT AN ASSAULT ON NEW ALL-TIME HIGHS

Compo Beach Westport
Oct 21

THE NEWS IS AWFUL – SO EXPECT AN ASSAULT ON NEW ALL-TIME HIGHS

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.

 

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.

Jupiter Lighthouse
Oct 14

Long Time Sideways — Marginal Gains

During the recent mini-correction, the price of the S&P-500 briefly dropped below its 2018 high. So, investors have been able to collect dividends, but make only marginal gains from the appreciation of their equities for months. I expect this may continue for as long as it takes to build out a major top, or evidence of substantially rejuvenated demand appears.

Recent updates have discussed the very different emotional processes at work, as the stock market builds out major tops, and on the contrary low risk tradable bottoms.  So, no need to repeat that explanation about gossamer like euphoria dissipating during major tops, and primal fear compelling a “flight or fight” reflex among investors, with their wealth at risks, during the formation of low risk tradable bottoms. However, it is worthwhile to observe that human beings tend to repeat our behavior over and over, so these very different emotional responses will likely continue to be exploitable for as long as we can objectively measure their never ending circuits.

Last week’s update warned investors that the metrics surrounding the recent price decline implied perhaps an incomplete purge of weak hands, and/or nervous potential sellers. Sellers did re-appear, and once again the sellers failed to drive our premium/discount to value indicator into deep discount range. However, by Friday the sellers disappeared, and the stock market appears to have begun yet another attempt to assault new all-time highs. Objective measures of the balance of supply and demand continue to show demand remains in the superior position to supply, which in turn suggests this budding assault on new all-time highs remains a viable probability.

The view from 35,000 feet continues to suggest a fatigued stock market rally, but one which may have enough residual strength in its balance of demand over supply to undertake another assault on new all-time highs. Should objective measures of supply and demand begin to suggest fatigue may be turning into exhausted buyers, and in turn supply overtaking demand, then we will be compelled to take defensive action to protect accumulated gains, and/or client wealth. Major top building can be a very time consuming process, so this slow creeping range may continue to drift higher in the weeks ahead, but recently the signs of buyers fatigue have continued to grow. Clients would do well to brace themselves for an increasingly volatile market environment as the calendar turns toward the election, and all the related attendant uncertainty.

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 the 150 level, and well above the red zone surrounding the 140 level. However, the negative divergence, shown on the chart by the down sloping orange line, remains in place. Should the price assault new all-time highs, and the negative divergence remain, then stocks could remain vulnerable to another correction, and possibly a much stronger decline than the recent mini-correction.

The signs of fatigue, which may progress to signs of buyers exhaustion remain, but for the time being have not reached levels requiring defensive action in client portfolios. However, the signs of fatigue have chilled my desire to add new money, or excess cash, into the equity market, unless the stock market serves up a substantial discount to value situation followed by a clear low risk tradable buy signal. These conditions were not met during the recent mini-correction.

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

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

SAMMY excels at finding low risk tradable bottoms in the stock market. And, when used in conjunction with the premium/discount to value indicator, it has a record of providing superb low risk purchase entries for putting idle cash to work in the stock market. However, we have chosen to ignore recent buy signals flashed by this indicator, because the premium/discount to value indicator failed to offer us a substantial enough discount for us to feel comfortable feeding cash into the stock market so close to new all-time highs. Obviously the bull run is not young and dynamic, but aged and showing signs of fatigue, so we have elected to take only the most promising buy signals, even though SAMMY has an enviable record of accuracy as a low risk buy signal indicator.

THE BOTTOM LINE

If we are compelled to become defensive by our proprietary supply and demand indicators, then we will take action to bank some accumulated profits, and/or protect client wealth. On the contrary, if our criteria for a low risk purchase to put excess cash to work is met, then we will act on the signals. Otherwise, we are comfortable holding equities previously purchased at their current levels of asset allocation. We will put new cash to work for clients migrating to Optimist Capital from other money managers, when our indicators suggests a low risk purchase entry has arrived.

Clients should brace for increasing volatility as the election looms closer. However, our outlook is our proprietary supply and demand indicators will provide our clients with opportunities to increase their wealth at a faster rate as volatility increases, as opposed to being penalized by the attendant corrections following the completion of a major top, or in the extreme a new outright bear market lasting weeks, months or years. The volatility associated with significant corrections, or bear markets, is the enemy of buy and hold investors. And, the friend of investors armed with effective supply and demand based indicators making their purchases only during conditions, where fear has made available steep discounts to value.

 

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.

Oct 7

BUYERS BECOMING FATIGUED ON THEIR WAY TO EXHAUSTION?

