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RUN AWAY BULL?

Holiday Village
Dec 9

RUN AWAY BULL?

Last week’s update was on the topic of “the pause which refreshes”, and advised investors to not be surprised, if the stock market encountered some weakness in the range of 3 to 8% before assaulting new all-time highs. On Tuesday the Dow plunged over 400 points intraday, and appeared well on the way to a much needed consolidation, or brief correction. However, by Friday’s close the popular stock indexes had recovered to slightly below new all-time highs leaving those of us with some cash needing to be invested a bit frustrated that the very brief decline did not give us a classic buying setup vis-à-vis our proprietary indicators. We prefer to be buyers when measurable evidence of exhausted sellers is followed by resurging demand. And, which is also confirmed by measurable evidence that the price has been compressed below “value”, which in turn creates a very low risk buying opportunity.

In strong bull trends corrections tend to be shallow and brief, which has the effect of not allowing would be buyers an opportunity to join the bull party at a significant discount. Stock market psychology is a bit upside down in that rising prices tend to create more buyers, when in other disciplines it tends to take declining prices to attract larger pools of buyers. It is not unusual in the history of the equity markets for bull trends to accelerate as prices rise, and in some cases this acceleration phenomenon can sometimes result in what is known as blow off tops at very elevated valuations, as buyers finally exhaust themselves.

We are not in the predicting business, as we prefer to leave that very difficult exercise to those, which believe they have the ability to know the future. However, this past week’s almost instantaneous encounter with motivated buyers after such a shallow, and brief dip in the price, makes me inclined to take into account the possibility that this record setting bull trend may have a strong enough residual bid under it to power an acceleration higher, the news and rich valuation be damned? Please note that taking into account a possibility is not the same as stating the probabilities favor such an outcome.

Objective measures of the balance of supply and demand continue to favor demand over supply, so yes the probabilities continue to favor assaults on new all-time highs, but at this point the notion of an accelerating bull trend higher is just one of a number of possible pathways to new all-time highs.

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 format.

TATY finished the week at 154, which is well above the red zone surrounding the 140 level. As long as this strategic indicator paints out BOTTOMS in, or close to, the red zone the bull trend is likely to continue to attempt new all-time highs. An excursion by this indicator into the caution zone surrounding the 115-125 level would be our first warning that the balance of supply and demand may be changing enough to cause supply to over take demand. If this condition was met, and then followed by the completion of a “Big Chill” warning setup, then Alexander and I would be compelled to consider taking defensive action to preserve accumulated profits, and/or protect client wealth from rising risks of a significant decline, or in the extreme a budding bear market.

Please note that the premium/discount indicator shown in the lower panel of the TATY chart was not driven much below the zero line by this past week’s shallow, and brief decline. Low risk buying opportunities are defined by the premium/discount indicator being driven below the minus eight level (red line) and then beginning a recovery back to the minus three level (green line), and then on to above the zero line. When this condition is met, and the SAMMY tactical indicator shows evidence of resurging demand, often a very low risk buying opportunity has arrived. As my former friend and mentor, Paul Desmond of Lowry Research, used to opine bottoms require evidence of exhausted sellers followed by evidence of resurging demand. In the current case Tuesday’s decline was so fleeting that it never painted out the required setup for us to deploy all the new cash coming into our firm.

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 is used for reference only.

SAMMY is interesting this week. TATY failed to paint out the conditions we needed to be buyers, as the premium/discount indicator never got anywhere close to a significant discount to value, but SAMMY did register some evidence of resurging demand. And, as a counter-balance to the possibility of an acceleration higher, SAMMY developed a big negative divergence with the rallying price as the week wore on. Careful inspection of the SAMMY chart shows the SPXL ETF nearly touching a new high, like most of the popular stock indexes, but the SAMMY indicator is not even close to its previous high. This is called a negatively diverging indicator to the price. Investors want the price confirmed by indicators, not the indicators negatively diverging as SAMMY is in the current case.

