THE BOTTOM LINE
The price of various equity indexes continues to oscillate with bouts of strength and weakness below the all-time high. Supply and demand indicators have weakened over the last several months, which has resulted in the current seasonal weakness. Potential exists for the price weakness to expand given the lack of objective evidence of a sustainable bottom. However, at this point in development there is little objective evidence, beyond over-valuation and overly bullish sentiment, to support the case for a devastating and destructive bear market.
The weight of the evidence does support the case for some seasonal weakness, but it is difficult to make the case for a market crash leading into a great bear market based on the current evidence. The weight of the evidence is subject to change as is our risk management asset allocation, especially if a low risk alternative to equities emerges. We continue to believe that a swift 200 basis point change in nominal interest rates would imply a game change situation in the stock market, and a severe impact upon funding our national growing deficit. Protestations to the contrary by Fed Chairman Powell, the markets control intermediate to longer term interest rates, and we may be entering the part of the cycle where excess global liquidity manifest itself in commodities and interest rates, which would then become stiff competition for global equity markets.
THE WEIGHT OF THE EVIDENCE
As has been said many times in these weekly updates major tops are a process, which often takes weeks to complete. The current price weakness did not appear just out of thin air, but is the result of weeks of decay in Lowry Research indicators, and many of our own. However, the spreading weakness in numerous supply and demand indicators has not yet caused TATY to decline into the caution zone surrounding the 115-125 level. This implies that seasonal weakness is at work, but not necessarily the beginning of a prolonged correction, or an early step in a new bear market.
An internationally famous bear on the stock market continues to predict an October crash sequence, which will usher in a bear market on a scale never before seen, as it will eventually correct the great bull run dating all the way back to the 1700s in England. He may prove to be right, as he has made bold predictions in the past, which have actually come true. So, his seemingly outlandish current outlook cannot necessarily be rejected out of hand. However, while Lowry Research indicators, as well as many of our own, are displaying some weakness, none are currently reflecting the level of weakness most respected analysts would consider as precursors to a crash.
I am growing suspicious that the current weakness suggesting some top building may be somewhat similar to the run up to the October 2000 major top. Screenshot-401 shows the S&P-500 in weekly candle chart format for 2000, where the first (higher) top was made in March, and the final (lower) top in October. In the intervening weeks the stock market marked time. If the famous big bear is right, then the price will soon begin to decline swiftly, and there will be significant changes in Lowry Research indicators, and our own. If not, and there is no immediate recovery to new all-time highs, then the remainder of 2021, and early 2022 may begin to resemble 2000.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in yellow with the S&P-500 shown in red and blue candle chart format. TATY has crawled back into the red zone at 140, but is still well below the strength of just a few weeks ago. The big observation about TATY is that the recent weakness in the price, and numerous indicators, has been insufficient to drive TATY into the caution zone surrounding the 115-125 level, which would set up the first step in a new “Big Chill” warning. In the absence of a “Big Chill” warning, it is difficult to make a case for more than seasonal weakness, and coincident volatility in the stock market. Obviously, if the weight of the evidence changes, then we will be compelled to change client risk exposure with it.
SAMMY —A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in Screenshot-399 in yellow with the S&P-500 overlaid in red and blue candle chart format. SAMMY remains “betwixt and between” just like last week, and unable to climb to a new high to demonstrate gathering strength, nor decline below the dashed yellow support line, which would indicate increasing weakness, which would tend to confirm an increasing probability that the price may accelerate lower. Neither condition currently exist, so SAMMY grades out as neutral.
STERLING — A PROTOTYPE REPRESENTING A NEW FAMILY OF SUPPLY AND DEMAND INDICATORS
STERLING is shown above with the upper panel with the S&P-500 eMini futures contract in the lower panel. The version of STERLING shown above is just one of a couple dozen currently being tested for their effectiveness at painting out “island” bottoms at, or near tradable price bottoms, and significant negative divergences as short to intermediate term rallies begin to run out of gas. In the version above I have drawn rectangles around the “island” indicator bottoms below the lower Bollinger Band. I have depicted positive divergences with up sloping dashed lines, and negative divergences with down sloping dashed lines.
The price declined most of this past week as STERLING rallied in a positive divergence. Although no “island” formed below the lower Bollinger Band, the growing positive divergence in STERLING, like a gravitational pull, eventually pulled the price higher by the end of the week. Washout bottoms, where would be sellers purge themselves out of the supply and demand equation, usually show up as “island” bottoms in STERLING. Positive divergences lacking an “island” below the lower Bollinger Band are still capable of foreshadowing a rally, but these rallies may lack the staying power of rallies following “island” bottoms in STERLING.
STERLING having just signaled a rally, which was confirmed by the price beginning to rally, suggests this potentially weak rally will likely continue until STERLING begins to negatively diverge with the rallying price. This implies that the bear case would improve, if the price fails to make a new all-time high before the STERLING family of prototypes roll over into negative divergences, and then descend below their middle Bollinger Band. Screenshot-402 shows the S&P-500 through Friday’s close with a Fibonacci grid overlaid. If the price rally is repelled in the zone above the .618 retracement level, say in the 4445 to 4475 zone, then the current weakness is likely to linger, perhaps like it did from March to October 2000. A rally above that level would imply the growing potential assault on new all-time highs.