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    The Weekly Optimist

    Mar 16

    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.

    Sincerely,

    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

    www.nbcnews.com

    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   —   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 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   — A REPRESENTATIVE 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 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 BOTTOM LINE

    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.

    Mar 9

    THIS AIN’T NO PLACE FOR AMATEURS

    In the words of the late Rev. Dr. Wilson L. Nearing, “THIS AIN’T NO PLACE FOR AMATEURS”, a dear friend, and mentor, from my post Georgia Tech years. At 6’ 5” and 275 pounds, and with a personal portfolio including a stint as a life guard in Daytona growing up, a college fullback, a business executive, a professional operatic baritone, Columbia Theological Seminary in Atlanta, and liaison to the Atlanta power structure for North Avenue Presbyterian Church during the late 1960s Civil Rights movement. Bill Nearing was a talented and larger than person, whose life experiences made it possible for him to relate to people from all walks of life. His one line observations on life continue to guide me to this day, and as the stock market put on a volatility show this past week some of his wisdom came to mind. There are some we meet in life, which have the ability to enrich our lives through their acquaintance, and Bill was one of those rare individuals.

    CLIENT AND RESEARCH CUSTOMER STOCK MARKET UPDATE FOR THE WEEK ENDING MARCH 6, 2020

    This past week reminded me of the fall of 2008, when the stock market was gyrating in large swings at a velocity of hundreds of Dow points per hour, or in some of the most intense selling scores of points per minute. At one point the S&P-500 eMini futures contract moved over 80 handles (points), or $4000.00 in one minute, when the Fed announced a cut in interest rates. Would be futures day traders no doubt got a lesson in the power of the market, even if they were trading only one contract! So the question naturally arises, has the stock market entered a bear market, which will wipe away billions, possibly trillions of dollars from stock accounts globally, or is this just another periodic correction before the longest bull stock market in history resumes? In the comments below I’ll discuss how both possibilities will likely look in the context of our proprietary supply and demand indicators. And, how we will apply those indicators to first preserve your wealth, and then enhance it with the least risks possible.

    TATY —  A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

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

    TATY has been around a long time. It was among the first concepts I programmed back in the 1980s, when I acquired an Equatorial Satellite Dish with an IBM PC-XT strapped to it in order to get real time data for the stock market. I remember the Satellite dish vendor saying: “You must really need this dish, because you are our first customer in the Southeast”. Ditto for the software vendor for the IBM PC-XT in NYC. Of course from that beginning TATY has been through countless evolutions, and control parameter changes, and finally that original notion of how to objectively measure the ever changing balance in the supply and demand for stocks has generated families of both strategic and tactical supply and demand indicators. All in efforts to get at how global opinions about the equity market resolve themselves into the forces of supply and demand. In my approach we are not trying to guess the impact of the individual inputs, but rather the implication of the changing balance the inputs produce, which is much more important to the won/loss ratio of our investments/trades.

    There are millions of investors making countless transactions globally per day, so to assign a “cause” to one news event for the movement of prices in the stock market is an exercise in statistical futility from my perspective. Then there is the issue of the “magic” newspaper, you know the one that tells you next week’s news today. If you had the only copy, could you predict the stock market’s reaction to the news you have the advantage of getting a week in advance? The answer is no. You need an example? On the night the current occupant of the White House was elected the futures market sold off hard, but when the NYSE opened the next morning a prodigious rally began. So, we leave predicting the stock market to those, which believe they have the talent and expertise to be successful at that most difficult of arts. However, we will continue to rely on attempting to objectively measure the most fundamental of fundamentals in Capitalism, the Law of Supply and Demand, which is the true driver of prices in any market in order to navigate the rise, and fall, of risks to client wealth in the stock market.

    TATY, for the second week in a row, finished the week in the green zone surrounding the 90-100 level at 90. Excursions into the green zone are infrequent, and always mark periods when sellers are highly motivated. Motivated selling produces opportunities for the price of equities to trade at a discount to their “value”, and we like to be buyers at substantial discounts to value. Alexander has been picking up some individual stocks trading below their recent lows, with P/Es in the lowest part of their range for weeks, and with generous dividend yields, while at the same time interest rates were  touching new all-time lows. I’ve begun dollar cost averaging into some ETFs, as the market offered us discounts to value, even though this decline is not yet showing any classic signs of ending. However, the discount to value indicator in the lower panel of the TATY chart is showing a gross discount to value being available at minus 31 and change, so it makes sense to do some buying at this level of market distress.

