THE BOTTOM LINE
By historical standards the bears make a good case given the numerous market measurements at extreme levels never recorded before. However, the missing link in the bear case appears to be a lack of a low risk alternative to grossly overvalued and over loved stocks. This is a situation ripe for volatility, but not necessarily for a big correction, or new devastating bear market. In the absence of a TATY “Big Chill” warning, a breakdown in SAMMY, and confirmation from other Lowry Research and/or our own supply and demand indicators, we will continue to refrain from taking dramatic defensive action in client portfolios. This position is subject to change based on changing weight of the evidence.
The bears continue to press their case that overvaluation and bullish sentiment at levels never seen before must result in the imminent arrival of a correction, or new devastating bear market to match in like degree the historic extremes achieved by the great bull run. These weekly updates have mentioned some of the excesses achieved during this long bull run, but we have not come close to cataloging for clients the dozens of extremes achieved, which have never been seen before. So, the bears do have some solid metrics upon which to build their case.
However, at this point no low risk alternative to holding equities has emerged, and although there is now a dust up going on in the bond market based on comments by Fed Chairman Powell, the move higher in rates last week would appear inadequate to trigger a wholesale move out of overpriced equities into equally overpriced bonds. In fact, some bond traders can make investors a case that the bond market is more dangerous than the equity market.
Global liquidity remains high, and with all that cash looking for a home the pattern of would be corrections in the equity market have remained one of mild pullbacks quickly attracting motivated buyers. And, lacking market generated evidence like a TATY “Big Chill” warning to signal a break in the bull market “buy the dips” fever, the price remains not far from all-time highs. The stock market discounts the future, and at the moment the stock market does not appear to be discounting a huge move in interest rates, which would provide the bears with the missing link in their bear market outlook. However, if global markets take interest rates sharply higher over the protestations of the Fed to the contrary, then the bear case may become more critical. That is to say, a loss of confidence in the Fed’s ability to keep rates low may provide a catalyst for the bear case to loom as a greater probability.
There is one internationally famous bear, which has recently published his outlook that a bull trend dating back to the 1700s has just ended, and a great new bear market is upon us, which will likely begin with a crash sequence in October. This is the most bearish case out there at the moment, and if it is correct then a free fall in the price will be getting underway soon. The weeks long decay in a number of Lowry Research supply and demand indicators, and also the decay in some of our own metrics are suggesting a volatile seasonal period is likely.
However, at this point the creeping weakness we are monitoring with both Lowry Research, and our own indicators, simply are not yet confirming the big bear case, but are suggestive of rising volatility. Given the weight of the evidence, and the lack of a low risk alternative to equities, we will continue to delay wholesale defensive action in client portfolios. Client portfolios are already conservatively postured, so we may do some defense at the margins, if changing weight of the evidence compels it.
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 marginally below the red zone at 138.
TATY has a superb record of painting out “Big Chill” warnings prior to significant tops in bull trends, and rebound tops in big bear trends. Although the stock market has experienced a 90% downside day during the month of September, selling pressure to date has been inadequate to drive TATY down into the caution zone surrounding the 115-125 level, which would be the first step in a new “Big Chill” warning.
“Big Chill” warnings are market generated evidence that the absolute belief in the bull trend has been shaken, which in turn gives investors a reason to take profits to protect gains once a new rally gets underway. As long as investors have an absolute belief in the ongoing bull trend, then they will likely continue to provide a bid under every selloff attempt. It is only once that belief is shattered can a sustainable correction, or new bear market get underway.
Even though the price was weak in September, selling pressure has remained too tame at this point to push TATY into the caution zone, which means September’s volatility has failed so far to trigger even the first step in a new “Big Chill” warning. In the absence of a “Big Chill” warning, and even weaker Lowry Research indicators, it is difficult to move to an all out defensive position, which would be appropriate for the big bear case. This could change as the weight of the evidence changes, but for now a 4% price decline off the all-time high is for the stock market like you and me breathing in and out.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format. SAMMY is “betwixt and between” at the moment unable to move to new highs to confirm surging strength under the price, nor to decline below the dashed horizontal dashed yellow line to confirm growing weakness to power a budding correction, or newly minted bear market.
STERLING — A REPRESENTATIVE PROTOTYPE OF A NEW FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
The STERLING prototype shown above is just one of a couple dozen under testing, and may not be the eventual survivor. However, STERLING continues to paint out “island” bottoms as the price approaches a bottom, and strong negative divergences as rallies begin to run out of gas. This means STERLING will likely be an effective short to intermediate term indicator for both bottoms and tops, which is a near impossible mission given that the processes at work at tops and bottoms differ greatly. Negative divergences are shown by down sloping dashed lines, and positive movements in the price are shown as up sloping dashed lines.
As the bears became more strident as this past week wore on, please note that STERLING grew stronger, which foreshadowed the late Friday rally of almost 500 Dow points. STERLING may become a crucial tool in confirming the big bear case, or calling it into question. At the moment neither TATY, SAMMY or STERLING are signaling much love for the big bear case.
Please be safe!