This condition suggests Tuesday’s plunge may be just the first leg down in a “flat” or “irregular” correction, which needs another leg down to complete the correction at, or marginally below Tuesday’s low. Yes, it really is complicated in the short term, but not in terms of the big picture, which is the odds favor new all-time highs soon, or after the completion of another leg down in a shallow correction. Investors should be aware that if there is another leg down to come in an ongoing correction, then it is likely to be quite nasty, violent and fast. A nasty, violent and fast leg down would likely create the conditions we need for a low risk buying opportunity, so if between now and the end of the year the market literally looks as if it is “falling out of bed”, then please do not be concerned, as what is actually happening is opportunity disguised as a brief panic, perhaps in reaction to some news driven event. This kind of situation would likely purge any would be sellers from the investor mix, and give the buyers a chance to tighten their grip on the stock market.

THE BOTTOM LINE

While the road to new all-time highs may take some unexpected twists and turns, the balance of supply and demand still favors demand over supply, so the odds are favorable that the stock market is on the road to new all-time highs late, or soon.

 

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.

Dec 2

TIME FOR A PAUSE WHICH REFRESHES?

Recent updates have advised investors to ignore the steady drumbeat of bad news, because our objective measurements of the balance of supply and demand for stocks favored demand over supply. As long as demand remains in the superior position to supply the price will likely continue attempts to assault new all-time highs, regardless of the negative trending evening news and/or historically rich valuations for equities.

Warren Buffett, who made his name as a Graham and Dodd value investor, has recently been in the news, because he nixed a take over deal for a tech company over concern that the bidding had become too rich. He is also rumored to be sitting on more than one hundred billion in cash, because he finds little “value” in the stock market. His concerns definitely apply to buyers of individual equities, but we are index ETF investors, and indexes usually continue to rise after valuations have become rich by historic standards, because institutions tend to put cash into the stock market as soon as it is received. This institutional investing bias tends to be good for them, but not so much for their investors unfortunate enough to arrive near a bull market top.

The stock market is up over twenty percent this year, so a pause to refresh and re-invigorate demand should not come as a surprise. The sudden appearance of a budding bear market would be a surprise, as the current balance of supply and demand for equities still favors demand over supply making the sudden appearance of a bear market a relatively low probability, Mr. Buffett’s angst notwithstanding.

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

TATY finishes the week at 150 a bit off its peak reading of recent weeks, but still well above the red zone surrounding the 140 level.  TATY is shown in the first chart above in yellow with the S&P-500 overlaid in red and blue candle chart format. As long as TATY continues to paint out BOTTOMS in, or near, the red zone assaults on new all-time highs will remain a viable probability. An excursion into the caution zone surrounding the 115-125 level would be the first sign that the balance favoring demand over supply may be changing. A follow on issuance of a “Big Chill” warning would likely be a call to action to protect accumulated profits, and/or wealth. The required market gymnastics to paint out a “Big Chill” warning would likely take weeks to complete.

The bottom line for this section is TATY has backed away from its recent highs, but continues to confirm that demand remains in the superior position to supply.

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

SAMMY is shown above, and below with the SPXL 3X S&P-500 ETF overlaid. The SPXL three times leveraged ETF is for reference only, due to its leverage, and certain quirks related to its construction, which may cause tracking errors against its benchmark over time. SAMMY has an outstanding record of identifying resurging demand after periods when sellers have exhausted their desire to sell. SAMMY is of little value otherwise, as so far I’ve not found it particularly useful in warning of impending tops. Consequently, SAMMY is shown above for information only, but it will become extraordinarily valuable again following the next decline in which sellers become exhausted.

THE BOTTOM LINE

The stock market is extended, overbought, and due for a pause that refreshes. However, unless measures of supply and demand shift swiftly and significantly, then investors may reasonably expect more attempts to assault new all-time highs in the days, and possibly weeks to come, regardless of how negative the news, or how rich valuations become. The news, nor valuations, determine the price level of the stock market, as the price is determined by the absolute bedrock of the capitalistic system, which is the law of supply and demand. Currently our proprietary measures of supply and demand continue to favor demand over supply.