    As previously stated, Alexander and I are not in the business of making predictions, but we most definitely are in the risk management business. So here is how we expect to manage the market risks implied by the current situation. At some point history suggests TATY will begin to diverge with the downtrend in the price and rally. The price is likely to remain “heavy” until TATY can sustain numbers into the caution zone surrounding the 115-125 level, when the price may begin to stabilize, or even move higher. In the interim the price will likely move both up and down with substantial velocity.

    Once TATY recovers above the caution zone, and the premium/discount indicator in the lower panel of the TATY chart has rallied first back to the red line at minus eight, and then on toward the green line at minus three, the price will likely begin to rally, and follow the supply and demand indicators higher. Or in other words, the supply and demand balance will begin to shift in favor of demand before the price responds with beginning a sustainable rally. This historical sequence has occurred over and over, and is really wonderful news for those of us wanting to buy clients into the market. The good news is we almost always can see the ongoing shift in favor of demand before the price responds, which usually gives us a window of time to scoop up bargains before the price begins to follow our indicators higher. Buying when our supply and demand indicators have already painted out yawning positive divergences to the price has been shown to be a highly effective approach to managing the risks associated with putting cash to work with new equity purchases. This begs the question, why be a buyer, if the stock market is entering a substantial correction, or even a bear market?

    Until hard evidence of a budding bear market arrives, then we must give the benefit of the doubt to the notion that the bull trend has just entered a correction and not a bear market. At this point all we know for sure is that sellers are highly motivated. However, more information will be needed before a determination can be made, if this is the initial leg down in a new bear market, or just a periodic correction before the resumption of the bull trend. If the conditions are met for a “Big Chill Warning”, then we will begin to shift our asset allocation away from our current equity exposure. Until that evidence arrives, we will treat the current market distress as an opportunity to put excess cash to work, which we are doing. If we are beginning a new bear market, then clients need to know that the average rebound rally in the 2007-2009 bear debacle lasted approximately 12 weeks, plus or minus. Rallies of that magnitude are opportunities given that TATY diagnosed every one of them.

    SAMMY   —   A REPRESENTATIVE 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 is shown for information only, because it has just one purpose in life, and that is to show clearly when investors/traders have begun to scoop up perceived bargains in size after sellers have exhausted their propensity to sell. Exhausted sellers are a necessary condition for a stock market bottom, but not a sufficient condition. For a stock market bottom to be complete evidence of exhausted sellers must be followed in a short period of time by evidence of re-surging demand. SAMMY has a history of successfully identifying evidence of re-surging demand. At this point there is no evidence of exhausted sellers, so evidence of re-surging demand is moot.

    THE BOTTOM LINE

    There is evidence that sellers are highly motivated, but no evidence at this point that the correction is ending. When TATY begins to paint out a positive divergence to the price, and the premium/discount indicator in the lower panel of the TATY chart rallies first to the red line at minus eight, then on to the green line at minus three, the price is likely to respond by staging a sustainable rally. In the absence of a “Big Chill Warning” forming as TATY rallies, then the follow on rally by the price will have the potential of touching new all-time highs. Should the conditions for a “Big Chill Warning” be met, then the follow on rally will likely fail short of new-all-time highs, and decisions will need to be made about adjusting equity asset allocations in line with the new evidence of rising risks to equities.

    Obviously this is a process, which is likely to take days, perhaps weeks, before any definitive action must be taken to protect accumulated profits, and/or your wealth. In the interim, clients should continue to expect a much more volatile investment environment. However, please remember volatility can also be the investors/traders friend, if they are armed with talent, training, experience, effective and proven supply and demand indicators, and the courage to act decisively in chaotic situations. The courage to act is the product of preparation!

     

    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.

    Storm CLouds
    Mar 2

    FEELING A CHILL ARE WE? THE VOLATILITY HAS ARRIVED!

    Here is a quote from last week’s update. These are the required steps in the “Big Chill” warning, when overly euphoric and aggressive investors/traders in large size suddenly feel a “big chill go down their spine”, when a break in the market causes them to recognize they are too exposed, often too leveraged, to equities. This recognition results in euphoric recklessness quickly becoming prudent sobriety, as they attempt to adjust their asset allocations away from equities, usually all at the same time. The stock market is driven by the perceptions and the discounting of the future, so when the generally accepted perception of a continuing bull market changes toward a more uncertain future, the elements for a nasty decline, or budding bear market start to build momentum.

