Russian Bear Behavior
Russian Bear Behavior

Russian Bear Behavior


The stock market in its role as a master of disguise is being reluctant to yield a comforting confirmation that the great bull market expired on January 4th at S&P-500 4818. On the contrary, our key supply and demand indicators have presented a dichotomy where both positive and negative divergences with the price are being successful virtually at the same time. Until one of these divergences is definitively violated, or other definitive evidence appears, then a comforting confirmation that the great bull stock market expired at S&P-500 4818 may remain elusive.


Russian Bear Behavior

In the wee hours of Thursday February 23rd, the Russian Federation began to invade Ukraine, the first step in fulfilling Mr. Putin’s dream of re-establishing the former Soviet Union. The school yard bully does not stop being a bully until someone gives him a bloody nose, and neither will Mr. Putin, who is a fascists autocrat and not the leftist communist he is often mistaken for in the West.

Having tasted the intoxicating elixir of conquest in the Crimea and Ukraine, Mr. Putin is now a motivated man on a mission, and will not likely be stopped short a military conflict with a more powerful adversary(s) than Ukraine. At least that is what history suggests in the most recent example of a previous leader intent on re-establishing a nation to glory on the world stage after a humiliating loss; the Sudetenland, then Austria, then Czechoslovakia, and then on September 1, 1939, the invasion of Poland comes to mind, as a fascist autocrat of a former generation became ever more embolden as the great powers of the time did nothing.

While Russia is the largest country on the globe by land mass, 11 time zones wide, it’s GDP is only a fraction of California’s and is dependent almost completely on oil and gas revenue. NATO eventually wore down Soviet Russia’s economy resulting in the collapse of the former Soviet Union in 1989, as dramatically symbolized by the ad hoc concert in the Berlin Opera House of Beethoven’s Ninth Symphony conducted by Leonard Bernstein as the Wall was coming down outside. Ironically, the orchestra included some members from the Kirov, alas those heady days are now yielding to the harsh reality of another powerful autocrat invading his neighbor daring the free world to challenge him.

So, the NATO allies have decided to run their old Soviet playbook again in the hope an autocrat seeking a place in history will abandon his longtime dream. History and Mr. Putin’s personality suggests the odds are not good that he will. And, unfortunately the Chinese are watching carefully while they contemplate mischief in the South China Sea and annexing Taiwan, which we have a treaty obligation to protect.

Initially the stock market declined sharply after the opening bell on Thursday, but then began to rally after bottoming at approximately 4120, one hundred S&P-500 points below the key January 24th spike low at 4220, and by the close was up on the day. The rally continued Friday with the Dow closing up over 800 points on the day. Say what, the largest armed conflict in Europe since WWII breaks out and the stock market rallies?  In the runup to the 1990 Gulf War the stock market was weak but rallied once the invasion began. So, there is a precedent for the market selling the rumor of war and buying on the outbreak of war.

In the 1990 Gulf War there was a consensus that the war would be won by the Allies in short order, which it was in a matter of hours. In the current Ukrainian case, the consensus is the Russian Federation will overcome the Ukrainian resistance in a few days, in which case investors are betting the great bull stock market will continue with the removal of uncertainty. They may be right, but the weeks upon weeks of the erosion of the foundation of the bull market remains, as does the long list of historic excesses referenced often in these weekly updates. And the outbreak of war has not caused the Fed and other central banks to change their plans to raise interest rates several times in the weeks ahead, which no doubt will add to the increasingly volatile and fragile state of the of the stock market.

These weekly updates have warned over and over that volatility would continue and investors should prepare for swift and potentially violent price movements both up and down. This past week the stock market put on an exhibition of what we have been preparing clients and investors to expect. If the great bull market expired on January 4th at S&P-500 4818, then we expect volatility to continue, and perhaps increase as bear market rallies are often swift and powerful, but alas tend to be short. During bear markets investors are prone to repeatedly mistake powerful bear rallies as the start of a new bull market, and then buy into the rally only to be trapped when the bear market resumes usually with a vengeance. This is a part of the bear market process, which is so efficient at creating rapid wealth destruction.



