THE BOTTOM LINE
Joe Biden is not the very popular FDR with a huge majority in the House and Senate, nor is he the tall imposing personal figure, and former powerful leader of the Senate in the person of LBJ, a man so driven that he threated to run over his long time friend and mentor, Senator Richard Russell of Georgia, in order to pass the Civil Rights Act of 1964. However, for reasons I do not fully understand, the stock market has formed the belief that with only a three vote majority in the House, and a zero vote majority in the Senate, that record additional stimulus is in the offing, an almost impossible accomplishment for more popular, and powerful political operators like FDR and LBJ. If the theory of a never ending liquidity driven bull market depends on near term passage of bills in Washington, then does the growing weakness in many supply and demand based indicators, Lowry Research and also our own, suggest the imminent failure of the ambitious spending agenda in Washington?
Regardless of Afghanistan, Washington, Beijing, the EU, or the politics in Asia or old Europe, the creeping weakness of the past many weeks appears to now be on the cusp of a tipping point toward increased volatility, and rising risks to investors. Consequently, we will now be changing more toward a defensive mode in client portfolios, as opposed to the maximization of gains.
Supply Growing
The stock market has been traversing a landscape littered with valuation and bullish extremes of an historic nature for weeks fueled by infusion after infusion of global liquidity, compliments of overly friendly central bankers. All this excessive liquidity has been seeking a home, and some of it has flowed into commodities, think the huge spike in lumber prices for example, which has now collapsed from its peak.
Related to the spike in lumber prices has been the phenomenal demand for housing, which in some areas, like here in Palm Beach, has resulted in bidding wars for desirable properties, and in other locations home sales over the internet without the buyers ever visiting the property, but motivated to act anyway because of the perception that the property was likely to attract a bidding war. None of this is a sign of prudent investing, on the contrary history teaches that these are some of the signs of a bubble on the cusp of bursting.
When I awakened from my recent successful back surgery, Franklin Roosevelt was not President with a vast Democratic majority in the Congress, nor was Lyndon Johnson, the tall Texan and much feared former leader of the Senate turned President due to the assignation of the young, and dynamic John F. Kennedy. So imposing and powerful of a personality was Lyndon Johnson that opponents often melted, when called into his presence, so much so that Johnson even threatened to run over his long time friend and mentor, the formidable Senator from Georgia, Richard Russell. If leadership is defined as leading opponents to where they do not want to go, then Johnson had that intangible quality, which incredibly led to the bipartisan passage of the Civil Rights Act of 1964.
The current occupant of 1600 Pennsylvania Avenue is neither FDR nor LBJ, but for reasons I do not fully understand, the markets have perceived Joe Biden will deliver even more stimulus with only a three vote majority in the House, and zero plus one for the Vice President in the Senate in case of a tie. This would likely be an impossible political lift for even FDR or LBJ, but the stock market has bought the notion of never ending stimulus, or has it?
Lowry Research has been tracking the continuous alternating overlapping of Buying Power and Selling Pressure in recent weeks, and after the close on Friday published a flash bulletin that the advantage of Selling Pressure over Buying Power has increased sharply enough to issue an intermediate term sell signal. This comes after weeks of decay in a number of factors often reviewed in these weekly updates, which have been confirming a slow, but spreading weakness in a number of supply and demand indicators. This does not necessarily mean additional assaults on new all-time highs are off the table in the absence of a “Big Chill” warning, but it does mean that the time for protecting accumulated gains from rising risks is upon us.
Given the historic nature of long topping processes is it possible that Lowry Buying Power may stage a resurgence to regain the superior position above Selling Pressure, yes that is possible, but the weight of the evidence has now made that a lower probability. So, we will now view rallies as opportunities to lower risks to portfolios given that volatility may tend to exaggerate routine pullbacks into corrections, and corrections into potentially a bear market here in the seasonally weakest part of the stock market calendar.
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 138, and below the red zone surrounding the 140 level.
In recent weeks TATY has been unable to confirm a “BIG Chill” warning by dipping into the caution zone surrounding the 115 level, nor a run away bull leg by approaching the blue zone surrounding the 160 level. Unless the current weakness in the price gives way to a spontaneous crash sequence, which we do not expect, then TATY is likely to yield more very valuable information before any pull back, or budding correction gets very far into development. A “Big Chill” warning would be probable, and a welcome sign and confirming warning for the Lowry intermediate sell signal, but is not always issued.
If there is a big correction, or budding bear market in the offing, then the likely path would be a big break in the price followed by a renewed assault attempt on new all-time highs during which the steps for a “Big Chill” warning would likely be completed. Here within one percent of the latest new all-time high, and lacking the completion of a “Big Chill” warning, I’m inclined to expect an increase in volatility in both directions until the indicators yield a clearer picture of the level of potential danger to equity investors.
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 has been so frustratingly consistent in its message as to be easily overlooked. Week after week of negative divergences shouting that the rally since the March 2020 low was weaker than the run up to the February 2020 high. SAMMY’s message has never changed, as it has warned that not all was well, as the price touched new all-time high after new all-time high. So, now with an sharp change being registered in Lowry Research Buying Power and Selling Pressure is SAMMY finally going to be vindicated? That remains to be seen, but the bottom line is that SAMMY is still negatively diverging, so we will take that as additional evidence, which tends to confirm the change in the Lowry Research outlook.
SAMMY has broken below the dashed green up sloping line for two weeks now, and a break below the longer term horizontal dashed yellow support line would be additional confirming evidence of weakening demand, and growing supply now apparent in the Lowry Research indicators. Obviously, the movements of all our indicators in the weeks ahead are becoming ever more important to the determination of rising, or falling risks in the stock market.
STERLING — A FAMILY OF PROTOTYPES UNDER GOING TESTING
STERLING is shown in daily format in the top panel, and the S&P-500 Emini futures price in the lower panel. The prototype shown is just one of a couple dozen variations currently under testing, and may not be the eventual survivor, but given the possibility of a significant top under development in the stock market, STERLING could not have a better candidate for a test period.
I do not normally post anything related to prototype indicators under development, because most of them fail to approach the reliability of the indicators I do publish. STERLING is a decades old attempt to combine both reliable top and bottom locating information into one universal indicator. This by definition should be impossible, because the processes which form tops and bottoms differ dramatically. However, with ever more derivative data, and ever more powerful computing power available in this information age, the quest has better prospects than when it began with that hapless futures trader decades ago.
In the sample shown above STERLING has been consistently been painting out “islands” at short term bottoms, and negatively diverging (magenta down sloping dashed lines) prior to short term tops. In the fast moving 50:1 leveraged world of futures trading a minute or two heads up can be a lot of money, and in this test sample STERLING is yielding sometimes a couple days. If this continues at a high statistical rate, then rolling down our client exposure to equities as demand continues to fade, and supply grows more dramatically, then STERLING’s potential as an analysis tool will grow more important. For now, we just want to give clients an update on what is constantly going on behind the scenes at Optimist Capital.
Please be safe!