    On February 12th  the popular stock indexes hit all-time highs while a host of supply and demand indicators were moving lower after weeks of displaying negative divergences. Fast forward a few days, and the indexes have moved into correction territory in the fewest number of days ever, and accelerating the decline in the TATY strategic supply and demand indicator, crashing it completely through the caution zone into the green zone surrounding the 90-100 level. TATY finished the week at 95, something it has only done on a monthly closing basis four times previously since the summer of 1998 Long Term Capital debacle. However, on an intraday basis the green zone surrounding the 90-100 level has been touched twelve times previously during the same time period, so Friday’s excursion into the green zone is number thirteen since the 1990s. The fourth chart above, snapshot 330, shows all the spikes into the green zone beginning from 1996, a period rich in history related to important stock market declines, hence the example. I apologize that the chart is so busy, but getting the perspective on one page may be helpful to seeing what is really happening.

    PANDEMIC! SARS, H2N2 FLU and EBOLA, how many of you remember what happened to the stock market in the aftermath of the media hype about these recent pandemic scares? Coronavirus is a problem, more severe than the run of the mill flu for sure, but certainly not on the level of Ebola, or the Black Plague of old, or more recently in the United States Small Pox, which thankfully is now confined for research purposes to a freezer at the CDC in Atlanta. Please remember news and facts do NOT drive the price of stocks, but rather it is the perceptions about future events. Given the tendency of the news cycle to be quite short these days, one must wonder how long the current pandemic scare will dominate the news, and by the way there is a rather important primary election next Tuesday, so soon there will be some serious competition for air time, just saying. OK that is enough of probably useless observations about current events, so let’s now turn our attention to some objective and more useful information, because it is information being generated by the market itself.

    In the strategic and tactical sections to follow, I will review the current state of the market, and provide some historical perspective on the history made this past week, as the popular indexes posted record point losses from record highs. Record point losses from record highs is not as an important metric as record percentage losses. The percentage losses from the record high were in the range of 3% per day, more or less. Some of us were plotting the market by hand on October 19, 1987, when the stock market declined a bit less than 25% in one day! These things happen in markets, fortunately not often, so let’s take a look at how to not only deal with these relatively rare events, but hopefully make money for clients in the process.

    TATY   —   A REPRESENTATIVE 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 chart format. TATY finished the week at 95 in the green zone surrounding the 90-100 level after falling through the caution zone surrounding the 115 level without pausing. This presents a bit of a conundrum, because declines into the caution zone surrounding the 115 level always trigger the first step in the process of eventually issuing a “Big Chill” warning. However, since the 1990s crashes into the green zone surrounding the 90-100 level have been followed by substantial rallies in bear markets, or rallies back to new all-time highs in bull markets. A TATY crash into the green zone suggests panic is causing a burn rate with would be sellers at such a high intensity that a tradable bottom may tend to form more quickly than usual.

    Please take a look at what has actually happened in the past (second Chart), when TATY declined into to green zone surrounding the 90-100 level, shown in the fourth chart above snapshot 330. The 1997 episode was a warning that investors and traders may be getting a bit uncomfortable as the market was touching new highs during the tech mania. The 1998 spike into the green zone was blamed on the collapse of Long Term Capital. The 1999 decline occurred as tech IPOs were coming to market and some of those companies did not even have any sales let alone earnings. The 2001-2003 bear market was blamed on 911, but that was a Red Herring, since the bear market was already well underway before 911. Sharp eyed investors will take notice that the events of September 2001 did result in a TATY excursion into the green zone, but the 2002 decline was actually more intense, and by the time the price touched its final low in March 2003 TATY had been rallying strongly for weeks.

    The 2007-2009 decline was blamed on the mortgage crisis, over-leveraged banks, and the collapse of Bear Sterns and Lehman Brothers. And, then there was the Flash Crash of May 2010, for which there was never a reason given that I remember, nor for the weakness in 2011, but there were some concerns that the recovery from the Great Recession may give out of gas. The 2015 weakness was thought to be the beginning of a new bear market, but the price decline, although painful, clocked in at only 16%, short of the commonly accepted bear threshold of 20% or more. The February 5, 2018 dip was related to difficulties by Credit Swiss to lay off its risks in the futures and options markets for its XIV volatility product. Credit Swiss ceased trading in the product, and investors trading the XIV took a hit. The late 2018 decline has been blamed by some as an echo of the earlier February issues with managing volatility risks. That brings us up to this past week, and the fifth excursion into the green zone on a monthly closing basis, and thirteenth overall intraday since the 1990s.

