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The Burden Of Proof Is On The Bulls

Our weekly updates have been observing that objective measurements of supply and demand for stocks favored demand over supply, and that continues to be the case. The evening news continues to provide the ongoing bull trend in stocks with a “wall of worry” to climb, and so far the bull trend has demonstrated enough strength to keep the uptrend moving toward new all-time highs at S&P-500 2941. However, the lingering question of extending bull market, or a bear trap in the making remains an open one.


These updates have been monitoring a developing negative divergence in the tops of TATY, a strategic supply and demand indicator. The negative divergence, depicted by the down sloping aqua line on the first chart above, has been in place for weeks until Friday, when the downtrend was broken by the late week rally. New all-time highs, which seemed a long way away back on December 24, are now only marginally above Friday’s close. When a bull trend is moving higher it manifest itself by painting out bottoms in the TATY indicator in, or close to, the red zone surrounding the 140 level. As you can see on the chart the March price weakness did cause the indicator to dip into the red zone before it recovered to break the multi-week negative divergence. However, this minor price weakness was insufficient to push the premium/discount indicator into the acceptable discount range to confirm the corresponding SAMMY tactical buy signal.

Breaking the negative divergence bodes well for the rally, and suggests the prior all-time high at S&P-500 2941 may be assaulted sooner rather than later. However, as previously observed the rally has now reached into the danger zone, where the burden of proof is squarely upon the bulls to prove they are in charge of the stock market. On the contrary, should the bulls falter, then weeks of sideway congestion, or an outright decline may emerge to the surprise of many analysts. The break of the negative divergence is hard evidence that for the time being the advantage remains with the bulls. However, the failure to push the premium/discount indicator into the significant discount to value range suggests an assault on new all-time highs may run a bit short of the fuel needed to sustain a rally much above the all-time highs. Like the bear trap question, the extent of any new run to all-time highs remains an open question.


When the strategic indicator, TATY, is signaling that the big picture is displaying a favorable balance of demand over supply, then the tactical indicator, SAMMY, has been shown to be effective at locating low risk opportunities to put excess cash to work, or to enter intermediate term trades in an effort to increase overall performance with relatively low risks. SAMMY signals alone have been proving that they can locate low risk entries for long intermediate trades, but I prefer to use this indicator with confirming indicators like the premium/discount indicator in order to keep client risk exposure to a minimum. I’ve shown the last two SAMMY entry setups in the chart above and below, Above (without the price overlaid), and Below (with the price of SPXL overlaid and scaled on the left side).

The last two trade setups in SAMMY worked out fine with SPXL, but would have struggled to be as meaningful using the non-leveraged VOO ETF. I suspect that the last two declines in price, which were insufficient to push the premium/discount indicator into discount zone, accounts for the tepid move higher had VOO been employed instead of SPXL. This is why we shall use VOO with SAMMY only when the SAMMY setup is also confirmed with a corresponding move into the discount zone by the premium/discount indicator. Yes those kinds of trades will be fewer in number, but also result in client accounts being exposed to very low relative risks during intermediate trades.


The Bottom Line


The probability of an assault on new all-time highs increased this past week as the developing negative divergence in the TATY indicator was broken, signaling renewed demand for stocks. However, the burden of proof remains on the bulls, as the price enters an obvious danger zone marginally below the all-time S&P-500 high at 2941.


DISCLAIMER: Alpha Wealth Strategies, LLC (AWS), and/ or Optimist Capital LLC, does not guarantee the accuracy and completeness of this report, nor is any liability assumed for any loss that may result from reliance by any person upon such information. The information and opinions contained herein are subject to change without notice and are for general information only. The data used for this report is from sources deemed to be reliable, but is not guaranteed for accuracy. Past performance is not a guide or guarantee of future performance. Alpha Wealth Strategies, LLC, and/or Optimist Capital LLC, and any third-party data providers, shall not have any liability for any loss sustained by anyone who relied on this publication’s contents, which is provided “as is.” AWS and Optimist Capital LLC disclaim any and all express or implied warranties, including, but not limited to, any warranties of merchantability, suitability or fitness for a particular purpose or use. Our data and opinions may not be updated as views or information change. Using any graph, chart, formula or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such device. The information contained in this report may not be published, broadcast, re-written, or otherwise distributed without prior written consent from Alpha Wealth Strategies, LLC and/or Optimist Capital LLC.

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