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    A Different Kind of Debt Threat

    With Market volatility reaching an all-time, I wanted to take a moment to discuss before we get into Greg’s weekly. Every wild market is slightly different, but the ultimate market moves of supply and demand are consistent throughout history. The investments we all hold are those that we strongly believe can and will ride us out of the rough times. You will see periodic and strategic buys, but again we have been preparing for this a long time and held a lot on the side for the potential of a downturn. This may very well turn into one of the greatest modern buying opportunities.

    Many have asked why I prefer dividend payers to growth, there are two simple reasons, as many of you know I come from a long fixed income (bond) background, that has always driven me to prefer an investment that gives back to you. Secondly Companies that pay a healthy dividend do so because their balance sheets are strong and they know they could pay this into the foreseeable future. Growth on the other hand means the company is holding every bit of profit (if they have any at all) to grow. The inherent risk in that is: one there is no cushion (dividends create a few percentage point cushions for the investors) and two if we are in a no growth environment the only way they can go is down. When markets like we are seeing now happen, there is a flight to the strong dividend payers as they are considered safer, a benefit to us that will only grow as the market turns around.

    Of final note, I have always said we are never asleep at the switch and we are in the risk control business. I want to reiterate both of those, we are in control we have a steady hand and this is not the first major pullback we have been through. Finally we are here, you can reach me directly, you can reach Greg, Ada, Ian or Bianca as well. If you have questions if you have worries please ask, knowledge is always comforting.


    Alexander R. Cooke

    Managing Director


    The Coronavirus is a very serious matter, as is any disease with deadly consequences, no matter the low probability of those contracting it actually dying from it, unless you are over age 65, or otherwise in vulnerable health. And, this Pandemic likely has a short dated expiration due to the suspicion among many in the medical community that warmer weather may cause it to diminish like other strains of the virus, and various flu varieties. So why the panic on Wall Street, which has now seen the decline reach percentages off the recent all-time highs sufficient to bring the decline into official bear market territory of 20% or more off the highs, and in record time.

    The likely correct answer is it is not the Coronavirus, but the heretofore hidden weaknesses in the global economy the Coronavirus may uncover into public view. Chief among theses weaknesses, which have been obscured by a raging bull stock market, is the corporate and government debt binge of recent years. While this rampant problem deserves many paragraphs in this update, this link

    will take you to a well written description of the corporate and government debt bomb, and what may trigger it. The obvious reasons for stock market movements, in the current case Coronavirus, are often not the real reasons. The Coronavirus may become simply the catalyst, which then triggers the more dangerous to the financial system debt bomb crisis.

    The first chart above shows the S&P-500 cash index beginning at the March 2009 low through Friday’s close with an uptrend line drawn through the bottoms in 2011, 2016 and the touch of the uptrend line this past Thursday. Sharp eyed investors will notice that although the panic like decline has touched 20% down off the all-time highs made in February, at this point the uptrend, which began in March of 2009, remains intact. The decline reversed after touching the uptrend line, and the Dow rallied nearly 2000 points. Unfortunately, veteran readers of these weekly updates, will also notice that the premium/discount indicator in the lower panel of the chart is still in hard down mode. This is not a favorable development for the duration of the bounce, which began late Friday afternoon. In the Strategic and Tactical sections which follow, I will lay out the most probable way this bear market will likely develop. However, while bull markets follow one basic form of higher highs and higher lows, bear markets can take more than a dozen different forms. So, the discussion to follow will deal with only the most basic generic form, which in bear markets can replicate itself in a variety of ways.


    TATY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format.

    TATY finished the week at 68. TATY is not bounded on the upside, nor on the downside side, and it can go negative. However, a reading of 68 is very oversold for this indicator, and it is currently accurately reflecting the panic selling, which existed for most of the past week. At this point there is no objective evidence of exhausted sellers, which casts a shadow of the longevity of the bounce, which began late Friday. I am very suspicious that if the bounce fails, which the current evidence available suggests it may, a follow on breach of the rising uptrend line shown in the first chart above, would in short order bring into play the December 24, 2018 low, around 2345 basis the S&P-500. The Friday bounce off the rising uptrend line from 2009 is a positive, but in the absence of a series of supply and demand indicators achieving positive divergences several days in advance, calls into question the notion that a quick and nasty correction turned bear market has already completed its course. As an aside, the current occupant of the White House took over on January 20, 2017 with the S&P-500 trading at 2266 and change.