Major stock market tops and bottoms are both products of the shifting balance in the supply and demand for equities. However, the behavior of our proprietary supply and demand indicators is substantially different as the market approaches a major top from how the indicators behave as the market approaches a low risk tradable bottom. Bottoms tend to form during episodes of fear, and major tops tend to form as buyers first become fatigued, and then later exhausted, in an environment of euphoria. Euphoria is a gossamer like emotion, which usually takes time to dissipate, whereas fear is a powerful primal emotion calling into play a circumstance of “flight or fight”, which our helped our species survive as we evolved, and is now imbedded in our DNA.

There is some objective evidence starting to appear, which suggests that buyers may be becoming fatigued on their way to exhaustion. Predicting how long it may take for buyers fatigue to manifest as exhaustion would be an exercise in low probabilities. However, human beings tend to repeat their behaviors over and over, and in the markets our repetitive behavior can be quantified, and then compared historically as markets transition from bull trend, to bear, and then back to bull. Tracking the shifting values for our market generated supply and demand indicators, in a historical frame of reference, tends to have a much greater probability of success at determining where the stock market is in its risk/reward circuit than say relying on the average lengths of bull and bear markets, or other less than statistically reliable information.

For example, the major brokerage houses have been known to promote the notion of buy and hold, because according to them bear markets last about 18 to 24 months. However, a quick check of the history of the NYSE shows that if an investor bought at the September 1929 high it took until the mid-1950s before that investor finally got even. Yes, that may be an extreme example, but how about a more recent episode, say 1966 until August 1982, 16 years of the Dow making round trips between 500 and 999. An age 50-something investor may have found those recurring 50% declines a serious setback to their retirement plans. And, as Bob Prechter once observed in a letter years ago, the English stock market has experienced a bear market lasting almost a biblical lifetime, and another spanning over 200 years!

Obviously bear markets are worth the intensive analytical effort required to avoid them. In the current circumstance the evidence vis-à-vis our supply and demand indicators does not yet support the case for the completion of a major top, which would logically be followed by a nasty correction, or an outright bear market. However, as you will see in the analysis below, the evidence of buyers fatigue is growing, which implies that if the negative trend continues, then the weight of the evidence may result in our indicators issuing a “Big Chill” warning. The issuance of a “Big Chill” warning would likely compel us to take defensive action to protect accumulated gains and client wealth in general. Given the uncertainties normally surrounding presidential elections, volatility is likely to increase, potentially accelerating the formation, and perhaps confirmation of the completion of a major stock market top in the weeks ahead.

The bottom line for this section is evidence is emerging that buyers may be becoming fatigued, and perhaps on their way to becoming exhausted. In the days and weeks ahead investors will need to remain vigilant for additional evidence that the stock market may be completing a major top, which would logically be followed by a really costly correction, or even a multi-week, multi-month, or multi-year bear market.

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. This strategic big picture indicator finished the week above the red zone at 147 after painting out a bottom in the red zone the previous week. TATY is suggesting that the balance of supply and demand still favors demand over supply, which in turn suggests another assault on new all-time highs remains not only a viable probability. but also a likely one. However, not everything is rosy with this indicator, and the rub is with the premium/discount to value indicator shown in the lower panel of the TATY chart.

While the dust up in volatility these past several days has received a lot of attention in the financial media, the objective metrics being created by the stock market suggests the media attention may be a bit hyperbolic relative to what has actually been happening. You see the last two price declines have failed to drive the premium/discount indicator into deep discount to value range below the minus eight level before turning back up. Previous updates have drawn this anomaly to the attention of investors by suggesting the failure to decline below the minus eight level likely failed to drive all the weak hands, and/or would be sellers, from the mix of investors. Short of a complete purge of all the weak hands, and/or would be sellers, may have left a nervous group of potential sellers in the mix.

Those nervous potential sellers did suddenly re-appear just below new all-time highs, which created enough supply to trigger the volatility dust up of the last few days. Additionally SAMMY, a representative of the family of tactical  supply and demand indicators, had also failed to flash a buy signal at the previous bottom, which is why we optioned to not deploy our excess cash into the market so close to all-time highs. So far that decision, based on our proprietary indicators, and the probabilities, seems to have been the correct one.

The decline of the past several days has unfortunately been too weak once again to reward us with an opportunity to be buyers at deep discounts to value. This decline did manage to take out the previous price low, but failed to drive the premium/discount anywhere close to the minus eight level, which historically has resulted in exhausted sellers, and a completed purge of potential sellers. So once again we have a situation where sellers could suddenly re-appear, which in turn casts a shadow on the longevity of the budding rally, which began yesterday. Given the probability for nervous potential sellers still in the mix, a question arises about probability that the previous all-time highs may become a significant barrier to any rally sustaining itself much beyond marginal new highs. And, there remains the potential for the rally to fail short of new highs, since indicators were mixed as the price made bottom,

The bottom line for this section is according to TATY the balance of supply and demand is likely favorable enough for the stock market to attempt new all-time highs. Unfortunately, the condition of the premium/discount indicator implies a failure to completely purge weak hands, and/or would be sellers, from the mix of investors. This casts a long shadow of doubt on the ability of the budding rally, which began on Thursday to sustain itself.