If a pause to refresh and re-invigorate demand does occur, and if this pause takes the price down say in the 3-8 percentage range, and during which a new SAMMY buy signal is issued, then we will be prepared to put new cash, and/or excess to work in the equity market on our own terms. We have entered what is historically a seasonally favorable period of weeks, so we shall be inclined to act on any SAMMY buy signal following evidence of the price having declined below “value”, sellers having become exhausted, and resurging demand triggering a SAMMY buy signal. Such a series of events would suggest a new leg of rally was getting underway. Which has the potential to reward equity investors regardless of the negative news, and/or rich valuations.

HAPPY HOLIDAYS!

 

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.

Nov 25

SOME ECONOMIC HISTORY YOU MAY NOT KNOW?

In late September 1977, my new bride and I began an extended Honeymoon trip that would take us to Atlanta, New Orleans, Las Vegas and then on to stops in San Francisco, Monterey, and finally a grand tour down the beautiful Big Sur coast highway to San Luis Obispo, and a return back to San Francisco up through the California valley. We visited the Hearst Castle in San Luis Obispo, where the tour guide remarked that everything, which looked like gold was gold, including the faucets in the bathrooms, and the fixtures in the huge swimming pool. William Randolph Hearst was so wealthy that he had full grown trees floated in on barges, transported to the Castle, and then re-planted, because he knew he would not live long enough to see newly planted trees reach maturity.

Hearst had made his fortune in the newspaper business, and re-invested his initial wave of wealth in thousands of acres of seemingly low value real estate, upon which there was soon discovered vast deposits of oil, and later uranium. Hearst became immensely wealthy during a period in United States history, when there was little taxation. This was the time of the so called “Robber Barons”. Among Hearst’s eccentricities was his dinner parties at the Castle, the invitations to which were highly coveted. Hearst would invite notable guests of the time with different views to sit opposite each other at a huge dinner table overlooking the Pacific Ocean. The highly animated conversations which followed were of intense interest to the newspaper man, and was one way he was able to keep his finger on the pulse of the times.

According to the tour guide, arising out of one of these debate like dinner parties, Hearst became an advocate of the graduated income tax system. He declared that is was not in the best interests of our country for anyone to ever amass the incredible wealth he, and a hand full of others, had accumulated. He believed that such a concentration of wealth came with a byproduct of power and influence, which he feared would likely be abused. Hearst then applied his own power of the press to advocate for a graduated income tax system, and other wealth tax reforms.

Hearst believed democracy requires a broad and strong middle class, and an educated and well informed electorate to survive. A case could be made that the lack of one, or both, of those two requirements has led to many failures of would be democracies in Latin American down through the decades. In many Latin American countries the nation’s wealth is owned almost entirely by just a few very powerful families, and too little of the population is educated, and/or well informed. As Helen Fortney, my high school civics and social studies teacher, once said: “In a well-functioning democracy the political pendulum swings back and forth, but the democratic process survives and adjusts with the times”.

Given the current wealth and political divide in our country, and the emerging and imminent natural takeover of our institutions by a new generation, I am fascinated that the leading candidates for the up coming presidential election are all in their seventies. The country is on the cusp of so many generational, and demographic changes, that an objective analyst may conclude that at least one representative of a younger generation would be leading in some of the polls. Perhaps that brewing storm of generational, and demographic change, will emerge in a later election cycle, but the evidence grows that perhaps the pendulum may be reaching another extreme, just as it did when Hearst was moved to action. Stay tuned!

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

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

TATY finished the week at a strong 155 level. As long as this big picture indicator continues to paint out bottoms in, or near, the red zone surrounding the 140 level, periodic assaults on new all time highs will remain likely. When TATY is making bottoms in the red zone demand is in the superior position to supply. The law of supply and demand determines the price regardless of market valuation, which in the current case is not cheap, or the news. If one had taken the news into account, then most clients would have been in cash several thousand Dow points ago. The news may very well grow worse, it really is a dangerous world out there, and there is a big election looming on the horizon, which will no doubt be lucrative for the folks delivering all those attack ads to come.

