THE BOTTOM LINE
Conditions appear to be coming into alignment for a resolution of the question of peaking aged bull trend, or new strong and vigorous bull market, perhaps by sometime in the first half of 2021. A return to a more normal political, economic and medical environment, along with some Lowry Research metrics would appear to favor a continuing bull trend in 2021. However, stock market valuations above those prevailing at tops preceding the 1929-1932 crash and bear market, the 2000-2003, and 2007-2009 tops and bear markets, and record or near record bullish sentiment since 1987, imply some conditions exists for a correction with the potential of turning into something even more damaging to client wealth.
The days ahead should provide us with more clarity about how the manage potential market risks to client portfolios, as the price is likely to attempt to assault new all-time highs. It will be important to the risk management analysis, if new all-time highs are confirmed by a series of supply and demand indicators.
New Normal?
As the stock market approaches the end of the event filled year of 2020, it would appear a number of uncertainties are beginning to fade. The election with no end has completed another chapter in the on going saga with Friday’s ruling that the Texas case seeking to overturn the election results in four key states had “no standing”, and would not be heard by the Supreme Court. The Electoral College meets next week, and then the final act of the election drama of 2020 will be resolved with the Georgia Senate runoff on January 5th. And, so far foreign would be bad actors have not created any serious mischief during this chaotic and bizarre lame duck session. If one factors in the approval, and now distribution of an effective COVID vaccine, then things appear to be on the glide path back to something resembling “normal”.
With all this good news about a return to normal, the financial news is full of prognostications that 2021 will not just be the continuation of the bull market, but a great year for investors. It may be, but the stock market does not respond to what is known, but rather to what may be in its role as discounter of the future, a role in which surprises and sudden uncertainties can cause a disproportionate impact on the price. A quick check of the current balance of supply and demand reveals what the stock market needs to do to earn its stripes as a newly minted bull market from the March 23 low, or throw off objective signs of exhaustion in perhaps a last leg up in an aged bull trend. Obviously, the difference in the two potentials could be some serious gain, or loss, in client portfolios. So let us take a look at what the stock market is telling us about itself.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown in Snapshot-384 in yellow with the S&P-500 overlaid in red and blue candle chart format.
TATY finished the week at 130 after briefly moving into the red zone surrounding the 140 level. TATY previously dipped into the caution zone surrounding the 115-125 level, and has now finally managed to reach the red zone after lagging the rally in the price since the March 23 low. This atypical and unprecedented behavior has been an aggravation ever since the record setting plunge in the price to down 38% in just 27 days beginning with the February high. TATY has a long history of first positively diverging with the declining price as bear legs are ending, and then pulling the price higher as TATY leads the recovery post a bear leg bottom. So 2020 has borne witness to an outlier event with regard to this key indicator, which begs the question has TATY now returned to normal behavior, and the ability to be a reliable warning of rising risks, as the price approaches intermediate and/or significant tops? It would appear a test is now at hand.
After the recent excursion into the caution zone surrounding the 115-125 level, a stalling out in the red zone would complete a “Big Chill” warning, which have in the past foreshadowed significant changes in trend from up to down in the stock market. At this point TATY has probed the red zone just once, and has now been turned back. This is a necessary condition to trigger a “Big Chill” warning, but probably not sufficient, as usually the red zone is probed more than once before the price becomes exhausted, and then the balance of supply and demand tips in favor of supply. Given the short term buy signal now trying to develop in the SAMMY tactical supply and demand indicator, it is very likely the red zone will be probed some more before anything definitive arrives in the mix. However, if a buy signal does develop with SAMMY, then prudence would dictate some profit taking as TATY would likely probe the red zone as a result of the buy signal.
So here is what to look for as the calendar turns toward 2021. If this is the last leg up in the aged bull market, then TATY will likely stall out in, or near, the red zone surrounding the 140 level, and then begin to roll over into a decline. If a new strong and vigorous bull market began at the March 23 low, then TATY will find a way to begin to levitate through the red zone toward the blue zone surrounding the 160 level. As time passes TATY will then likely begin to paint out bottoms in, or near, the red zone and tops in, or near, the blue zone surrounding the 160 level. Take a look at the green ellipse on the TATY Trend chart above for an example of how TATY would confirm a continuing strong and youthful bull trend once it has become well established. If we see this develop, then a fully invested asset allocation would be justified. The current status of a number of Lowry Research supply and demand metrics suggests demand remains in the favorable position to supply, and demand is expanding as supply remains stubbornly higher than optimal.
TATY has finally returned to the red zone, and now we need to monitor where it begins to paint out bottoms and tops. The higher the better for the new bull market case, and a stalling out and failure to maintain the red zone level would suggest at least a correction in the offing, and perhaps a change in trend from aging bull trend to developing bear market. The outcome remains uncertain at the moment, but resolution seems to favor the first half of 2021.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown in Screenshot-187 in daily format, and in Screenshot-186 in weekly format.
SAMMY recently broke above its resistance represented by the horizontal magenta line on the chart, but has now turned back down toward the line. If the price continues to rally and SAMMY lags behind, then a negative divergence will likely develop between the tactical indicator and the rallying price. If the price makes a new all-time high and SAMMY cannot rally above its own recent high, then I will be inclined to harvest some profits, because SAMMY may be in the process of signaling the expiration of the current leg up in what would then likely be an aged bull trend. Yes just when the news would be favorable about the potential return to normal, and bullish sentiment indicators at, or near record highs, the price could throw most investors a curve ball. As a mentor cautioned me decades ago: “Careful how you embrace the stock market, because she is indeed a fickle and cruel mistress”! Conditions may be moving toward that observation becoming a reality again.
Screenshot-186 shows SAMMY in weekly format, and still shows the negative divergence (down sloping dashed magenta line), which developed prior to the February top. There was some evidence on Friday that several tactical indicators were positioning to turn up signaling a rally perhaps sometime next week. We are now watching carefully for a rally back to new highs not confirmed by a new high in SAMMY. So if TATY stalls in the red zone, and SAMMY stalls below its recent high, and the price manages a new all-time high, then the new high will be unconfirmed, and at peril of rolling over into at least a potential correction to reinvigorate demand, or possibly the early stage of a change in trend at a larger degree.
Why the observation about the potential for a change in trend at a larger degree? Please take a careful look again at Screenshot-186, the weekly chart of SAMMY with the S&P-500 overlaid. I have not drawn in the yawning negative divergence between the February price high and the current position of SAMMY as of Friday’s close, but it is obvious that the recent new all-time price high is not even close to being confirmed by the SAMMY indicator. While we are looking for some short term weakness to reinvigorate demand, an outlook confirmed by some Lowry Research metrics as well, the huge negative divergence between the current price and SAMMY implies the potential at least for a run of the mill correction to turn into something much more significant. Prudence would require some trimming of profits, if the conditions just outlined come to pass.
Happy Holidays, and please stay safe!
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