    The common denominator in all these cases is the spike into the green zone was a signal that sellers may be becoming exhausted, and the actual recovery back into the caution zone surrounding the 115 level was evidence the correction, or bear market, had likely ended a phase, or perhaps ended completely, and the recovery in the price was about to get underway, or had already started. Obviously, the premium/discount indicator, shown in the lower panel of the TATY chart, plunged below the minus eight level, and as it began to recover back toward minus three, then toward zero, the price was approaching its final lows, or had already made bottom, and had embarked on a bear market rally, or the next leg higher in a bull trend. Keep in mind that the chart is in monthly format in order to show the entire post 1996 period on one chart, because this time period contains some of the most important post WWII declines. TATY is usually shown only in weekly format, so what may appear to have been a quick process on the monthly chart actually unfolded over a period of days, or weeks. Please keep in mind that this is a historical perspective, and does not guarantee the current situation will develop in the same manner, but the odds suggest it likely will.

    The chart directly above is a weekly chart of the S&P-500, which shows how quickly all those small steps higher in a bull trend can be quickly erased in a correction. We religiously buy for clients only when we are offered a discount to value, and this chart is a vivid example of why, as it shows the rally from last fall has now been completely wiped out in record brevity. The last chart above is of the S&P-500 in monthly chart format, and I’ve overlaid a Fibonacci grid showing that the rally from the late 2018 low has now been retraced by 50%, a likely level from which a bounce may develop, or perhaps after some testing of a lower low, the development of a longer lasting rally attempt?

    However, history suggests that TATY must recover at least into the caution zone surrounding the 115 level, and the premium/discount indicator in the lower panel must turn up, and then rally back toward first the red line at minus eight, then on to the green line at minus three before the price will likely turn higher. So at the moment all we know for sure is motivated sellers are selling at a rate, which history suggests may be unsustainable, and causing exhaustion to arrive sooner rather than later. Should evidence of exhausted sellers appear, quickly followed by evidence of resurging demand, then we will become aggressive buyers in the expectation of a tradable rebound in a new bear market, or a resumption of the previous bull trend. Regardless of the “causes” for these previous panic like declines, the recoveries to date have all followed the same format according to our proprietary supply and demand indicators.

    SAMMY   —   A REPRESENTATIVE 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 has plunged with the market, but will become an extremely important indicator when buyers return in size to scoop up perceived bargains, after sellers have exhausted their propensity to sell. SAMMY is shown for information only in this update.

    THE BOTTOM LINE

    The S&P-500 eMini futures closed on December 31, 2019 at 3232 and change. I have been doing some limited dollar cost average buying in accounts with excess cash, as the price declined below S&P eMini 3232 level. I will begin to buy in size should our proprietary supply and demand indicators signal evidence that sellers have exhausted their propensity to sell, and evidence also arrives of re-surging demand. It matters not to us if we have entered the initial phase of a new bear market, or this is just a less than 20% correction in a continuing bull trend. I watched today as the S&P-500 eMini futures contract moved ten handles (points), or $500, in one minute! Volatility is the ally of those with the requisite analytical tools, training, experience and courage to turn the volatility, and price velocity to advantage.

    Corrections and/or bear markets are often like foundations for buildings. A shallow foundation being dug by workers with shovels will likely support a new one story building. A foundation being dug by multiple large excavators many feet deep will likely support a sky scraper yet to be constructed. In like manner, declines in the TATY strategic supply and demand indicator often tend to be foundations for the degree of the price recovery/rally to follow.

    Once we are provided objective information to become buyers at a discount to value, we shall hold newly purchased positions in anticipation of a significant, and tradable counter-trend rally in a new minted bear market, or a resumption of the previous bull trend. It is too soon to know which option the stock market will dial up. We are prepared for either.

     

    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.

    Cobra Ferrari Porsche BMW
    Feb 24

    Negative Divergences can Linger

    Monitoring the changing strength, or weakness, in the balance of the supply and demand for equities has been shown to be an effective way to manage risks. When the balance favors demand over supply the price is likely to attempt to rally, and when the balance favors supply over demand the price will likely attempt to decline. This is a simple and straight forward approach that both seasoned, and neophyte, investors can easily grasp, but which is built upon the bedrock of the capitalistic system, and the only absolute in economics, the law of supply and demand.