TATY is an objective measure of the balance of supply and demand generated by the only source, which is really worth anything  —  the stock market itself. If you want to listen to opinion, then listen to the evening news. If you want to know the facts about how all the opinions of the market participants have resolved themselves into aggregate action, then watch our objective strategic and tactical indicators.

TATY continues to signal demand is in the superior position to supply, so we expect an upward drift, and an occasional assault on new all-time highs along the way. The stock market is entering the holiday season, which in the past has translated into low volume dull market behavior. The political arena may be interesting these days, but I suspect the upcoming holiday period in the stock market may be typically dull?

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

SAMMY has an enviable history of identifying re-surging demand following a period when sellers have exhausted their propensity to sell. As such SAMMY is of little value during a period of extended rally, as is the current case. SAMMY is shown above alone, and below with the SPXL 3X S&P-500 ETF overlaid. The SPXL leveraged ETF is for reference only.

THE BOTTOM LINE

Historically the Holiday Season is a low volume and listless trading period for the stock market. The current conditions in the balance of supply and demand suggests that the price is likely to attempt more assaults on new-all time highs. However, these new assaults on all-time highs may be achieved on low volume, and as a product of a dull and listless drift higher. There have been many new highs over these last many months, but the stock market’s overall gain during this period has been less than satisfying given the anemic relative net gain. For example, take a look at the S&P-500 in September of 2018 as shown on the first chart above versus Friday’s close, which is less than two hundred points higher!

 

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.

Nov 18

ADVANTAGE BULL

Last week’s update drew investor’s attention to the positive seasonal bias at work roughly from Halloween to Easter most years in the equity market. Studies have shown that this span of weeks has contributed almost all of the accumulated gains in the stock market over the last one hundred years or so. And, the period from Easter to Halloween has contributed almost nothing to the gains over the same period. The recent performance in the market, including this past week’s new all-time high on Friday, has once again contributed to this tradition of seasonal outperformance.

Given the very positive readings on an array of objective supply and demand indicators, the weight of the evidence continues to favor demand over supply. So, the seasonal bias, and the balance of objective measures of supply and demand, favor the stock market touching new all-time highs in the days, and possibly weeks, ahead. As long as the balance of supply and demand remains favorable toward demand over supply, then we will use periods of weakness as opportunities to put cash coming in from new clients , or excess cash in existing client accounts, to work in equities; regardless of how bad the news may become, or how unreasonable valuations may become. Neither the news, nor valuations, determine the price level of the stock market. The price is determined by the law of supply and demand, the only absolute in economics. Currently the balance of supply and demand, as measured by our proprietary indicators, favors demand over supply.

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 format.

TATY finished the week at a strong 156, and rising. As long as this big picture strategic indicator is painting out BOTTOMS in the red zone, investors may reasonably expect the stock market to have a positive bias, and enough residual demand to power periodic attempts to assault new all-time highs, in an ebb and flow type behavior. These attempts are likely to continue until TATY paints out a “Big Chill Warning”, which will likely become the first objective evidence that the balance of supply and demand may be shifting in favor of supply over demand.

Big Chill warnings have been highly effective at alerting investors to rising risks in the equity market, and at issuing warnings timely enough for investors to take action to protect accumulated gains, and/or their wealth. No indicator is perfect in this business of risk management, but of all the major top identifying methods I have studied over the decades, TATY is the indicator with the best record by far. Major tops are a gossamer like euphoria diffusion process, which is extremely difficult to measure objectively, which in turn makes it difficult to determine the price level at which market risks to invested capital may have become critical. TATY has a decades long record of identifying levels at which equities may have become vulnerable to the onset of a substantial correction, or outright bear market. Unfortunately, I’ve discovered no method in decades of searching, which can tell us in advance, if a correction may turn into a bear market, or if a nominal bear market may turn into major bear market.