Also, please note the down sloping orange line in the upper part of the TATY chart denoting a negative divergence developing in the favorable balance of demand over supply. And, the orange line on the premium/discount to value indicator in the lower panel illustrating the failure of the recent price decline to drive the indicator below the minus eight level, which historically is indicative of a decline strong enough to result in a mostly complete purge of potential sellers from the investor mix.

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 only.

SAMMY did not issue a tactical buy signal at the previous (bounce) low. However, following Thursday’s low it has shown signs of resurgent demand, which has triggered a tactical buy signal. However, as explained above in the TATY strategic section, the tactical buy signal was not confirmed by a sufficient discount to value in the premium/discount indicator. Accordingly, we have elected to disregard the SAMMY tactical buy signal. I suspect the tactical buy signal will be profitable, because SAMMY signals tend to be deadly accurate. However, given the less than satisfactory purge of potential sellers suggested by the explanation in the previous section, I do not like the risk/reward for putting new money, or excess cash, in the market this close to all-time highs. This is a game of probabilities, and the probabilities are simply not favorable enough to put new money in the market. I’m comfortable holding positions purchased previously, but not comfortable adding to those positions unless more favorable conditions are quantified by our objective measures of the balance of supply and demand.

THE BOTTOM LINE

The new SAMMY tactical buy signal will be disregarded, even though I suspect the signal will be successful, because the buy signal is not being confirmed buy the premium/discount indicator. Non-confirmation implies the possibility of a sudden re-appearance of nervous potential sellers. I’m comfortable holding previously purchased positions of VOO and QQQ, but not adding to them due to the mixed nature of our indicators.

VOO and QQQ went ex-dividends in late September. I expect clients to receive the quarterly dividend in their accounts sometime in October.

 

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.

Jupiter Lighthouse Safety
Oct 4

Politics, Markets & Where to From Here

An election year is only months away. One that we will likely enter with a President well into a full blown Impeachment inquiry, and an overly expansive Democratic candidate list. All of which only increases the risks to an expansion phase well into the late innings.

We never take political sides over here, rather we bring to light the risks of any outcome and prepare accordingly. To that end lets be clear about one thing, love him or hate him, impeachment proceedings are never good for the economy or populace. The faster we get to an outcome, whatever it may be, the better it will be for all those involved. Unfortunately these things take focus away from all the work that must be done to maintain and build both our economy and country. That leads us to the Election, it also causes focus to be moved from operating the country. Before we even move on to how late we are in the expansion phase, we have two major headwinds to future growth.

Will this be the straw that breaks the camels back? Time will tell, but with these factors mixing with changing interest rates and an economy/market near all time highs, the camel’s pace is not what it once was.

The end of the year looks to stay on a modest growth track and we will close this year with solid numbers yet again. It has always been our belief, that when every piece of information says we are nearing the end of growth, its time to begin the transition to protection of the returns we have created. Many of you will begin to see more funds being placed into treasuries, inflation-protected securities and treasury/inflation-protected based ETF’s based upon account size and planning. We do not believe in getting involved in the rush to safety at the last minute, rather we softly begin the move to safety when markets are still riding high.

We have said many times in past articles, not to fear the end of growth, but to prepare for it. I am personally known for stating a very specific quote far too often, “Money doesn’t disappear when markets drop, it just goes somewhere else.” We do everything in our power to already be somewhere else before that transition happens. Current markets suggest that the money will not move outside the U.S. (at least not now or in the near future), rather it will be a “Flight to Safety.”

History has shown that the rush to safety is always short lived. Sooner rather than later, the next big market makes itself apparent. It has been my belief that the next big market will be the return of the next 30 year Fixed Income market.

After the rush into Treasuries, interest rates will begin to both normalize and increase, regardless of what the Federal Reserve does now. One major misconception about interest rates has always been that the Fed controls them. They can manipulate them and adjust the market to soften the blow, but the market itself will always set where things are headed and should be. In fact we have seen just this happen already with the Mortgage Market. Despite the lowering of interest rates by the Fed, we saw mortgage rates increase. This IS a market telling the Fed and all of us that rates are not where they should be and will rise in the future.

 

Alexander Cooke

Alexander Cooke, Gregory Adams, Wealth Managers
Sep 23

GETTING A BIT TOPPY PERHAPS?

