THE RETURN OF OPTIMISM?

THE BOTTOM LINE

The financial media is awash with optimism that the bear market ended at S&P-500 3636 on June 24^th. However, history and the current weight of the evidence do not support the notion that the bear market is over. Indeed, the weight of the evidence is favorable toward the continuation of a potentially large “degree” bear market, which could morph into a potential threat to accumulated client wealth on a scale rarely experienced, if S&P-500 2190 is violated on a closing basis. So, until evidence to the contrary emerges, we shall continue to play defense in client portfolios. However, in the unlikely event objective market generated evidence emerges that favors a new emerging bull market, then we shall pivot toward offense.

THE RETURN OF OPTIMISM?

Here is a quote from the BOTTOM LINE of the June 19^th weekly update, which was titled “A LABORED STRUGGLE LOWER”: The popular stock indexes declined over four present this past week and touched new lows for the bear market to date while generating multiple 90% downside days. In the process of making new lows the stock market has become oversold and some key supply and demand indicators are now positively diverging with the declining price, which suggests some restraint upon any further decline during this leg down off the all-time high, and/or a soon to develop countertrend rally of unknown strength and duration. However, exhausted sellers are not sufficient alone to bring an end to a bear market. New bull markets require evidence of exhausted sellers usually in the form of a series of 90% downside days and evidence of strong and resurging demand. Lacking this evidence, we shall continue to treat the stock market as being in a bear market requiring ongoing defense in client portfolios. The stock market bottomed the next week on June 24^th and a rally “of unknown strength and duration” has emerged and is now approaching some important zones of resistance.

Bear markets are insidious masters of deceit constantly trapping victims with the hope that they are buying at bargain basement prices, which will soon yield a fat profit, when the reality is that when the real bargains eventually appear the would-be buyers will likely be too terrified and panicked to pull the trigger on their buy orders. Bear markets end in capitulation into panic and despair with prices in a free fall, which is a far different environment than the one at the June 24^th S&P-500 3636 low. The rally which has emerged off that low has so far followed the script for a bear market rally, which recently includes the return of optimism just as key resistance levels loom just ahead.

This past week the financial media was awash with pronouncements that the bear market was over and in some cases the pronouncements were giddy that all was well, even as the 2–10-year Treasury negative yield curve widened to 40 plus basis points, the most to date for this iteration of the spread, which is often the harbinger of a recession. Nor did the rising potential for the emergence a labor cost push inflation spiral due to the red-hot labor market driven by historic low unemployment get much play, a key factor in why the Volker Fed had such a difficult time in extinguishing inflation, which eventually caused the Volker Fed to push Treasury Bond yields into the high teens before that inflation spiral was broken by the resulting recession.

The notion that the bear market is over, and that all is right with the world is classic bear market psychology and behavior after the initial leg down in a new bear market, a phenomenon which has happened over and over down through the years. So, can all these (mostly young) financial analysts be right this time round by sounding the all clear? Why yes, they may be right, but for those of us with decades of experience intensely studying the markets would observe that history and the odds are not favorable for a new leg up in an ongoing bull market having begun at the June 24^th low.

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 a bit lower at 136 and remains short of the red zone surrounding the 140 level, even as the recovery price rally managed to touch a new high off the June 24^th low. TATY is currently playing odd man out by fading in strength relative to most supply and demand indicators, which are managing to touch new highs for the countertrend rally. This suggests the price is likely to have enough residual strength to levitate a bit higher with TATY probably lagging and eventually stalling in, or near the red zone surrounding the 140 level.

I suspect if TATY falters approaching the red zone, then other supply and demand indicators will likely begin to negatively diverge before TATY issues the next “Big Chill” warning. If this setup develops, then the Premium/Discount indicator in the lower TATY panel will also likely negatively diverge with the still rising price. We are not there yet, but these are things to be watching for as a “tell” that the bear trap is about to spring shut on the overly optimistic investors in the process.

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 shown in green and red candle chart format. SAMMY managed to exceed its long-term resistance dashed horizontal line before fading a bit late in the week. This suggests the price rally is not yet complete but is likely to begin to labor and struggle higher toward the next Fibonacci target, which is the 50% level. SAMMY is implying the rally is likely to loiter several more days, in like manner as it did back in the fall, before the rally is in any danger of expiring. We are now watching this indicator for the appearance of a developing negative divergence with the rising price.

STERLING   —   A PROTOTYPE REPRESENTATIVE OF A NEW FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS UNDERGOING TESTING

STERLING is shown above in green and red candle chart format with the S&P-500 eMini futures contract shown in the lower panel. STERLING has a history of negatively diverging with the price at opportune price levels at which to exit profitable long trades. At this point STERLING appears to be on the cusp of beginning to develop a negative divergence with the rising price but has work to do before any significant negative divergence will be in place. A 3-to-5 day or longer, negative divergence would be significant this long and deep into the rally off the June 24^th low. For now, it is wait and monitor for the entire supply and demand indicator cohort.

Screenshot-931 (above) shows the S&P-500 eMini futures contract laboring at the purple lower resistance line but with possibly enough residual strength to manage a challenge of its upper dashed horizontal red resistance line generated when previous support was broken and became resistance, a time-tested notion in chart analysis. I suspect the upper dashed horizontal red resistance line target may be challenged coincidental with numerous supply and demand indicators negatively diverging. This would likely be a prologue to the next leg down in the ongoing bear market should the setup develop.

Screenshot-932 (above) shows the progress of the S&P-500 since the June 24^th bottom relative to Fibonacci targets for the rebound rally. The next target is shown in yellow at the 50% level at 4227 and given the lack of negative divergences that level is likely to come into play, as will possibly the 62% level at 4366, if negative divergences are slow to develop.

Screenshot-933 (above) updates a chart shown numerous times previously, which shows Fibonacci targets based on two different lows, the March 9, 2009 low at S&P-500 666 and the March 23, 2020 low at approximately 2190. The chart also shows support levels created during the long rally into the S&P-500 4818 all-time high as blue horizontal rectangles. The color coding for the respective Fibonacci retracement levels is the same namely orange 25%, red 38%, yellow 50% and green 62%. An eventual return to the bear decline following the expiration of the bear rally is shown as roughly drawn in dashed white lines.

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