Fortunately, our inventory of supply and demand indicators include some like SAMMY, which have a proven record of measuring and identifying resurging demand. These have a record of announcing the end of corrections, and/or phases of bear markets, or the completion of a major bear market in equities. This information then becomes critical to the decision to re-deploy cash as price declines are ending.

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

SAMMY is shown above.

SAMMY has earned an outstanding record at identifying resurging demand following substantial declines, corrections, and/or bear markets. Tradable low risk bottoms require evidence of exhausted sellers followed in short order by evidence of resurging demand, as investors rush back in to the stock market to scoop up perceived bargains. Our premium/discount indicator, located in the bottom panel of the TATY indicator, and the price charts, has an enviable record of identifying levels at which sellers have exhausted their propensity to sell. Once this has occurred the risks to further decline drops precipitously, as those wishing to sell have already done so leaving few, if any, sellers to drive the price any lower. This is the level at which SAMMY earns its stripes by objectively providing evidence that buyers are re-entering the market in size, which registers with SAMMY as resurging demand.

Once the resurging demand process is underway, the price has very likely reached a turning point. And, while the newly formed price bottom may be “tested” at some point, the objective evidence of exhausted sellers followed by evidence of resurging demand sharply increases the odds that the decline, correction and/or bear market has ended, and a tradable low risk bottom has arrived. Obviously these low risk tradable bottoms are relatively rare wealth building events (a few times a year perhaps), and are ideal price levels for cash to be put to work in equities with relatively low risks.

SAMMY is a supply and demand tool for confirming low risk bottoms, but otherwise is of little value. SAMMY is currently in rally mode with the price, so it is shown in this update for information only. However, upon the arrival of evidence of exhausted sellers during the next substantial decline, SAMMY will become an essential tool for identifying the next low risk tradable bottom. Given the positive seasonal, and the current favorable balance of demand over supply, SAMMY may not be needed for a while?

THE BOTTOM LINE

Most clients are adequately invested in equities for a stock market crawling higher, and touching new all-time highs along the way, even after taking some profits recently. However, if the stock market serves up a low risk entry to put new, or excess, cash to work, then we will act on the signal, as long as the strategic big picture continues to favor demand over supply. We shall lean toward being invested until the arrival of the next “Big Chill Warning” at which time Alexander and I will be compelled to act to protect accumulated profits, and/or client wealth, should the weight of the evidence begin to shift in favor of supply over demand. Until evidence that supply is overtaking demand arrives, then we will stay invested in equities, and collect dividends for clients along the way.

 

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.

Nov 11

TIS THE SEASON

In the agricultural markets there are often strong seasonal tendencies related to the planting, growing and harvesting of crops in the Northern Hemisphere. Obviously this annual cycle impacts the available supply of ag products like corn, soybeans, and so on, which in turn affects price expectations come the harvest. Some commodity traders design strategies to take advantage of these seasonal trends, and books have been written about how a would be ag investor may be able to bend the seasonal cycle to his, or her, advantage.

Seasonal trends in the financial markets are much less obvious, because there is no easily identifiable planting, growing and harvesting cycle at work. However, there is one seasonal worth mentioning, which is often at work in the equity market. Numerous studies have shown that over the last one hundred years, or so, almost all the gains in the stock market have occurred roughly from Halloween to Easter each year. And, the period from Easter to October has made almost no positive contribution to the overall performance of the S&P-500.

The positive seasonal tail wind for stocks from Halloween to Easter is obviously a blunt financial tool, and a significant challenge to apply successfully, but not without a valid basis. Income taxes for the current year ending December 31st are due to be paid in full by April 15th of next year. This annual not so pleasant deadline gives rise to a flood of new money contributions coming into retirement accounts, as the deadline for the current tax year’s retirement contributions loom. Most financial institutions immediately put this flood of new money into the stock market, which in turn creates an artificial seasonal demand for stocks. This process is also boosted by other factors like spending for back to school, or college. Regardless of the contributing factors, this financial seasonal has been proven to exist, but alas the seasonal tendency is not a surgical tool in an investor’s tool box, but more like a tail wind is to a jet airliner, which may be at work sometimes at varying levels of strength.