The recent mini-correction appeared to end without substantial evidence of exhausted sellers followed by objective evidence of resurgent demand, which are the classic markers of a tradable bottom in our approach to risk management. The decline’s failure to purge all the weak hands, and/or would be sellers, from the mix of investors set up the potential for the sudden appearance of renewed selling, which has now occurred as the rally has shown signs of struggle as it is approaching the previous all-time high. The struggle higher seems to have given way to a breakdown on Friday afternoon. These conditions suggests an assault on new all-time highs may still be possible, but if it happens then it will likely be done in a stumbling fits and jerks type mode, as opposed to a strong and powerful bull trend higher.

We are invested in VOO and QQQ for clients, which in the current environment is a real advantage, as investors holding individual stocks are likely having to take action to keep pace with the stock indexes due to group rotation, which normally happens with the approach of major tops. Institutional investors tend to crowd into stocks that are highly liquid, and easy to own household names, which are often familiar to retail investors. Lesser known names, which often are of smaller capitalization, tend to have less liquidity as major tops approach, and then begin to roll over into bear trends, even as the indexes continue to touch new highs. Studies by Lowry Research, and others, have shown this phenomenon continues until the popular stock indexes actually have significant percentages of their holdings, which have already been in bear markets before the few remaining institutional favorites, which are attracting most of the buying, finally break down. And, given the tendency for human nature to be repetitive, this characteristic related to major top building tends to occur over and over.

It is too early to declare a major top building process has reached a point of significant danger to investors, but it is not too soon to be vigilant for the objectively measured evidence that the process may already be underway, which will eventually result in the demise of this long liquidity driven bull run. Yeah, if one pours enough fuel on the fire it will linger for a long time, and Uncle Sugar, and his counterpart central bankers around the globe, have been pumping fuel on the liquidity fire periodically since the Great Recession of 2007-2009. Recent news articles suggest they may be preparing to do so again, this time cloaked in the disguise of “negative interest rates”. So, objectively measuring the response to all this extraordinary, and continuing, fiscal stimulus will be more important than ever, as the litany of bad news being reported daily on the evening news may be in part, or wholly, offset by the central bankers pumping more fuel on the fire, while putting the cost of the fuel on an ever growing national tab.

Our job is to successfully navigate this wild financial environment, which seems to grow wilder by the day, for our clients. Volatility in the global financial system can be decried, or turned to advantage by the rare few with the training, proprietary tools, experience, and most of all courage to, like a martial arts expert, turn their adversary’s strength to advantage. In the financial arena volatility is a powerful adversary, but that power can be turned to advantage. No not by the legions of insurance sales people masquerading as professional investors, or the countless gifted relationship builders extracting excessive fees from their clients for below average performance, but by the proven in the crucible of the market few, which have the tools, skills and requisite courage to navigate the likely, and perhaps historic, volatility to come.

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 finished the week above the red zone surrounding the 140 level. However, TATY has failed to match its previous high, and appears to be tracing out a negative divergence with the price. Negative divergences can remain in place for days before they eventually result in a decline in the price, which is the usual the outcome. However, negative divergences can also disappear due to resurging strength in the indicator’s components, but this happens much less frequently.

Given the obvious negative divergence, depicted above on the TATY chart by the down sloping red line, I’m inclined to begin scaling back some equity exposure on any further rally, especially a rally which touches new all-time highs with the negative divergence still in place, or which is growing worse as the price is touching new all-time highs. Please note that banking some accumulated profits, and trimming some equity exposure, is NOT the same exercise as turning from offense to defense in client accounts. Banking some profit is just being prudent in the face of creeping weakness in a family of key strategic indicators. The time for defense would be after the appearance of a “Big Chill” warning, and that has not happened, and that process from beginning to completion is normally measured in weeks and not days.

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

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

SAMMY is a valuable tactical indicator for bottoms, as it often clearly identifies strong resurgent demand after a decline strong enough to exhaust sellers, and in the process create discounts to value situations. SAMMY did not flash a classic buy signal at the recent mini-correction bottom, and for the time being is not particularly helpful. However, SAMMY has not responded vigorously to the rally in the price, and is negatively diverging with the price in like manner as TATY. If a price decline arrives, which is strong enough to exhaust would be sellers from the mix of investors, then SAMMY will become a very important tool to identify a low risk entry to put excess cash, or newly arrived cash, to work.

We had some cash available at the recent mini-correction low, but the failure of a SAMMY low risk buy signal being triggered caused us to stand aside, and not invest the cash. Given the struggling rally to date, the do not invest the cash decision appears to have been a prudent one. Near all-time highs, and with a host of negative factors emerging, we elected to be forced into buying, because of the appearance favorable objective measurements, would be the more prudent path than just acting on the need to invest excess cash. Given the relatively weak rally which has emerged, the indicators appear to have done their job by not signaling a low risk buying opportunity was at hand.

