CLIENT AND RESEARCH CUSTOMER STOCK MARKET UPDATE FOR THE WEEK ENDING MAY 3, 2019
Early this past week the stock market touched a new all-time high, and then closed down and on the low of the day a behavior, which completely “engulfed” the price action of the previous day. In a discipline I do not use in my analysis, but is followed by many other analysts, this kind of market behavior is believed to signal weakness, and is often thought of as a harbinger of a short to intermediate decline. I issued an interim update taking note of this event, but warned that more information would be required before taking any defensive action, and I warned that I had long held issues with price only type analysis. Some marginal weakness did occur, but was quickly reversed by Friday. The so far fleeting weakness was enough to drive tactical indicators into marginal oversold zones, and some marginal discounts did appear in some related premium/discount indicators, which triggered a SAMMY tactical buy signal when evidence of resurgent demand appeared on Friday.
TATY — A REPRESENATIVE OF A FAMILY OF STRATEGIC BIG PICTURE SUPPLY AND DEMAND INDICATORS
TATY declined intraday only to 146 during this past week’s short bout of weakness, which is well above the red zone. TATY continues to signal that demand remains in a favorable position to supply, which implies there will likely be more assaults on new all-time highs in the days, and possibly weeks ahead. This indicator cannot tell us if at some point short sellers will be forced to cover their losing positions, or if under-invested money managers cannot stand the pain of not being fully invested and begin to buy in size adding demand to the rally at the margins. Such an event could result in the conditions being present for a stampede higher, but please note this observation is a recognition of conditions prevailing at the moment, and most certainly is not a prediction. I only measure strength, or weakness, in supply and demand in the market, but always leave making predictions to those, which believe they have that talent.
The previous paragraph made the case that the conditions for a sprint higher maybe coming into place. On the contrary, a prudent investor would also be aware that the stock market is not cheap by historical standards, and recently there have been some creeping evidence of buyers fatigue. So the big picture remains favorable, but we do not yet know whether the eventual expiration of this leg higher will come as part of a buying climax as investors panic into stocks, or if like old age buyers fatigue overcomes demand as supply rises.
TATY is shown in yellow above with the S&P-500 overlaid in red and blue weekly candle chart format.
SAMMY — A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in the by itself, and below with the 3X leveraged SPXL exchange traded fund (ETF) overlaid.
The marginal decline ended almost before it began, but it did force SAMMY to go through the required gymnastics to issue a tactical buy signal. The new vertical blue line on the attached chart shows where SAMMY, and the market, bottomed. The evidence of resurgent demand following immediately in the next bar confirmed that a short to intermediate term bottom had likely formed. While I never like buying close to new all-time highs, SAMMY is suggesting that all, or most, would be sellers have been exhausted for the moment, as the sellers caused SAMMY to paint out the “body” of its candle bar below the lower Bollinger Band, which is indicative of an exhaustion zone. And, then several premium/discount indicators (not shown) made marginal excursions into their discount zones. Given the potential for the development of a short covering type event, I am going to add some excess cash to our VOO and QQQ holdings on any weakness, which holds above this past week’s low. However, I am viewing this as a potential buy to soak up some excess cash as just a trade to potentially enhance overall performance, and not as a long term core investment.
I do not want to miss out on a short covering type sprint higher if it occurs, and if it does not then I’m willing to cash out with a relatively modest profit, or marginal loss if conditions change toward the adverse. I do not expect a loss given the accuracy of our proprietary indicators, but one must take into account that this close to new all-time highs volatility could spike at any time, even though the odds are significantly favorable for more rally. Investing is all about probabilities and not certainty.
THE BOTTOM LINE
The budding weakness of this past week was over almost as soon as it began. The issuance by SAMMY of a new tactical buy signal sets up yet another potential assault on new all-time highs. It also keeps alive the potential for a short covering, under-invested, type sprint higher, as a scramble to get invested may add demand at the margins to ignite an acceleration higher. Thankfully we have been following our own advice, and most of our clients have been, and remain, appropriately invested in equities, so this new buy signal will be primarily to add excess cash to existing holdings in an effort to increase overall performance by way of applying our tactical indicators to maximum advantage.
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