    These weekly updates have as a goal not only to keep you briefed about what we are doing with your wealth, but also educating you about the how and why we are doing it. Our office is located in a very upscale, and wealthy part of this country, and too often we encounter potential clients coming to us, which suddenly find themselves in charge of significant amounts of wealth accumulated by their spouse, significant other, or relative, which is now their responsibility due to divorce, illness, or death. Unfortunately, these potential new clients have often been taken advantage of by being sold investments benefiting those selling the investments more than the client. So, these weekly updates attempt to educate clients about how the equity market really works, so you can better understand the ever changing risks associated with maintaining and increasing your wealth.

    This past week the stock market decided to provide us with an example of why it is important to pay attention to weakening demand as prices march higher. The weeks long evidence of weakening demand has now resulted in an uptick in volatility, and the price finally following our proprietary supply and demand indicators lower. Unless this decline is another brief dip before once again attempting new all-time highs, then clients are likely to be shown the round trip process of how low risks buying opportunities develop in the stock market, regardless of the price level of the popular stock averages, or the overall valuation of equities. In our approach to managing risks, if demand is in the favorable position relative to the supply for stocks, then we want to slant our equity allocation more in favor of stocks, and if supply is in the favorable position relative to demand, then we want to reduce our allocation to equities. A simple approach, which is driven by our families of very sophisticated, and time tested proprietary supply and demand indicators.

    TATY   —   A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

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

    TATY finished the week in the red zone at 141 after painting out lower and lower tops since October 2019, even as the price continued to touch new all-time highs during the same time period. This was a classic negative divergence between the rising price, and the weakening balance favoring demand relative to supply. Last week’s update stated that any uptick in supply would likely result in the price following the weakening indicator lower, and now it has. However, markets do not travel in a straight line, and corrections in the price during rallies is like you and I breathing in and out, so at this point we do not know, if the stock market is just taking a breath, or if something more serious is afoot. Fortunately, there are objective ways to determine, if this is a buying opportunity, or the beginning of the end of the long economic recovery, and the concurrent bull market, or just the likely formation of a low risk buying opportunity. The difference in the two possibilities has the potential to reward, or seriously damage your wealth.

    If in the days ahead TATY forms a bottom in, or near, the red zone the implications for more attempts to assault new all-time highs is clear. This strategic indicator has a long history of confirming rallies, when it forms bottoms in, or close to, the red zone surrounding the 140 level. Equally important is the fact that every major top, and every significant rebound top during bear markets, has been preceded by TATY making an excursion into the caution zone surrounding the 125 level, and then subsequently stalling out in, or near, the red zone surrounding the 140 level. These are the required steps in the “Big Chill” warning, when overly euphoric and aggressive investors/traders in large size suddenly feel a “big chill go down their spine”, when a break in the market causes them to recognize they are too exposed, often too leveraged, to equities. This recognition results in euphoric recklessness quickly becoming prudent sobriety, as they attempt to adjust their asset allocations away from equities, usually all at the same time. The stock market is driven by the perceptions and the discounting of the future, so when the generally accepted perception of a continuing bull market changes toward a more uncertain future, the elements for a nasty decline, or budding bear market start to build momentum.

    In the current situation all we know for sure is TATY has arrived in the red zone after weeks of fading strength. If over the coming days TATY is able to bottom in, or near, the red zone, then a buying opportunity is likely at hand. However, should evidence of weakening demand continue, and is confirmed by TATY descending into the caution zone surrounding the 115 level, then prudent investors would be compelled to watch carefully for the completion of the “Big Chill” warning, which in turn would be an objective reason to consider lowering our asset allocation to equities. In the absence of a TATY excursion into the caution zone surrounding the 115 level, we shall consider the current decline to be a buying opportunity in progress.

    SAMMY   —   A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

    SAMMY is shown above alone, and below with the SPXL 3X S&P-500 ETF overlaid. The SPXL is for reference only.

    SAMMY excels at determining re-surging demand after sellers have exhausted their propensity to sell. Exhausted sellers are a necessary condition for a stock market bottom, but not a sufficient one. Evidence of exhausted sellers must be followed quickly by evidence of re-surging demand to confirm the likely formation of a low risks buying opportunity. SAMMY is currently oversold, but has not flashed a signal that buyers are returning to the market in size, which drives re-surging demand.

    THE BOTTOM LINE

    The weeks long negative divergence in the price touching new all-time highs, and supply and demand indicators displaying weakening demand for stocks has now resulted in the price following the indicators lower. As this situation continues to develop we expect to objectively determine, if this decline is likely a buying opportunity in progress, or if something more serious is just getting underway. Until evidence to the contrary arrives, we shall treat this decline as a potential buying opportunity in progress.

     

    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.