THE BOTTOM LINE

Evidence is appearing to support the case that the current rally may fail at, or marginally above, new all-time highs. I am prepared to trim portfolios of some equity exposure, and to bank some accumulated profits, if it becomes obvious that this leg of the rally may be expiring. On the contrary, if evidence emerges that the rally is gaining strength, then no action will be taken, and we shall continue to hold our equity allocation at current levels.

Clients will earn another quarterly dividend on our VOO holding by the end of September. Additionally, clients holding VOO and QQQ will likely benefit from the normal group rotation, which often occurs as stock indexes build out major tops. Investors holding individual stocks will likely begin to be penalized, as some of their stocks move higher with the indexes, even as the majority of their stocks begin to move lower, and some even into bear trends, as the stock indexes likely continue to touch new all-time highs, as institutional investors crowd into fewer and fewer highly liquid big cap stocks. Popular stock indexes tend to be capitalization weighted, so their impact on the index can be huge relative to their numbers in the index. This is why as bear markets begin the majority of stocks are already in serious declines by the time the big cap indexes finally roll over to join the majority of already declining stocks. Once the big caps roll over, then the down trend in the index tends to accelerate, which traps the unwary in the emerging new bear market. Clients reading this weekly update now know more about how major tops form than most Financial Advisors, whose real mission is to create revenue for their firms, or run the risks of being terminated!

 

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.

Sep 16

A RALLY TO SELL?

Last week’s update alerted investors that even though a classic SAMMY low risk tactical buy signal had not been completed, the stock market would probably attempt to make new all-time highs. This past week the stock market, as measured by the S&P-500, did finish just shy of new all-time highs.

Last week’s update also mentioned that the failure of the stock market to complete the necessary requirements for a low risk SAMMY buy signal may result in a rally to follow being less than satisfactory in terms of having purged all the nervous weak hands, and/or would be sellers, from the pool of investors. That observation also appears to be coming to fruition, as the rally has been more of a creeping and stumbling affair than one being powered by rejuvenated strong demand. While there is some evidence that demand may be sufficient to power the rally to marginal new highs, the overall profile of the rally leaves me uncomfortable with the notion that the rally will move much beyond the previous highs. If more evidence emerges that concerns me, then we shall be compelled to consider trimming some equity exposure by banking some accumulated profits, almost all of which already qualifies for long term capital gains treatment.

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 overlaid in red and blue candle chart format.

TATY bottomed in August marginally below the red zone and finished the week at a strong 150 level. However, sharp eyed investors will notice that with the price essentially tied with the previous all-time highs, TATY remains substantially below the level it achieved as the price was painting out its all-time high in July. Should the price touch new all-time highs, which at this point is a reasonable expectation, and TATY continues to develop a negative divergence with the price relative to its level in July, then the failure to complete a classic low risk buy signal, as this leg of the rally began, would cast a shadow of concern on the quality, and potential endurance, of this new leg of the rally. In short, I am less than sanguine about how this rally began, and I’m on high alert that it may fail to have much follow through, should it achieve new all-time highs. However, like hurricanes down here in south Florida, today’s observations are subject to change as conditions change.

The bottom line for this section is the current rally likely has enough demand under it to drive the price back to new all-time highs. However, questions remain about the strength and longevity of the rally, and strategic conditions must be monitored carefully for signs that markers for the formation of major top conditions are beginning to creep into the balance of supply and demand. The formation of a negative divergence between the price touching new highs, and the strategic indicator TATY failing to confirm by also touching new highs for its rally, would compel Alexander and I to consider cashing out some accumulated profits, and potentially lowering our overall client asset allocation to equities. Our appraisal of the potential for rising risks in the equity market will require more information over the days to come, which is ideal since our ETF holdings will go ex-dividend before the end of September, and we like dividends

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

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

Last week’s update reviewed the failure of the premium/discount indicator, shown in the bottom panel of the TATY indicator, to decline below the important minus eight level. Sell offs with enough power to drive the premium/discount indicator below minus eight result in motivating nervous weak hands, and/or other would be sellers, to sell at an accelerating rate, which purges the investor pool of potential supply at a relatively fast rate. The recent mini-correction drove the premium/discount indicator almost to the minus eight level, but then it turned higher suggesting a less than complete purge of the nervous weak hands, and/or other would be sellers. Such a situation could obviously leave a pool of nervous investors in the supply and demand potential mix. So, the strategic sequence related to the mini-correction concluded in a less than satisfactory manner.

The less than satisfactory strategic picture was followed by the tactical indicator, SAMMY, failing to issue a clear buy signal born of evidence of exhausted sellers followed by evidence of strong resurgent demand. And, now a somewhat wimpy rally has carried back to close to new all-time highs. There appears to be enough residual demand to drive the price back to new all-time highs, even in the absence of evidence of strong resurgent demand, as the price turned higher off the low. However, as president Reagan once said: “trust but verify”. The current rally may gather strength at some point, but until it does it shall remain a candidate for some selling into strength vis-à-vis our approach to risk management. Rallies unconfirmed by objective measures of the increasing strength of demand relative to supply are environments, where risks may rise dramatically and quickly. So, obviously we have entered a period, where constant vigilance will be required by risk adverse investors.

