THE BOTTOM LINE
For those paying careful attention, the weight of the evidence continues to mount that the bear market did not end on June 17th at S&P-500 3636 as hypothesized by some in the financial media. It is more likely that a countertrend bear market rally expired on August 16th at S&P-500 4325.28 and that a new leg down in the unfolding bear market, potentially of a very large but unknown “degree”, is now painting out lower lows and lower highs. There is support at S&P-500 3800, 3636 and 3200, but should these levels be violated, then investors will increasingly be at peril of the decline accelerating as more and more investors recognize the bear market did not expire at S&P-500 3636, but rather was just settling in for a potentially long siege.
As long as S&P-500 2190, the March 23, 2020 low is not violated, then we shall treat the bear market as a “normal” correction of the last leg up of the ongoing bull market from S&P-500 2190 to the 4818 all-time high.
THE BEAR IS BACK
After announcing the declaration of war on September 3rd, 1939, Prime Minister Neville Chamberlain appointed Winston Churchill First Lord of the Admiralty, a position Churchill held when the First World War broke out a quarter century earlier. Instantly the wireless flash went out to the Royal Navy, which was, and had long been, the most powerful navy in the world: “ Winston Is Back”!
In May 1940 Churchill became Prime Minister in what became known as Great Britain’s “Darkest Hour”, as the free nations of Europe were falling to Adolph Hitler and the Nazi scourge leaving Britain alone and surrounded. However, Churchill “mobilized the English language and sent it into battle” according to President John F. Kennedy quoting Edward R. Murrow of CBS News. By the grace of God, the courage of young pilots, some only in their teens flying R. J. Mitchell’s beautifully designed, highly effective, and highly adaptable Super Marine Spitfire fighters during the “Battle of Britain”, and the oratory of Winston Churchill the British did go on to victory, which Churchill described as “Our Finest Hour”!
While there has been no wireless flash to investors, the weight of the evidence continued to accumulate this past week that signals to those paying attention that the Bear is back! Churchill did not seek to sugar coat the dire situation prevailing as he became Prime Minister, but rather assured the British people that preparations were being set in motion, which would eventually gain victory over the Nazis. In like manner, we have been suspicious that a bear market, possibly of a very large “degree”, began at the January 4th all-time high at S&P-500 4818, which would eventually “correct” the historic excesses built up during the long bull run to the all-time high, excesses registered in extremes in many market metrics never previously experienced by global investors. Like Sir Winston, we have wasted no time in preparing to not only protect our clients from a potentially gathering global financial storm, but also to continue to grow your wealth. Recognition of a threat to one’s wealth is the necessary first step toward a proper response to the threat.
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 125 in the caution zone surrounding the 115-125 level.
Beginning in April TATY steadily climbed higher positively diverging (rising blue line) with the declining price and so did the Premium/Discount indicator in the lower panel. The price bottomed on June 17th and began to follow TATY higher finally peaking at the S&P-500 countertrend high at 4325.28 on August 16th during a new TATY “Big Chill” warning, the third successful in as many attempts. A series of lower lows and lower highs have formed since the expiration of the bear market rally, which implies an assault on 3800 and the low to date for the bear market at 3636 are probable during this new leg down. A breach of 3636 would suggest that investors are beginning to recognize the bear market may be just settling in and did not end on June 17th at 3636. Such an event would raise the odds of an acceleration in the decline as recognition of the rising danger to wealth may result in investors fleeing equities seeking safety.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in yellow with the S&P-500 eMini futures contract overlaid in red and green candle chart format. In like manner as TATY, this indicator positively diverged with the declining price beginning in April (dashed green up sloping line) and then confirmed TATY’s “Big Chill” warning as it stalled at its long-term resistance line at the August 16th countertrend rally high at S&P-500 4325.28. Until there are new positive divergences in both TATY and SAMMY, then the odds favor a continuing decline in the price. A SAMMY decline below its dashed yellow long term support line would likely raise the odds of some acceleration in the price decline.
STERLING — A REPRESENTATIVE OF A NEW FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS UNDERGOING TESTING
STERLING is shown above in candle chart format in the upper panel with the S&P-500 eMini futures contract in the lower. STERLING has been attempting to positively diverge with the declining price, but over the last couple days has been staggering around a bit. However, of the more than three dozen of these prototype candidates being tested most have developed clear positive divergences as the price touched an intraday low on Friday. This implies that the new leg down in the resumed bear market likely needs to relieve its current oversold condition before the decline continues to a possible “point of recognition”.
Screenshot-967, 968 (both above) and 969 (just below) are the S&P-500 cash and eMini futures updated through Friday’s close for your additional perspective and information about the progress of the bear market to date.
Screenshot-970 (above) has been posted several times previously and includes Fibonacci price targets generated from two different important lows, namely the March 23, 2020 low at approximately 2190 and the March 9, 2009 low at the biblical number of 666. The different projections share a common color coding representing the 25% retracement level in orange, the 38% level in red, the 50% level in yellow, and the 62% level in green. There is a confluence of levels at S&P-500 3800 and 3200 with the low to date for the bear market in between at 3636. So, these levels represent support zones until they are broken.
Screenshot-971 (above) is an expanded look at the same projections in Screenshot-970 with the Fibonacci projection off the March 2020 low at 2190 and the white dashed line estimate of how the bear may progress removed for clarity. The remaining Fibonacci projection and the horizontal support zones created during the long bull run to the all-time high at 4818 are moot unless S&P-500 2190 is violated on a closing basis. However, a violation of S&P-500 2190 would be, in our opinion, a dramatic confirmation of our suspicion that investors may be in the midst of something much more dangerous than a run of the mill bear market to correct excesses built up during the previous last leg up in the ongoing bull market.
The scale, or “degree” of the current bear, if it balances out the previous historic excesses registered in multiple market metrics of long standing, suggests a bear market orders of magnitude greater than “normal”. We are not fortune tellers or makers of predictions, we are risk managers, but it is just common sense that once in a lifetime excesses as the price drove toward its all-time high are not likely to be corrected by anything resembling a “normal” context. We hope clients never have to be exposed to a bear market of the potential “degree” implied by the excesses prevailing at the all-time high, but better you be briefed on that theoretical potential early than late, as opposed to trying to get you up to speed as unprecedented events would likely be happening and at potentially surprising speed suggesting economic, social, political and geopolitical chaos on a global scale.
And, yes I’ve also done some projections for if 666 were to be violated, but hopefully those will never have to be discussed in these updates.