    Artigras Palm Beach Shades
    Feb 18

    UNCONFIRMED NEW ALL TIME HIGHS

    After recently completing a new TATY low in the red zone, the price rallied back to touch new all-time highs as measured by the S&P-500. As long as the TATY strategic supply and demand indicator continues to form bottoms in, or near, the red zone surrounding the 140 level, the price will likely continue to attempt to assault new all-time highs. This is not an opinion, but a reference to the historical behavior of the TATY indicator over three plus decades. That is the good news.

    The bad news is although the price has touched new all-time highs as expected, it has done so in the face of a persistent, and growing, negative divergence between the declining indicator and the rising price. These kinds of negative divergences can linger for weeks, but are almost always resolved by the price eventually following the indicator lower. The positive seasonal bias from roughly Halloween to Easter is also getting long in the tooth, so given these factors, plus a market which is certainly moving toward the rich end of the valuation spectrum, clients will likely witness a growing propensity toward increasing volatility as election looms closer on the horizon.

    TATY   —   A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

    TATY finished the week at 151, and well below the negative diverging orange line on the first chart shown above. Investors will also notice that the premium/discount indicator in the lower panel of the TATY chart is also displaying a negative divergence, which is depicted by the down sloping orange line in the lower panel. This means the price has managed to touch new all-time highs on weakening demand for equities. This situation implies that any increase in supply may have the potential to quickly overcome already weakening demand. Obviously this is a situation, which will require constant monitoring in the days ahead. However, history suggests that the rally should be given the benefit of the doubt until our family of supply and demand indicators issue a “Big Chill” warning, which would begin with TATY descending into, or close to, the caution zone surrounding the 125 level.

    The chart gymnastics required for TATY to complete a “Big Chill” warning would likely take days, or perhaps weeks, to complete, but the accompanying volatility would likely begin immediately. Its been many months since volatility ruled the stock market, so when it returns, possibly suddenly, investors will likely be shocked, and perhaps instantly uncomfortable with their exposure to the equity market. However, Alexander and I expect to turn the increasing volatility into opportunities to enhance the wealth of our clients, as the speed of price movements will likely move from something resembling a turtle to that of a road runner at full sprint.

    SAMMY   —   A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

    SAMMY is shown above alone, and below with the SPXL 3X S&P-500 ETF overlaid. The SPXL is for reference only.

    SAMMY is a wonderful tool for detecting resurging demand after sellers have exhausted their desire to sell. However, it is of very little value once a sustained rally gets underway, so it is shown above for information only. However, investors will notice that SAMMY is also showing a pronounced negative divergence, as depicted by the down sloping orange line on the second chart. With three key indicators displaying negative divergences with the price touching new highs, prudent investors would likely do well to postpone any additional purchases, and cash out any long leveraged holdings. Family members received quick and substantial profits on the SPXL ETF positions I purchase near the recent low, and I have now cashed out all those leveraged positions. I’m going to hold all non-leveraged long positions for clients, and family members for now, but fully invested accounts will be subject to some marginal profit taking, if it becomes more apparent that this leg of the rally may be nearing an end.

    THE BOTTOM LINE

    The previously discussed negative divergences between the price touching new all-time highs, and a series of fading indicators suggesting a continuing trend toward weakening demand for equities, has compelled me to take profits on our SPXL 3X leveraged positions in family accounts. The arrival of more evidence that the current leg up in the bull trend maybe ending may result in some marginal profit taking in long non-leveraged positions in both family, and client accounts. The eventual issuance of a “Big Chill” warning would compel Alexander and I to consider protecting accumulated profits, and client wealth, by lowering our asset allocation to equities firm wide in the face of objective measurements of rising risks to portfolios. We expect to see a substantial rise in volatility as the calendar marches toward the election, but we expect to turn potentially rising volatility into opportunities to increase client wealth

     

    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.

    Time Travel
    Feb 10

    HAVE WE ALREADY BEEN, OR YET TO COME

    Last week’s lengthy update reviewed the process of how low risks buying opportunities usually develop in the stock market according to our proprietary supply and demand indicators. The update observed that the negative divergence between the price touching new all-time highs, while several of our key indicators were in obvious down trends, had finally resulted in the price rolling over to chase the indicators lower. Then in the afternoon of last Friday the decline in the price accelerated driving our premium/discount to value indicator below minus eight. Discounts to value touching this zone almost always represent a significant enough of a discount to deploy some excess cash into the equity market. A discount of minus eight in magnitude also implies the correction likely has more to go before the price bottoms, and then commences a new leg higher. We did do some ETF purchases as part of our plan to dollar cost average into a larger equity asset allocation, as the anticipated remaining steps in the bottoming process completed, which unfortunately failed to develop before the rally back to new highs.