THE BOTTOM LINE

The good news is the market, as measured by the S&P-500, will probably touch new all-time highs. The bad news is the current leg up has begun from less than satisfactory supply and demand conditions, and will require constant vigilance on the part of risk adverse investors. The rally may gather measurable strength at some point, but until it does it will remain a candidate rally to sell into strength to reduce potential rising risks, and to cash out some hard earned accumulated profits. Additionally, the rally will likely linger long enough for our clients to collect another quarterly dividend on our ETF holdings, which are due to go ex-dividend by the end of September.

 

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.

Sep 9

Another Run at All Time Highs?

Last week’s update raised the possibility that the stock market may form a bottom without first painting out the classic signs of a tradable bottom vis-à-vis our proprietary supply and demand indicators. The indicators at that point in the development of the correction were mixed, and the evidence of exhausted sellers and resurgent demand present at low risk bottoms simply had not appeared. What followed was more listless movement of the price in the established range, and then a sprint higher past the 62% retracement level on the news that China and the USA were going to renew trade talks in October.

Having been close to fully invested in most accounts, especially those which have been with us for some time, we elected to add new purchases of stocks and/or ETFs only if our indicators flashed a low risk entry was at hand. Unfortunately, a low risk entry was never confirmed, and no new purchases were executed. Failure to use the recent weakness to make additional purchases of stocks and ETFs may penalize new accounts coming in with lots of cash, but the impact on accounts of long standing will be marginal. There will be other low risk opportunities to make purchases to soak up excess cash for accounts of long standing, and for accounts coming over to us with large percentages of cash. And, a recent update listed a copious number of reasons why investors should be very prudent with new investments in equities in the weeks ahead leading up to the 2020 election, and Alexander and I will be.

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 overlaid in red and blue candle chart format. After bottoming marginally below the red zone surrounding the 140 level, TATY finished the week at relatively strong 149. As long as TATY continues to paint out bottoms in, or close to, the red zone the stock market will likely attempt to sustain its rally, and possibly assault new all-time highs.

The premium/discount indicator in the lower panel of the TATY indicator never quite reached the important minus eight level during the correction. Excursions below minus eight is evidence of sellers being so motivated to sell that they tend to become exhausted at a high rate. Purging weak hands, or would be sellers, from the pool of investors is an important step in the formation of a tradable low risk bottom in our supply and demand approach to risk management.

The failure of the premium/discount indicator to descend below the minus eight level suggests that not all the weak hands, or would be sellers, have been driven from the current pool of investors. This in turn suggests these nervous investors could turn into sellers much quicker than longer term investors. This situation, plus the recent listing of potential risks as the 2020 election looms, causes me to be concerned that this incomplete purge of weak hands may result in the potential for a truncated rally to follow? For the time being, the recent bottom in TATY does suggest there may be enough demand for the price to make an attempt at new all-time highs at some point in the days ahead.

Our ETFs are in position to go ex-div some time in late September. Once the ex-div date is announced, I will be inclined to trim some long positions into strength, if our supply and demand indicators do not confirm any additional price rally from present levels. Alexander and I expect increasing volatility in the weeks leading up to the election, so a larger percentage of our holdings will likely be used to make tactical trades in such an environment, as compared to our core longer term investments. Successful tactical trading in a more volatile investment environment may reduce risk exposure, and significantly increase potential returns on the allocation of capital exposed to equities.

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 developed a range during the correction just like the price. However, SAMMY never confirmed that the sellers had exhausted their propensity to sell, nor just as importantly SAMMY never registered any objective evidence of resurgent demand to confirm the end of the correction, and a low risk entry for new purchases. This leaves investors with too many unanswered question for my comfort, which is why I have not made any new purchases. And, given that SAMMY is a tactical indicator, please take a look at the last chart above with the SPXL overlaid. A trained trader’s eye would instantly notice that while the price has spiked dramatically higher, SAMMY has remained in its recent range, a negative divergence between the price racing higher and the SAMMY indicator displaying a case of lethargy remaining range bound. This is not a picture of how low risk tradable bottoms form in our discipline. This kind of evidence tells me the developing rally will need to gather strength quickly, or it may run out of gas sooner than investors expect.

