THE BOTTOM LINE
The stock market, and a number of supply and demand indicators, appear to be on a collision course with confirmation of a continuing bull trend, or reactions and adjustments to an environment changing to evidence of inflation and pressure on labor costs due to what academics call full employment with potentially more stimulus on the way compliments of Uncle Sugar and the Congress.
Investors should respect the possibility that this struggle may become more intense as the calendar turns toward 2022, which may increase the potential for increased volatility, and eventually even the end of the current leg up off the March 2020 low. In any case, as bull trends mature the persistent small steps higher, and lower, but skewed in favor of higher tend to give way to swings with greater amplitude, as uncertainty causes increasing angst among investors. Investors should be aware that indicators may begin to imply the stock market is likely approaching a phase consistent with a maturing bull trend, and the attendant volatility often associated with it.
Rough Ride into Hurricane Season
Last week’s update admonished investors to expect assaults on new all-time highs, and it did not take long for that to happen as Monday’s open spiked to new highs. The update also asked investors to be aware that volatility was likely to increase, and immediately it did as a persistent decline began later on Monday, which accelerated in impulse fashion into a Wednesday afternoon bottom on a sharp increase in inflation related data in commodity prices, and fears that the Fed may be behind the curve with respect to rising interest rates. However, by the close on Friday a recovery rally had erased a substantial percentage of the Monday to Wednesday swoon.
Investors should expect more of the same, as the favorable seasonal in the stock market has ended, and the doldrums of the long dog days of summer loom on the horizon, as does the seasonal fragility typical of the fall looms not far behind. If one throws in a brewing civil war in one of the country’s major political parties, then a case can be made that a bumpy road ahead is more probable than smooth sailing, if you will forgive the mixed metaphors. Oh, and did I mention those pesky rising interest rates, which appear to be on the cusp of perhaps resuming their rise after a brief respite during which copper, ag commodities, energy, and the prices of building materials like lumber are soaring higher, some to all-time highs, as the labor market continues to tighten. The struggle to spiff the economy with more liquidity compliments of Uncle Sugar, and rising inflation and interest rates are a classic setup for rising volatility, and economic uncertainty. As previously mentioned in these weekly updates the stock market does not like uncertainty, inflation nor rising interest rates.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in Snapshot-275 in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week at 145, which is marginally above the red zone surrounding the 140 level.
TATY is now at an important inflection point vis-à-vis its long history. Should TATY begin to bottom in, or near the red zone, and form tops near the blue zone at the 160 level, then the market’s growing angst over the risks represented by rising inflation, and interest rates, will likely still be resolved in favor of demand for stocks over supply causing liquidity to continue to drive prices higher. On the contrary, should TATY commence the steps toward a new “Big Chill” warning by dipping into the caution zone surrounding the 115-125 level, and followed by a stalling out rally back toward the red zone surrounding the 140 level, then any uncertainty arising due to inflation, rising interest rates, or domestic or global uncertainties would likely be magnified in their impact on equity prices. Equity prices traditionally ignore the initial rise in interest rates seeing them as evidence of a strengthening economy, however that perception grows more negative as the rise in rates, and often in inflation, persists until a tipping point is reached.
TATY’s record of finding tipping points between the end of bull trends and the beginning of corrections, or bear markets is an enviable, but a less than perfect one. However, its record is better than any other method I’ve investigated over the decades. While a number of famous bears are looking for an immediate collapse in the stock market, TATY is implying that the process of this bull trend fading into a new significant correction with the potential of becoming a bear market, will likely still require weeks more for the steps required for a “Big Chill” warning to be completed. Can the big bears be right and a major correction, or bear market appear as if out of the blue? Well yes of course this is the stock market, and anything can happen as the market adjusts to rising uncertainty, but the odds are not favorable, and this is an odds game, and not an exercise in certainty.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in Screenshot-231 in yellow with the S&P-500 overlaid in red and blue candle chart format.
SAMMY spiked to a new high this past week, but then gave up its gains as the week progressed. However, even with the initial spike higher it still maintained its long negative divergence (down sloping dashed orange line), which has been in place post the March 2020 low. This negative divergence, and SAMMY’s failure to confirm TATY’s move to new highs, remains an aggravation and frustration, as it is an implied warning that although the price has enough demand behind it to touch new all-time highs, the net balance between demand and supply remains less powerful than that which existed at the February 2020 high. As we all know that situation was followed by the swiftest decline to down 20%, and eventually 38% in the history of the stock market. Like TATY, SAMMY is now at an inflection point, which may resolve this long standing negative divergence.
Please stay safe!
