THE BOTTOM LINE
Although it is not yet confirmed that a bear market began at the January 4-5th all-time high, the weight of the evidence suggests that the current 14.8% correction to date is insufficient to balance in “degree” the previous bull market dating to the March 23, 2020 low, the 1982 low, the 1973-4 low or earlier as some analysts date the beginning of the great bull market. If S&P-500 4102 ended the correction, then an attempt to assault new all-time highs should develop soon, but the probabilities are not favorable for such an event. What is more likely is continuing volatility accompanied by potentially violent price movements, both up and down, perhaps in like manner as the weeks long price action near the 2000 and 2007 major tops before those bear markets got down to the serious business of wealth destruction. However, the master of disguise, which is the stock market, will not likely be able to escape a diagnosis as the weight of the evidence continues to grow in favor of one outcome or another.
One last thing, I ran across a note this past week from a study from some years back, which observed that the stock market usually gets into trouble on average 29 months after the first raise in interest rates by the Fed. Obviously, with the current extremes being registered in inflation metrics this observation may be out of date. However, I also ran across the article shown in the following link by Jeffrey Gundlach, which is worth the time to read it: Gundlach “The stock market already peaked and will ‘roll over’ after a few more Fed rate hikes”
Volatility Echoes of the Past
Since the January 4-5th all-time high the S&P-500 (Screenshot-697) has painted out a series of lower highs and lower lows, which is the classic definition of a down trend. From the 4818 all-time high to the 4102 intraday low in February the downtrend managed a 14.8% decline, which qualifies it as a correction. Any further decline reaching 20% or more would turn the correction into a bear market according to an unofficial, but generally accepted definition.
These weekly updates have been admonishing clients for weeks to expect volatile and perhaps violent price movements, both up and down, and the first quarter has been a demonstration of why we have been repeating this warning, and slowly employing defense in client portfolios. The persistent rally going into the Friday quarterly expiration of futures and options on individual stocks and indexes now raises the question of did the correction end at S&P-500 4102, and new all-time highs are next, or did just a leg down in a developing bear market give way to only a counter-trend rally, which is destined to fail short of new all-time highs.
Here is what we know for sure. Bullish sentiment and valuations at the 4818 all-time high had achieved levels never experienced. A modest 14.8% correction in less than a calendar quarter does not qualify as sufficient to balance in “degree” the rally in the price even from the March 23, 2020 low, and certainly not the giant rally from the August 1982 low, or 1973-4 low, or even earlier as some analysts date the beginning of the great bull market. Then there is the matter of extreme bullish sentiment and valuation at the 4818 top, which has certainly not been balanced by a decline insufficient to generate any 90% down side days, or even modest bearish sentiment, nor strong enough to date to curb the “buy the dip” psychology. The Dow 1200 point intraday reversal comes to mind as evidence that the back of the dip buyers has not yet been broken. Conversion of the dip buyers into sellers of rallies will create the environment from which 90% downside days are likely to emerge.
If the sellers were in total control of the stock market, then S&P-500 4102 would have likely been breached on this initial move down, but enough dip buyers have showed up to at least delay that additional bear market evidence, or perhaps establish a bottom sufficient to support another assault on new all-time highs. The lack of any 90% upside days, or two consecutive 80% upside days suggests that an assault on new all-time highs is unlikely.
If the current rally is just another powerful rally in a developing bear market, then it is likely to expire perhaps as early as next week. If it lingers, then the 2000 (Screenshot-702 above) and 2007 (Screenshot-703 below) major tops may provide us with some guidance, because back then the price made volatile moves both up and down for weeks not much off the then all-time highs before getting down to the business of wealth destruction. However, the evidence that a bear market was under construction back then was essentially in like manner as the current evidence that something bigger than a 14.8% correction is likely under construction. And, why would that not be the case, since the current top is forming after the bull market registered extreme metrics never seen previously, which suggests it is likely more significant than the 2000 and 2007 major tops.
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 out of the caution zone at 130, but still oversold.
The Premium/Discount indicator in the lower panel did manage to rally into the green buy zone at minus three breaking the previous negative divergence. This suggests buyers perceived bargains available at discounted prices hence the late week rush to buy. This also suggests that the rally may linger past next week, but given the usual distortions and extreme volumes associated with the squaring of accounts on quarterly “triple witch” Fridays it is difficult to form an opinion about how long this likely counter-trend rally may last. At this point perhaps it is best to be alert for the development of any negative divergences in our trading indicators before looking for the rally to expire. If that happens sooner rather than later, then I’ll post an interim update.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format. Last week we noted that SAMMY had formed a positive divergence with the still at that time declining price. That positive divergence correctly foreshadowed the “triple witch” rally of this past week, as institutions squared their accounts going into the quarterly futures and options expiration. It remains to be seen if the rally can breach the down sloping magenta negative divergence line, but for now that level makes for a reasonable target for the rally to begin to struggle. SAMMY did manage to close above its long-term yellow support line, which suggests the rally may still have some gas left in the tank.
STERLING — A REPRESENTATIVE OF A NEW FAMILY OF SHORT TO INTERMEDIATE TERM TRADING INDICATORS UNDERGOING TESTING
STERLING is shown in the top panel with the S&P-500 eMini futures contract in the lower panel. STERLING continues to paint out both positive (green) and negative divergences (magenta) at bottoms and tops, respectively. STERLING also continues to paint out “island(s)” at tradable bottoms including another successful signal associated with the current rally. With more than two dozen STERLING candidates undergoing testing and most doing very well, then culling the candidates has become a real challenge.
Given their success to date, the next few days appear to be setting up for STERLING candidates to paint out a negative divergence, if the current rally is just a typical powerful, but destined to be short lived counter-trend rally in a developing bear market. As the dashed down sloping magenta lines show, STERLING has been helpful in identifying when tradable rallies are getting close to expiring.
Screenshots 697 (above) and 698 (below) are the S&P-500 eMini futures contract in daily and weekly candle chart format for additional information and perspective. The horizontal dashed magenta line is at the spike intraday low at approximately 4100, which was tested but not breached before the “triple witch” rally developed. Please note that even though multiple powerful rallies have developed since the 4818 all-time high, a series of lower highs and lower lows remain in place, which suggests the development of an ongoing correction, or new bear market is still a favorable probability. A close below 4100 would add additional evidence that a developing correction, or bear market began at the January 4-5th all-time high.
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