THE BOTTOM LINE

Strategic and Tactical indicators are displaying mixed signals, but on balance a rally has managed to exceed the 62% retracement level, and an assault on new all-time highs is possible, perhaps even probable. However, the recent listing of potential risks to the bull trend between now and the 2020 election still apply, and given the mixed nature of the signals from which the rally is developing, the potential for a short lived rally is significant without follow on evidence of growing strength in an array of supply and demand based indicators. The good news is the recent correction has likely ended, the bad news is there were not the classic signs of a low risk tradable bottom before the price began to move higher, which casts a shadow on the longevity of the rally.

 

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.

Optimist Capital, Hurricane Dorian
Sep 3

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.

Alexander Cooke, Gregory Adams, Wealth Managers
Aug 26

TESTING?

The early August decline was followed by an almost instantaneous 50% rebound, which was not the product of a SAMMY buy signal, nor accompanied by a positive divergence in the premium/discount indicator, which is shown in the lower panel of the attached TATY strategic indicator. The update following the rebound rally suggested there would likely be a test of the early August low given the lack of a bona fide Sammy buy signal, and the lack of a positive divergence. It was also suggested the 50% recovery rally must continue to above the 62% recovery range to turn the odds in favor that the early August spike down was going to be a complete correction. On Friday the questions surrounding a possible test of the low were answered, when the Dow painted out another Dow 600 point plus decline. The rest of this update will lay out how we view what is likely to happen next vis-à-vis our supply and demand approach to managing market risks.

TATY   —   A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS CHART 1

Last week’s update noted that TATY appeared to have completed a bottom in the red zone, and it would have to continue to paint out bottoms in, or near, the red zone for the recovery rally to enjoy enough strength to mount another assault on new all-time highs. That observation is still valid. However, it is now evident that the suggested test of the early August low will have to be completed before the TATY indicator will have its next opportunity to paint out a bottom in the red zone. Between now and then another big question will likely have to be answered, which is will the test of the low be completed with the development of a large positive divergence in place in an array of indicators, or will the test of the low generate an excursion into the caution zone surrounding the 115-125 TATY level. Such a development would then trigger the first step in a “Big Chill” warning. Should the TATY indicator then mount an expiring rally into, or near the red zone, an official Big Chill warning would be issued.

A “Big Chill” warning would be an important development, because every major top, and major rebound top during big bear market rebound rallies since the 1990’s have been preceded by a “Big Chill” warning. I suspect major tops before the 1990’s were also, but the data necessary to re-create the TATY indicator does not exist in eSignal format, making the indicator too expensive and complicated to re-create. However, the major topping process was tracked by Lowry Research all the way back to 1925, and within their discipline the topping process was always the same. This suggests the “Big Chill” process likely would have been the same as well, since my work includes representative derivative modules in addition to the Lowry NYSE only type data inputs in their indicators. Given the huge amount of risks being managed by derivatives these days, failure to supplement NYSE data with derivative representative input would tend to mis-represent the overall balance of supply and demand driving the price of stocks.

In any case, some of the most important market disruptions since the 1929 “Granddaddy” of them all tops occurred beginning with the crash of Long Term Capital in the summer of 1998 until the present, making the post 1998 period a good test sample. So, the bottom line for this section is a test of the early August low is obviously underway, and this test will likely create a tradable bottom as long as TATY stays above the caution zone surround the 115-125 level. A TATY decline into the caution zone would suggest a big change in the character of the balance of supply and demand, which could lead to the necessity of taking defensive actions to preserve accumulated profits, and/or lower client risk exposure to equities.

SAMMY   —   A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS CHARTS 2 & 3 (CHART 3 IS MAPPED AGAINST SPXL 3X S&P500 FOR REFERENCE)

Clients will note that we were not a buyer near the early August low, because the stock market did not serve up a relatively low risk entry according to our indicators. We told clients we would be buyers, if the tactical indicator SAMMY issued a clear buy signal, and positive divergences were in place with the strategic family of indicators represented by TATY, and its premium/discount indicator shown in the lower panel of the TATY chart. These conditions were not met, so we stood aside and waited. Now it appears a test of the low is well underway, which may result in our conditions for a low risk purchase being met for excess cash needing to be invested, or for new clients coming into our ETF model in cash.

Alexander and I are risk managers first, and that means maintaining discipline, especially when the market enters a hurly burly period of volatility, because our discipline will likely allow us to turn chaos and volatility into opportunity for our clients. Alexander and I do not fear bear trends, or outright violent bear markets, because buying when great companies are selling at substantial discounts to “value” lies at the very core of how we operate.  Our proprietary market tools are well suited for this approach, which leaves our competitors at huge disadvantage given that most excel at developing relationships, and actually managing money to a consistently superior risk adjusted return not so much.