    This past Monday the brief price decline ended abruptly, and the market rallied back to touch new all-time highs by the end of the week, giving clients instant profits on the positions purchased Friday afternoon. So is the shallow correction already over, or is the rally back to new highs a trap to be followed by nasty decline to set up the completion of the usual steps in the process of forming low risks tradable bottoms? Or, as the Time Lord in the hit British Sci-fi TV series, “Doctor Who”, once said: “Have we already been, or yet to come”. Yes, time travel can cause one to become confused as one skips around the centuries, or experiences unusual, or atypical, episodes in the stock market.

    So, our clients were offered a discount on new purchases, and we did some buying in anticipation of doing more, as the usual steps in a low risks bottoming process completed. And, while an instant profit on our new purchases is a plus, there is the matter of those pesky negative divergences remaining in place, and at this point growing much more pronounced, as the price has achieved new all-time highs. This suggests the potential that only a phase of the correction may be complete, and another leg down may be required to put in place a strong foundation for a new leg up in a continuing bull trend. The next two sections will explain how this conundrum may be resolved in the days to come.

    During bull markets corrections happen like breathing in and out for you and I. Bull market pull backs tend to be in the range of three percent to less than twenty, with most falling into the less than double digit percentage range. Bear markets, generally accepted to be defined as declines exceeding twenty percent, are often correlated with economic recessions. Recessions are often defined as two or more quarters of negative GDP, but for a more complete definition you may want to Google “NBER”, the organization, which officially declares when recessions begin and end. So, when MIT released a report this past week that there was a 70% percent chance of a recession in the next six months, it caught my eye. There’s a 70% chance of recession in the next six months, new study from MIT and State Street finds. Click on the link to read the article. Obviously, the longest recovery in history implies that a significant stock market correction, and/or economic recession is overdue relative to history.

    TATY   —   A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

    TATY is shown above in yellow with the S&P-500 cash index overlaid in red and blue candle chart format. I have left the orange lines indicating negative divergences in place, because they are likely still telling us important information. TATY bottomed marginally below the red zone surrounding the 140 level and finished the week at 145. Long time clients know that when TATY is painting out bottoms in, or near, the red zone, rally attempts are likely to follow.

    In the current case, a new rally attempt has assaulted, and then the price touched new all-time highs, rewarding clients with instant profits on the purchases made during the accelerating decline of a week ago Friday. However, investors will notice that the new rally high shown on the chart looks a bit lonely, because the confirming strength of the demand represented by the TATY indicator is lagging way behind. If the rally is to continue, and possibly accelerate, then evidence of strengthening demand must arrive soon in the form of a better confirming rally in the TATY indicator. Should the negative divergences shown on the TATY chart remain, or grow worse, then the rally back to new all time highs may only be part of a bull trap, which may then be followed by a persistent and accelerating decline. The outcome of this conundrum will likely take some time to be known.

    The bottom line for this section is the continuing negative divergences shown on the TATY chart by the down sloping orange lines imply that perhaps only a phase of an on going correction has been completed with possibly another leg down yet to come when the intervening rally expires.

    SAMMY   —   A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

    SAMMY is shown above alone, and below with the SPXL 3X S&P-500 ETF overlaid. The SPXL is for reference only.

    The conditions for the effective application of the SAMMY indicator never appeared during the fleeting three percent decline in the price, so SAMMY is shown this week for information only. SAMMY becomes critical when there is evidence of exhausted sellers in determining re-surging demand has begun. Since at this point there has been scant evidence of exhausted sellers, SAMMY is of no applicable value to us. However, I would call investors attention to the fact that the negative divergence discussed in the TATY strategic section exists also with SAMMY in the tactical section. The negative divergence is shown by the orange down sloping line on the second chart. So, SAMMY, in like manner as TATY, is suggesting to investors that the rally back to new all-time highs is so far unconfirmed by objective evidence of gathering strength in demand in these two important representatives of supply and demand indicator families.

     

    THE BOTTOM LINE

     

    Recent purchases made when our premium/discount indicator reached the minus eight level, a level indicative of the existence of reasonable discounts to value, has reward clients with instant profits. However, the subsequent rally back to new all-time highs has yet to be confirmed by gathering strength in a number of supply and demand indicators, which suggests that perhaps only a phase of the correction has been completed, and another leg down may yet develop.

     

    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.

