THE BOTTOM LINE
The best analysis currently available according to our strategic and tactical supply and demand indicators is that investors are participating in a leg up, which began at the March 23 low in an aged and fatigued bull trend, and not likely a new, strong and vigorous bull market, which was born at the March 23 low. Until TATY begins to oscillate painting out lows in the red zone and tops in, or near the blue zone at the 160 level, then it is likely investors are participating in a leg up in an aged and fatigued bull trend, which began at the March 23 low. If this analysis is correct, then investors are at greater risks of volatility, and spontaneous swift market declines due to rally fatigue, than if a new bull market began at the March 23 low, which has months, or years to go before it expires.
One last thing, while sentiment is not part of our analysis, it can be an important consideration at times. Extreme sentiment readings from surveys of professional investors to market generated sentiment readings from put/call ratios have an enviable record of preceding both tops and bottoms. However, these sentiment measures tend to be very blunt instruments, and are accounted for in our analysis as secondary information only. At the moment an array of sentiment reading across the board are touching record, or near record bullish readings, which have preceded significant stock market tops in the past. For example, the significant tops of 2000, 2007, February 2020, and September 2-3, 2020. Given the negative divergences in our own measures of both strategic and tactical supply and demand indicators, the movement of multiple sentiment indicators into their extreme bullish ranges is additional information suggesting that volatility is likely to remain, and/or rise, and that the potential for spontaneous, and possibly swift declines in the price exists, as the stock market attempts to claw its way to new all-time highs in the days ahead.
Investors should expect more assaults on new all-time highs in a volatile environment. In this situation we are inclined to trade around opportunities born of volatility, while paying close attention to our equity exposure to market risks, with preservation of capital as our first priority.
Assaults on Congress & Market Tops
Last week’s update observed that the uncertainties surrounding the election were abating, and suggested that in the absence of the declaration of martial law and/or actions on the part of would be bad actors the focus of the stock market would likely move on to new concerns, which may result in continuing volatility. So far martial law has not been declared, and foreign would be bad actors have remained on the sidelines, but a domestic mob did create an unprecedented event including fatalities, which has resulted in new uncertainties. At my age it is difficult to be surprised by much of anything, but I must admit that the dichotomy contained in this week’s byline is proof of the most unexpected kind that the balance of supply and demand drives the price and not the news du jour.
Last week’s update discussed the implication of the continuing negative divergencies in key supply and demand indicators, and that a period of weakness in the price was likely needed to reinvigorate demand, and right on schedule the Dow and S&P-500 began a sharp intraday swoon exceeding 700 points on the Dow. However, a late rally began to eat into the loss significantly, and by the time the angry mob breached the Capitol Building, and began to vandalize it, the S&P-500 was up over 25 points, and touching new all-time highs. I suspect short sellers lost a good bit of their money as the news of the day was saying sell, sell, sell, but the big picture metrics according to Lowry Research measures of supply and demand remained favorable.
So, by the close on Friday the S&P-500 and the Dow had managed new all-time highs. However, our measures of supply and demand continue to suggest the new all-time highs are likely part of a leg up in an aged and fatigued bull trend, which likely has some more to go, as opposed to a new, strong and vigorous bull market born at the March 23 low. Obviously investors participating in an aged and fatigued bull trend are exposing themselves to more risks than investors participating in a new bull market, which is likely to last months or years before supply becomes so strong that it creates a new bear market.
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 at 135 still painting out a negative divergence with the all-time high in the S&P-500 after previously touching into the red zone surrounding the 140 level. If a new bull market had begun at the March 23 low, then a reasonable analyst would expect TATY to begin to oscillate in a range bounded by bottoms in, or near the red zone, and tops in, or approaching the blue zone surrounding the 160 level, as TATY has in previous decades during the life cycle of strong bull trends. While this may yet come to pass, for the time being TATY continues to suggest that investors heavily exposed to equities are riding a bull trend, whose days are likely numbered as age and fatigue grow stronger. Just because an elderly relative has been admitted to a nursing home does not mean their demise is imminent.
The down sloping magenta lines on the TATY chart clearly show the negative divergence preceding the February then all-time high, which resolved into the record setting swift decline to 38.4% off the all-time high in just 27 days. The chart also shows the current negative divergence, which is now longer than the negative divergence leading up to the swift decline of February into the March 23 low. Tops are usually a long exhaustion of euphoria process, so the two shown on the TATY chart are exceptions in their brevity, but they may be elements in a topping process, which will require more elements before the end of the current bull leg higher.
Calling a final top is one of the most difficult challenges in market analysis due to the usually slow dissipation of gossamer like euphoria. And, these days that process has become exacerbated, as the Fed has chosen to rescue failing bull trends with oceans of liquidity, when the peril of a potential bear market arises. The Fed knows that our nation’s massive debt represents a ticking time bomb, should a stock market routine correction begin to morph into a bear market. So, more debt is piled upon existing debt to stave off the consequences of borrowed money, and an ever rising debt ratio to GDP. Unfortunately, the Fed has now trained financial institutions, and investors to buy every dip, because the Fed will come to the rescue, if the financial tide begins to turn against the markets to any significant extent. The rub is the awesome powers of the Fed really are finite, and no one knows how swiftly, or the depth of the decline in the markets may be should investor confidence in the Fed be shaken. For now all we know is financial institutions, and investors are still willing to bet that Fed fueled liquidity will drive the price higher, even as an angry mob storms the nation’s Capital Building.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in weekly format with the S&P-500 overlaid in red and blue candle chart format.
The negative divergence prior to the February high is still shown on the SAMMY chart by a down sloping dashed magenta line. The down sloping dash magenta line showing the negative divergence, which warned of the September 2-3 top before a decline of 11% is not shown on this weekly chart, but nonetheless at the time did a terrific job of warning us to not buy at fat prices into that top. At this point there is not a significant negative divergence on the daily chart (not shown) as SAMMY managed a slight rally as the market was touching new all-time highs as the Capital fell to the mob.
The price managed another all-time high as the week ended, but failed to erase the yawning negative divergence shown by the down sloping dashed orange line on the SAMMY weekly chart, but SAMMY did remain above the horizontal magenta line representing previous resistance, which was breached previously. So the bottom line from the SAMMY chart is the price has continued to climb to all-time highs, as the strength driving the price is much less than at the February high according to the indicator. Since TATY is not yet painting out oscillations with bottoms in the red zone and tops in, or near the blue zone, and SAMMY lagging the strength it was generating at the February high, then we are compelled by this objective evidence to conclude that investors are participating in a leg higher in an aged and fatigued bull trend, and likely not in a new bull market born at the March 23 low.
Please stay safe!