Last week’s update declared that in the absence of objective evidence to the contrary, we would approach the stock market as being in a continuing bull market. Both the strategic and tactical supply and demand indicators are generating numbers, which are consistent with the balance of forces favoring demand over supply. The S&P-500 and the NASDAQ have responded to this balance favoring demand by touching new all-time highs, even as the bull market in stocks continues to climb a “wall of worry”, and increasingly unreasonable historic valuations. Until there is a measurable change in the balance of supply and demand, I would expect this (creeping) rally to continue in fits and jerks.
TATY — A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown in the attachment above in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week at 156, a reading consistent with strong demand and weak supply.
TATY appears to be settling into rhythm of painting out bottoms in the red zone surrounding the 140 level. As long as this strategic indicator makes bottoms in, or near, the red zone during periods of price weakness, then history suggests that demand will remain sufficient to attempt assaults on new all-time highs (for example, see the March and May declines). A decline in the TATY indicator into the caution zone surrounding the 115-125 level would likely be the first hard evidence that the dynamics of the balance of supply and demand were changing enough toward supply to alert investors to be aware of the rising probability of the issuance of a “Big Chill” warning. Completion of a “Big Chill” warning would compel Alexander and I to consider taking defensive action to protect accumulated profits, and/or protect client portfolios from objective evidence of rising risks in the stock market.
The “Big Chill” warning has been in evidence before every major top, or major rebound top during bear markets, over the last several decades. So the odds favor TATY painting out its normal warning gymnastics again before the next major top. However, clients should be aware that navigating risks in the stock market is an exercise in the successful application of probabilities, as there is no certainty to be had in this business. TATY is the best indicator I’ve ever found during my three decades plus of searching for a major top warning indicator, but that does not guarantee the indicator will not fail at some point, as no indicator in this business of portfolio risk management has ever been perfect. However, as president Lincoln once said about trying to pass the 13th amendment: “I like our odds”. So in like manner, ditto for the odds of TATY calling the next major top. In the absence of objective supply and demand evidence to the contrary, we shall continue to treat the stock market as being in a bull trend.
SAMMY — A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above alone and below with the SPXL 3X S&P-500 ETF overlaid.
The SPXL three times leveraged S&P-500 ETF is only used for reference purposes. SAMMY has failed to be pushed far enough into discount to value territory to issue any new buy signals since MAY. However, SAMMY continues to confirm the MAY buy signals, and the price has responded by touching new all-time highs this past week.
Should the strategic indicators continue to signal a favorable big picture environment, and SAMMY flashes a new buy signal, then we will likely act on the new buy signal by moving excess cash into the market, even in the face of valuation concerns and the big “wall of worry”, which is all too evident in the news media. Why? The answer is the price is a result of the law of supply and demand, the only absolute in stock market. And, if our proprietary indicators say the balance is favorable, then we can undertake new purchases with a reasonable measure of confidence that the price will respond by going higher. It is far better to measure the balance of supply and demand than to attempt to assign cause and effect to events in the news media. The former is an exercise in reasonable odds, and the latter an exercise in futility.
So you find the previous sentence to be an incredible statement? How about this, you have a “magic” newspaper, which publishes next week’s news today, and next week there is a much anticipated economic number coming out, and now you have the number right from your magic newspaper. Well congratulations you have the number, but you still do not know how the markets may RESPOND to the number — if at all! For example, upon the announcement of the Trump victory the S&P-500 futures sold off dramatically in the overnight session, but not long after the NYSE opening the next morning the stock market began a rally, which is still in effect today. Horrific losses were likely incurred by those holding the short the futures positions sold during the night session, when the market rallied the next morning. So much for assigning cause and effect to the news.
THE BOTTOM LINE
Strategic and tactical indicators remain in conditions favoring demand for stocks over supply. Until this dynamic changes toward supply over demand, the odds will favor the continuation of the current (creeping) rally in stocks.
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