    If the bounce, which began Friday afternoon, fails and then takes out the rising uptrend line from 2009, what is next? Bear markets tend to move both up and down with great volatility, and/or speed in terms of Dow, or S&P-500, points per day. And, bear markets tend to find support at previously important price levels. Should the uptrend line in the first chart above be breached, then where is this leg down in the new bear market likely to experience a substantial, and potentially tradable reversal? The most likely candidate is the December 24, 2018 low at 2345 basis the S&P-500. Once there is evidence of exhausted sellers, and then evidence of re-surging demand, we will be buyers in anticipation of a tradable rally, which is likely to retrace, or recover, a very substantial percentage of the decline. The most probable retracement levels are 38%, 50% or 62%. A retracement greater than 62% would be a favorable sign that an attempt to assault new all-time highs may be a probability.

    Should the December 24, 2018 lows not hold, then the next significant level of support would be the February 2016 low, which is possible, but probably not likely before and intervening significant rally. Please remember that the most powerful rallies tend to happen in bear markets. So for those believing the big brokerage houses that investing is all about buying and holding, a bear market is an exercise in being financially brutalized, as hard earned wealth evaporates. For those with the tools, experience, training and requisite courage, bear markets represent opportunities to increase wealth by taking advantage of deep discounts to value, and extreme volatility and price velocity. Bear markets separate real risk managers, and investors, from the legions of sales people peddling the stock of the day recommended in the morning squawk box call.

    The bottom line for this section is once there is evidence of exhausted sellers followed in short order by evidence of re-surging demand, we will be buyers in order to take advantage the volatility, and price velocity, attendant with rallies in bear markets.  History suggests that declines from new all-time highs are often retraced to a substantial percentage, so for now we shall avoid selling into the current panic, and await a substantial rally to cash out accumulated gains, and/or protect client wealth from the often devastating late arriving crash like declines as bear markets typically tend to end in total capitulation by the last holdout bulls. The days and weeks ahead will be a continuing exercise in taking advantage of what the market offers us in the way of opportunities.


    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 determining when investors, and traders, are beginning to buy in size once sellers have exhausted their propensity to sell. This causes evidence of re-surging demand to show up in the behavior of the indicator. At this point in the new downtrend there is no evidence of exhausted sellers, so obviously there is no evidence of re-surging demand. SAMMY is shown for information only.


    The panic like decline from the February all-time highs has reached the technical definition of a bear market in record time. However, the Coronavirus is likely only the catalyst for a stress test, which may eventually reveal the abusive over leveraging (debt) of corporate, and government balance sheets, which in a substantial recession could cast a very long shadow on the financial system. The Fed must now go bear hunting with very little remaining ammunition. However, we intend to turn the volatility attendant with bear stock markets into opportunities to maintain, and increase, client wealth should the bear market linger for months, or longer.

    Should S&P-500 2266 be taken out by the new bear market, then the entire rally claimed by the current occupant of the White House will be erased. However, the debt binge, which has left trillions of dollars of additional debt on corporate and government balance sheets will remain, and will have to be eventually repaid, most likely with debased dollars, since a government default would be the ultimate financial disaster.

    The Chinese say: “May you live in interesting times”. And, we are for sure!


    DISCLAIMER : Optimist Capital LLC, does not guarantee the accuracy and completeness of this report, nor is any liability assumed for any loss that may result from reliance by any person upon such information. The information and opinions contained herein are subject to change without notice and are for general information only. The data used for this report is from sources deemed to be reliable, but is not guaranteed for accuracy. Past performance is not a guide or guarantee of future performance. Optimist Capital LLC, and any third-party data providers, shall not have any liability for any loss sustained by anyone who relied on this publication’s contents, which is provided “as is.” Optimist Capital LLC disclaim any and all express or implied warranties, including, but not limited to, any warranties of merchantability, suitability or fitness for a particular purpose or use. Our data and opinions may not be updated as views or information change. Using any graph, chart, formula or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such device. The information contained in this report may not be published, broadcast, re-written, or otherwise distributed without prior written consent from Optimist Capital LLC.

    ByOptimist Capital

    Optimist Capital Institutional Wealth Management for All

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