The stock market has been inching higher in slow holiday trading touching new all-time highs in the process. However, as previously mentioned in these weekly updates, a number of key strategic and tactical supply and demand indicators have been negatively diverging with the price for some time now. What this means is the residual bid under the stock market remains strong enough to power the price to new all-time highs, but the bid continues to weaken as the price is inching higher. I suspect the price may hold up through the next two market days, and may even attempt new all-time highs as 2019 comes to an end, but the first days of 2020 may see some selling come into the market.
The stock market has experienced outsized gains during 2019, even in the face of what would have likely been too much disturbing news in a different era. Given the prodigious markup of equities year-to-date, it is likely investors are all too willing to wait another couple days before cashing out some of their profits, in order to avoid any tax consequences until next year. The negative divergence in a number of indicators, shown on the charts above as down sloping orange lines, suggests the first days of 2020 are likely setup for some profit taking. A stock market decline on profit taking would likely paint out an opportunity for us to put excess cash to work in a low risk circumstance, since the strategic big picture remains favorable for demand in the superior position to supply.
TATY — A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in the first chart in yellow with the S&P-500 overlaid in red and blue candle format. TATY finished the week at 151, down a bit from last week, but still above the important red zone surrounding the 140 level.
As long as TATY continues to paint out BOTTOMS in, or near, the red zone surrounding the 140 level, then the price is likely to continue to attempt assaults on new all-time highs. However, investors should be alert to the possibility that the post-holiday period may experience a price decline to re-invigorate demand. A mild decline would likely only drive TATY into, or marginally below, the red zone. A price decline strong enough to drive TATY into the caution zone surrounding the 115 level, would be an early warning that the dynamics of the supply and demand balance for stocks may be shifting in favor of supply over demand. Obviously, any post-2019 decline strong enough to register TATY numbers in the caution zone may result in defensive actions being considered in portfolios.
As my late friend and mentor, Paul Desmond, would sometimes remark: “Low volatility begets high volatility, and high volatility begets low volatility”. For the most part 2019 has seen an exceptionally low volatility market, as the price has done a week after week slow grind higher. Paul Desmond’s comment may experience more currency than usual given that 2020 is an election year, and it has been many weeks now since the last “global crisis”, so investors should be aware the clock may be ticking on increased volatility in the year ahead.
SAMMY — A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above alone, and below with the SPXL 3X leveraged S&P-500 ETF overlaid. The SPXL is for reference only.
SAMMY excels at identifying resurging demand after sellers have exhausted their propensity to sell. SAMMY is a wonderful tool for locating low risk entries during, and after, significant declines. SAMMY is shown for information only, since it is of little value during persistent rallies. However, investors should also be aware that SAMMY is negatively diverging with the price, as indicated by the down sloping orange line on the SAMMY chart. So in conclusion for this section, negative indicator divergences exists at both the strategic and tactical levels, which implies the potential for some post-holiday market weakness.
THE BOTTOM LINE
A number of key supply and demand indicators have developed negative divergences to the price of the S&P-500, which has continued to touch new all-time highs. We are suspicious that investors may want to claim some of their hard earned profit early in the new year, postponing taxes on their gains into 2020. The negative divergences, and the potential for profit taking early in 2020, may be a setup for a decline early in 2020. Unless objective evidence to the contrary were to arrive, we will treat any price decline early in 2020 as a low risk opportunity to put excess cash to work in equities. We have market tested tools for identifying low risk opportunities to be buyers of stock, so if our conditions are met vis-à-vis our proprietary indicators, then we will be buyers.
“Low volatility begets high volatility, and high volatility begets low volatility”, so investors should be aware that 2020 may experience a significant increase in market volatility relative to 2019.
All of us at Optimist Capital wish you a very Happy and Prosperous NEW YEAR!
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