The bottom line on the positive seasonal influence on the stock market from roughly Halloween to Easter is investors may want to be a bit more aggressive with their asset allocation to equities during this period, if their analytical tools are confirming that demand is strong relative to supply, and/or the strength in demand is growing relative to supply.

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

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

TATY painted out a bottom marginally below the red zone in August, and another bottom in the red zone in September. When this indicator is making bottoms in, or near, the red zone demand is in the superior position to supply. There is no documented case of a major stock market top having formed when TATY is painting out bottoms in, or near, the red zone. Every major top, and the expiration of every major rebound rally during bear markets, over the last almost four decades have occurred after TATY declined into the caution zone surrounding the yellow 115-125 level followed by the indicator stalling out in, or near, the red zone surrounding the 140 level, and then beginning a persistent decline. Price bottoms tend to form in the stock market after TATY bottoms, and then begins to paint out an accelerating positive divergence higher, even as the price continues to probe for its final low.

Diagnosing the formation of a major stock market top is an extremely difficult exercise, and virtually impossible to accomplish successfully without sophisticated, and time tested, analytical tools like TATY. No indicator is perfect in this business, and they all have their individual quirks, but TATY does have an enviable record, and is the best analytical tool I’ve discovered for identifying the formation of major tops after my ongoing multi-decade search.

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

SAMMY excels at identifying resurgent demand after sellers have exhausted their propensity to sell. It is shown above in the second chart with the SPXL 3X leveraged S&P-500 ETF overlaid. SPXL is for reference only.

SAMMY is of little value during rallies, and the formation of tops, so it is shown above for information only. SAMMY will become extremely valuable again, when the stock market serves up the next tradable bottom. As a tactical indicator, if the big picture strategic indicators are flashing a favorable investment environment, then an investor armed with SAMMY would likely take every signal of exhausted sellers giving way to resurging demand, as an opportunity to put money to work in equities   —   regardless of the price level, or market valuation.

In Capitalism supply and demand determines the price, not the evening news, nor market valuations, rich though they may be currently. For example, the NASDAQ was soaring in the late 1990s, even as valuations became exponentially expensive, but supply and demand continued to drive the price higher powered by expectations the emerging internet would have a huge impact on commerce, and eventually it did. Some internet concept companies came public in those days without any SALES, not to mention no profits! Markets rise and fall on future expectations driving the balance of supply and demand, and not by what is already known and priced into the stock market.

THE BOTTOM LINE

The equity market is not cheap, and the news is really awful for a period of relative peacetime, and all this bad news is coming at investors as if we were drinking from a fire hose. However, while volatility may very well increase due to the uncertainty implied by the looming election, the classic signs of a major top having formed in the stock market are simply not yet in evidence vis -a-vis our proprietary supply and demand indicators. Given the stock market is entering a positive seasonal period, and the lack of objective evidence of a major top forming, investors may reasonably expect the current stock market rally to attempt renewed assaults on new all-time highs, until evidence arrives that supply is moving toward the superior position relative to demand.

 

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.

Palm Beach
Nov 4

BULL POWER VERSUS THE NEWS

On numerous occasions over the past several weeks, we have advised investors to ignore the constant stream of bad news to which they have been subjected by the media, both electronic and print. By definition the news is bad, when some members of an administration have already gone to jail, and the president is close to being impeached in the House of Representatives. Yes the bad news is evident domestically daily just by turning on the TV, or glancing at the headlines in the newspapers. And, if one has an international view, then the news is just as bad overseas with the Brexit struggle, an aggressive effort on the part of Mr. Putin to re-establish the former Soviet empire, and constant turmoil in the Middle East.  So, one should sell everything and go on defense in investment portfolios right? Well not so fast, because the bull trend is once again proving the old cliché that bull stock markets climb a “wall of worry”, and this past week the stock market once again in the face of bad news touched new all-time highs. The daily news does not determine the level of prices in the stock market, because the price obeys the law of supply and demand, which means the price level of any market is determined by the ever changing balance of the supply and demand. The law of supply and demand is the only absolute in economics, and everything else is just someone’s opinion.

