THE BOTTOM LINE
Lowry Research measures of supply and demand remain favorable, and some are improving. TATY has finally reached more normal operating levels, and tactical indicators like SAMMY, TATY LEIGHTON, CAROLINE LEIGHTON and STERLING have improved, and show some early signs of potential acceleration. Should these indicators continue to improve, and in the absence of the formation of negative divergences similar to the one which formed prior to the February 2020 all-time high, then the evidence of an improving balance of demand over supply would likely to result in assaults on new all-time highs.
However, should there fail to be follow through with these improving supply and demand metrics, then another decline in the price may be necessary to reinvigorate demand. The development of negative divergences in a series of indicators similar to the negative divergence at the February 2020 high, would imply the potential for something more serious than just a normal shallow pullback in an ongoing bull trend. Not all major tops are foreshadowed by the formation of a negative divergence in a series of indicators, but the formation of a negative divergence in this environment of historic excessive bullish sentiment, and historic over-valuation would be a warning that defensive measures may be necessary.
Up, Up and Away?
Investors appear to be discounting a future dominated by more trillions of dollars of debt driven stimulus causing the stock market to float higher upon excess liquidity seeking a home where it would be treated best. Recent reports have shown our national debt exceeding GDP for the first time since the financing of WWII with “War Bonds”.
After WWII many economists were forecasting a deep recession due to our debt exceeding GDP, but what followed was a lengthy period of “real prosperity” as pent up demand for housing and consumer goods drove the economy, after our soldiers returned home and started families (the baby boomers). And, although the world of finance is dominated by those which tend to vote Republican, even those so inclined know their history, which shows that the stock market tends to outperform during Democratic Administrations, a fact not lost on institutional money managers running prodigious amounts of money.
So, the confluence of massive liquidity, and a history of the stock market doing well during Democratic Administrations, has resulted in a nearly universally held belief that stocks must continue to rise, even in the face of historic levels of bullish sentiment, and equally historic over-valuation. And, it very well may, at least in the short term, as Lowry Research measures of supply and demand remain favorable, and in some aspects are improving, as are some of own measures of supply and demand.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in Snapshot-270 in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week marginally above the red zone at 145.
The rise in TATY off the March 2020 low has been painfully slow, which has cast a shadow on the viability of the rally, because of this atypical behavior. TATY normally sprints higher pulling the price higher with it after a major bottom, but the unprecedented uncertainty in the aftermath of the swiftest decline in history from an all-time high, as the COVID-19 pandemic emerged, seemed to be reflected in the behavior of this normally extremely reliable indicator at both tops and bottoms. However, TATY has now reached a more normal operating range, and what it is showing is the lack of a big negative divergence with the record setting price similar to the negative divergence it flashed just prior to the February 2020 high (down sloping magenta line). This implies TATY may potentially begin to oscillate with bottoms forming in, or near the red zone, and tops at, or near the blue zone at the 160 level.
Should TATY begin to form bottoms in, or near the red zone surrounding the 140 level, and tops at, or near the blue zone at the 160 level, then the implication would be that the rally could continue for weeks, or months, with even some potential for an acceleration higher. For example, please take a look at the last chart above, which shows TATY post the 2003 low with a green ellipse, as the price powered ever higher as TATY oscillated between the red zone and the 160 level. However, should TATY fail to maintain itself near the red zone, then another decline in the price may be necessary to reinvigorate demand, which may be triggered by any further increase in the new rising interest rate cycle.
SAMMY ET AL — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY, TATY LEIGHTON and CAROLINE LEIGHTON are shown above respectively in Screenshots 216, 217 and 218, and they all tell the same story. SAMMY, Screenshot-216, shows the negative divergence, which accompanied the February 2020 top as a down sloping magenta dashed line. SAMMY also shows that a larger negative divergence with the strength at the February high through Friday’s close with a dashed down sloping orange line. TATY LEIGHTON, Screenshot-217, and CAROLINE LEIGHTON, Screenshot-218, also show the negative divergence at the February high with a magenta down sloping dashed line. And, in like manner as SAMMY, neither have achieved the strength they displayed at the February 2020 high. However, recently this family of indicators have shown some tendency to begin to sprint higher, which in turn suggests some potential for the price to continue higher. STERLING is showing an even stronger break higher, but is not shown to avoid duplication of the same notion.
The stock market is logical some of the time, which misleads investors to assume it is logical all of the time. The truth is the stock market is emotionally driven all the time by perceptions, and beliefs about the future. Bullish sentiment and over-valuation at historic levels would imply a correction, or worse may be at hand. However, liquidity seeking a home where it is treated best is also at historic levels not seen in 75 years since the end of WWII. And, there is some potential for even more debt driven stimulus in the offing should the current Administration be successful in getting its agenda approved in the Congress, a heavy lift for sure. However, the odds of passage appear close enough to make for some drama in the weeks ahead. The recent improvement in TATY, SAMMY, TATY LEIGHTON, CAROLINE LEIGHTON and STERLING are suggesting the odds may be even better than conventional wisdom suggests.
The rally off the March 2020 low appears to have reached a critical point, where it may fail and require a decline to reinvigorate demand, or it may have reached a point of potential acceleration in anticipation of more massive stimulus being approved by the Congress. The latter would be the equivalent of pouring gasoline on an already raging three alarm fire.
Please stay safe!
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