THE BOTTOM LINE

A test of the early August low is obviously underway. If the test of the low results in a favorable outcome for a low risk entry to put excess cash, or new cash coming in from new clients to work in equities, then we will take advantage of the opportunity.  Such a buy signal would occur after a long and possibly fatigued rally, but with the expectation that it would still result in a profitable trade, and/or investment. However, if the test of the low results in the strategic indicator, TATY, declining into the caution zone, then a change in character, and the balance of supply and demand for equities may be at hand. If the TATY indicator was to complete an official “Big Chill” warning, then defensive actions may become necessary to protect accumulated profits, and/or to lower the potential impact of rising market risks to clients.

 

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.

Aug 19

HOW RELATIVELY LOW RISK BUYING OPPORTUNITIES FORM IN THE STOCK MARKET

The past several days have been a good example of the kind of increase in market volatility we expect as the stock market continues to march toward the 2020 election. The week included a decline of 800 Dow points, which was blamed on the yield curve inverting, the possibility of which has been apparent for weeks. The gyrations in the price would suggest that there has been a substantial change in the dynamics of the supply and demand balance, but so far our supply and demand metrics have been relatively less impacted than the sharp 800 point decline in the Dow would seem to suggest. At this point in its development, the correction looks to be on schedule to become a correction in an on going bull trend. This could change of course, but for now the historic markers of a classic major top forming in the stock market remain mostly absent.

TATY   —   A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY is shown above in the first chart above in yellow with the S&P-500 overlaid in red and blue candle chart format.

This week’s print of 145 for this indicator appears to have completed a bottom in the red zone, which historically is indicative of demand in the superior position relative to supply. I have no record of a major top forming when this strategic indicator is forming bottoms on the weekly chart in, or near, the red zone. So, far as long as TATY continues to paint bottoms in the red zone the bull trend is likely to remain viable, which suggests another assault on new all-time highs once the current correction has ended. However, once the correction has run its course, it will be important for TATY to continue to improve upon where it paints out its highs, the higher the better for the health of the bull trend. Given the recent volatility in the price, the strength being displayed in the TATY family of strategic indicators is surprising, and could even be characterized as atypical.

The premium/discount to value indicator in the lower panel of the TATY indicator is reflecting a more normal circumstance relative to the atypical behavior of the TATY indicator. The 800 point plunge in the Dow has driven the premium/discount indicator deeply into the discount range, as the indicator is approaching the minus eight level. What we would like to see in the days to come is for TATY to continue to bottom in, or near, the red zone while the premium/discount indicator bottoms, and then turns back up first toward minus three, then on up past the zero line back into positive territory. As these two things are happening, we would like to see the price continue to test the recent low resulting in a large positive divergence between the weakening price, and the strengthening indicators. So for the strategic indicators, we are beginning to see some necessary developments for a bottom in the price, but not likely enough to be sufficient to produce a resumption of the previous bull trend.

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

The SAMMY family of tactical indicators are shown above alone, and below with the SPXL 3X leveraged S&P-500 ETF overlaid. Please note that the SPXL ETF is used for reference purposes only.

SAMMY has not yet produced a buy signal, but it is showing some tendency toward the sellers becoming exhausted. Exhausted sellers are a necessary condition for a market bottom, but not sufficient. It takes both evidence of exhausted sellers, and evidence of resurgent demand to confirm an end to a market correction, and/or bear market. At this point there has not been any objective evidence of resurgent demand for stocks. And, ideally that evidence should be some time in the future to allow for the development of a strong positive divergence in the indicators, while the price continues to test the lows. These are the kinds of buy conditions, which result in the potential for very low risk purchases of stocks, or in our case equity ETFs. If these conditions come to pass, then we will use the low risk opportunity to put excess cash to work in equities.

THE BOTTOM LINE

Some of the conditions necessary for a bottom in the stock market are beginning to appear. However, these necessary conditions must be joined by evidence of other positive conditions in order for the mix to become sufficient to produce a low risk tradable bottom. The appearance of objective evidence of exhausted sellers is a necessary condition, but objective evidence of resurging demand must also appear in order to complete the mix necessary to be sufficient to confirm a low risk bottom, and the probable imminent resumption of the bull trend. When both the necessary and sufficient conditions for a tradable bottom are met, then we will consider using excess cash in client accounts for new equity purchases, which would meet our criteria for a low risk entry for putting new money into the equity market.

There are other optional paths for the market, but the outline above is in general how corrections, and/or bear markets end, which produce low risk buying opportunities, which in turn yield profitable trades, or investments over time. This classic process drives the weak hands out of the market, which creates discount to value situations, which in turn attracts long term investors to the perceived relative bargains. A rally back to new all-time highs, which begins without both the necessary and sufficient conditions having been met would likely be viewed as having a much higher risk profile, and potentially a fragile trap for new purchases. Given the proximity to new all-time highs, the historic length of the post Great Recession recovery, the inverted yield curve, and the uncertainties implied by the looming election; I will view any potential new purchases as optional, and taken only if the necessary and sufficient conditions for prudent risk management are met.

 

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.