For clients with legacy stocks, which have portfolios being transitioned to one of our ETF Models, sell targets have been set for your non-dividend paying stocks, which are lagging the performance of the S&P-500. The sell orders have been placed GTC (Good Til Cancelled) and may take several days to execute should the current rally continue to crawl higher. Legacy dividend paying stocks lagging the S&P-500 will have sell targets set once they go ex-div between now and year-end. The sales proceeds, if our sell targets above the market are touched, will be re-invested on the next decline strong enough to drive our premium/discount indicators into deep discount mode, which is then followed by a SAMMY tactical buy signal.

While the news is bad, and may become worse, as long as our objective supply and demand indicators suggests demand remains in the superior position to supply, then we will continue to be buyers of our preferred ETFs, VOO and QQQ, for as long as the market provides us with opportunities to do so on our own terms. This strategy, along with the accompanying tactics, will continue until the arrival of a “Big Chill” warning, at which time we will be compelled to consider re-positioning client portfolios for defense. That event may occur as a part of increasing volatility before the election, or months later after the election. The “when” is not as important as recognizing the “Big Chill” signal may be in the process of completion, whether that be late or soon.

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 at a strong 157 level, which suggests the current rally may linger for a while. The economic recovery from the 2007-2009 Great Recession continues to set records for longevity, and for the time being our supply and demand based indicators suggest the stock market rally is likely to confirm by touching new all-time highs. We are NOT in the predicting business, we are in the risk management business, so all we know for sure is our objective measures of supply and demand reflect that demand remains dominant relative to supply. Until that balance changes in favor of supply, investors should expect further attempts for the price to touch new all-time highs.

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

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

The recent buy signals generated by the SAMMY tactical indicator have continued this indicator’s record of extraordinary accuracy in spotting resurging investor demand, even as the price was hovering near all-time highs. We passed on the last SAMMY signal due to lack of confirmation of a deep enough discount to value situation, but nonetheless SAMMY once again detected the resurgence in investor demand, which recently powered the movement in the price to new all-time highs.

The record of this indicator continues give us the confidence to pull the trigger on purchases, often when institutions are rushing to sell. Institutions can be our best friends in supporting our performance, as their committee decision structure often causes them to sell late into bottoms, and buy late into tops. SAMMY does not have a useful record at tops, so for now there is not much beneficial information being generated by it. However, following the next significant sell-off, SAMMY will likely become critically important again, especially if the premium/discount indicator has reached a deep discount to value zone.

THE BOTTOM LINE

We are taking some well earned profits into the current rally into new all-time highs. Given the fatigued nature of the rally before the push up to new highs, it would be reasonable to expect a significant, and possibly playable decline, after this leg of the rally exhaust itself. We would expect to re-invest sales proceeds into the next decline as long as that decline does not display any signs of morphing into a “Big Chill” situation. At this point there is little objective evidence that a major top is under construction, so we shall be inclined to view declines as buying opportunities.

 

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 28

THE BULL TREND – FATIGUE DOES NOT EQUAL EXPIRATION

We have been admonishing clients for weeks now to not get caught up in the negative daily news cycle. We have been making the case that demand for stocks remains in the superior position to supply, which implies that a renewed assault on new all-time highs is probable. We also told investors that the rally was not young and vigorous, so the assault on new all-time highs was likely to happen as a stumbling “fits and jerks” crawl higher. The events of this past week have confirmed the accuracy of these supply and demand based observations. The negative news continues to come at investors somewhat like drinking from a fire hose, and literally the volume of bad news is too large to be sufficiently referenced in these brief weekly updates. Suffice to say focusing on the balance of supply and demand will likely always trump, no pun intended, the evening news.