TATY is shown above in Snapshot-322 in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week at 127 only marginally above the caution zone surrounding the 115-125 level despite the prodigious rallies off the S&P-500 reaction low at 4120. There has been a strange development in TATY, which is both the negative divergence shown by the down sloping magenta line and the positive divergence shown as green up sloping green lines are working at the same time. This is something I’ve not seen before.

The magenta down sloping negative divergence, which dates back to August did warn us the all-time high touching price was vulnerable, and the price has confirmed and broken down. In like manner, the up sloping green positive divergence lines have warned that the swift and violent spikes lower in the price may not have enough force behind them to generate the expected follow-on decline, and this too has come to pass. In terms of TATY the November modest price decline had more force behind it than the January 24th spike lower, and the January 24th spike lower had more force behind it than the decline leading to the 4120 low this past week. Put another way, TATY has been stair stepping higher as the price has been experiencing spikes lower. Ditto for the Premium/Discount indicator in the lower panel, which is now approaching the green buy zone at minus three.

The TATY conundrum will be resolved, if TATY can break above the down sloping magenta negative divergence line suggesting the correction has ended. On the contrary, a TATY decline back below the series of up sloping positive divergence lines would suggest the great bull market expired at the January 4th 4818 all-time high. A TATY decline back below the green positive divergence lines would likely result in even higher levels of volatility and raise the probability of a 90% downside day(s) and potentially a crash sequence. A breakout above the magenta down sloping negative divergence line would appear to be a heavy lift, but it cannot be ruled out given the series of higher lows being painted out. At this point the odds still favor lower lows in the price given the Lowry Research sell signal, the Dow Theory sell signal, interest rates trending higher, the previously noted historic extremes, and the VIX volatility index spiking into the thirties.



SAMMY is shown above and approached its dashed yellow long-term support line from below this past week. Everything said about TATY in the previous section can be said about SAMMY, as its dashed magenta down sloping negative divergence line is converging with its dashed green up sloping positive divergence line. This is a phenomenon I’ve not seen before and suggests one of these divergence lines must be broken before we may know if S&P-500 4818 was the top for the great bull market, or just the end of a leg up in the continuing bull market. The odds favor the former, but in its role as a master of disguise the stock market is keeping us attentive without a comforting confirmation of its intention.

TATY and SAMMY caught the top to date at S&P-500 4818 with their negative divergences but are now warning that the decline to date may only be a correction to re-invigorate demand before another leg up in an ongoing bull market given the obvious series of higher lows being painted out on both indicators. The odds favor the bears, but the bulls are putting up a fight.



STERLING is shown in the upper panel with the S&P-500 eMini futures contract in the lower. This family of indicators do a good job of painting out “island(s)” below the lower Bollinger Band as tradable bottoms are developing and negative divergences at short to intermediate tops. Positive divergences are shown in green and negative in magenta. The green positive line was breached briefly on Thursday’s decline but finished still positive by the close as the price recovered. However, the Bollinger Bands have been narrowing and STERLING is now approaching the upper band, which suggests that the prodigious rally off the 4120 S&P-500 low may be on the cusp of laboring higher.

Either STERLING will develop enough strength to widen the Bollinger Bands as it continues to rally, or both the indicator and the price will decelerate in their respective rallies. The latter would suggest that the odds still favor the bear case. If the STERLING rally lingers, then we will be watching carefully for the development of a negative divergence, which would likely warn that the powerful bounce off 4120 was waning and in danger of rolling back over into a decline.

S&P 500 Daily
S&P 500 Weekly

S&P-500 are shown above in daily and weekly charts, in candle chart format through Friday’s close for perspective and your additional information. I’ve left the crude drawing in white dashed lines to represent what a potential crash sequence may look like. Please remember that this is just one possible outcome among many and is included to illustrate how the consolidations in the price on the way up, horizontal blue boxes, may become Fibonacci targets on the way back down, if the bull market expired at S&P-500 4818.


One last thing, major tops tend to spread out over time and sometimes when the last tick in a bull trend is in it can still take months before the bear market really gets in gear lower like the 2000 top where top tick in the price was in March, but the roll over did not really begin until September (Snapshot-308 includes TATY in yellow). At other times when the last tick is in the downside action begins almost immediately, September 3rd, 1929, comes to mind (chart not shown).


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