Several days ago I placed GTC (good til cancelled) limit sell orders a few pennies below the previous all-time highs for some of our profitable VOO and QQQ positions. Years of experience has taught me that all-time highs are often probed a few times before the price actually closes at new highs. And, in recent months new all-time highs have been followed by bouts of weakness appropriate for an aged and fatigued rally, so a repeat of this see-saw crawling higher behavior would not come as a surprise.

Trimming some accumulated profit in these conditions seems to be prudent, so we are taking some of our profits in VOO and QQQ to the bank. However, taking some profit in a fatigued rally is NOT the same as positioning for the expiration of the larger bull trend. The objective evidence we require for the confirmation that a major top has likely formed simply has not arrived   —   yet. The tactical approach we are applying is rising volatility is likely in a fatigued bull trend, so raise a bit of cash to adroitly trade around any opportunities created by the likely increasing volatility.

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.

The strategic big picture of an on going bull trend was confirmed again this week, as TATY broke the negative divergence shown on the chart by the down sloping orange line. When TATY is painting out bottoms in, or near the red zone surrounding the 140 level, demand is in the superior position to supply. I can find no occurrence in the record of this indicator, when it was painting out bottoms in, or near, the red zone that a major top had formed. While no indicator is perfect, the current status of this strategic indicator implies the bull trend remains alive and well, but yes a bit fatigued. Until TATY completes the necessary gymnastic type steps required for the issuance a “Big Chill” warning, the probability of a major top having been formed remains toward the low end of the scale.

The bottom line for this section is current conditions suggest the probability of rising volatility in a fatigued rally, but within the context of an on-going bull trend.

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

SAMMY is shown above and below with the SPXL S&P-500 3X leveraged exchange traded fund (ETF) overlaid. The SPXL ETF is for reference only.

SAMMY does an excellent job at detecting resurging demand after sellers have exhausted their propensity to sell. A low risk tradable stock market bottom requires evidence of exhausted sellers followed by evidence of highly motivated buyers swooping in to scoop up perceived bargains. This process creates evidence of resurging demand, which then shows up clearly in this highly effective tactical buying indicator. SAMMY is pretty much a “one trick pony”, since it is virtually worthless in lending any help with identifying tops.

The last two SAMMY low risk buy signals were accurate, but we elected to not execute any purchases, because our premium/discount to value indicator did not confirm a deep enough discount to value. And, due to our angst about being an aggressive buyer on the cusp of new all-time highs. Yes we have cash, which needs to be put to work, but on our own terms. Our discipline requires low risk conditions for the deployment of excess cash into the stock market. SAMMY gave us half of what we needed to be a buyer, but the discount to value indicator failed to confirm, so we stood aside on making any new purchases so close to all-time highs.

Current conditions suggest the possibility of multiple attempts to establish new all-time highs, which perhaps will be followed by a break above the previous high, then perhaps a brief short covering sprint, then as the buyers become exhausted the rally may roll over into a new correction to reinvigorate demand. This sequence of events is just an experienced trader thinking out loud after many years of observing market behavior. Please note that I do NOT do predictions, as I choose to leave that highly risky exercise to those, which think they possess that difficult skill. However, Alexander and I do believe in constant preparation, so the sequence just described is one of the most probable at the moment. As Vince Lombardi once observed: “Luck is when preparation meets opportunity”. As an Eagle Scout the slogan of “Be Prepared” has always had traction with me.

THE BOTTOM LINE

The S&P-500 came within a point of new all-time highs on Friday, before fading a bit late in the session. More assaults on the all-time high are likely, which could lead to a brief sprint higher on short covering. If marginal new all-time highs are touched, and without additional evidence that demand is surging, then a correction will likely follow to rejuvenate demand. In the absence of a “Big Chill” signal being completed, we shall treat episodes of weakness followed by SAMMY buy signals as trading opportunities.

tors should prepare for increasing volatility as the election looms larger on the horizon. And, the negative news cycle should be discounted dramatically until objective evidence vis-à-vis our proprietary supply and demand indicators arrives that a major top is likely forming. Until that happens we will position clients for a continuing bull trend, and episodes of weakness will likely be treated as candidates to put cash to work in stocks.

 

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.

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.

 

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