    Rifle Target
    Feb 3

    RIFLES VERSUS HAND GRENADES

    After weeks of a slow grind higher setting multiple all-time highs, the stock market has arrived at a potentially important inflection point. As a result, I’ve decided to cover the current situation in greater detail than usual.

    Although Alexander and I have the discretion to trade client accounts as we feel is appropriate for our clients age, and financial circumstances, we have as a goal of our firm to constantly stay in touch with you about what we are doing with your wealth and why. These weekly updates are designed to keep clients informed about the strategies, and tactics, being applied to your account(s), and to over time do some basic education about how the stock market really works. And, how that understanding is key to managing the risks associated with your participation in dynamic, and often chaotic global markets.

    The law of supply and demand is the absolute bedrock upon which all of capitalism rests, and is derived in its various manifestations. Over the decades I have devised many strategic, and tactical, indicators to measure and monitor the ever changing balance of supply and demand in the equity market. The indicators we are using today have been constantly evolved over many iterations, and updates to things like control parameters to enhance the effectiveness of the original concepts now in the form of their resulting indicator formulations.

    These surviving indicators incorporate modules to account for NYSE type data streams, and for selective data from the derivative markets, given that huge amounts of dollar risks are managed in the derivative markets these days. So the simple chart representations clients, and research customers, see in these weekly updates belie the sophisticated nature of the underlying, and constantly evolving products, and the math driving their formulations. Leonardo da Vinci once said: “Simple is the ultimate sophistication”. So, while the indicator representations shared with clients in our weekly updates look simple on purpose, the genesis behind them is quite sophisticated.

    A good many of the supply and demand indicators, which are not shown from week to week, started life as tools for a futures trader I once tried to coach. Alas, the gentleman refused to incorporate the discipline required for successful futures trading into his approach to navigating day, and intermediate term trading, which in turn shortened his trading career, although he remained a successful tax attorney.  The survivors of those early tools, first developed in the late 1980s with personal computers with a fraction of the computing power available today, are still suitable for trading the S&P-500 eMini futures contract, although obviously that venue is not a focus of my work these days.

    The fast moving venue of day trading futures, options and highly volatile stocks require indicators with “rifle” type accuracy, and the requisite laser mental focus to properly apply them. However, short term trading with highly leveraged instruments is still done most effectively with tools measuring the swift intraday changes in the balance of supply and demand. Given the dynamics of short term trading, one would likely expect the won/loss record to be adversely affected as the trading time frame shortens, even with indicators more on the “rifle” end of the accuracy scale, because random market “noise” tends to become more and more of a factor.

    So where is the sweet spot for investors wanting to systematically, and methodically, increase their wealth? After decades of doing this research intensely, I prefer the intermediate time frames as the best balance of risk/reward for conservative investors needing to grow their wealth. Supply and demand indicators tracing their genesis to their development as futures trading tools tend to become more like hand grenades than rifles, as the trading time frame lengthens. But, as we shall likely soon see in real time, a strategic supply and demand indicator registering an accurate, but less than perfect, representation of the balance of supply and demand can be highly profitable, if combined and effectively applied with our proprietary tactical supply and demand indicators.

    On the beaches of Normandy on D-Day the most effective weapon against the Nazis machine gun nests were grenades, not rifles. A grenade will do the job, even if you only get it in the general vicinity of the target, as opposed to exactly between the cross hairs. In like manner, as bottoms are forming according to our proprietary strategic indicators (hand grenade type market tools), a series of dollar cost averaging purchases will likely result in an averaged cost near enough to the price of the absolute low tick to effectively reduce the risks to a level, where an eventual profit becomes a significant probability. During this process, if our objective measurements determine that sellers have likely exhausted their propensity to sell, and our tactical indicators confirm a re-surgence in demand, then the already significant odds of success for our new purchases will likely be enhanced even more.

    There are no guarantees of success in this business of managing risks, but objective measurements confirming the existence of exhausted sellers, followed in a reasonable length of time by measurements confirming a re-surgence in the demand for equities, tends to stack the odds of success heavily in favor of investors armed with these kinds of proprietary supply and demand tools. All that is left to do at that point is to have the courage to act on the potentially profitable information being displayed by the indicators. Having the courage to act, when opportunity arrives as it often does cloaked in fear, and/or whiffs of panic, has been the undoing many an extremely bright, and often highly educated, would be stock market operator!

    So, never under-estimate the courage required to be successful in the arena of trading and investing. All the high intelligence, exclusive and expensive education, and elite training are meaningless, if one’s courage fails, or is lacking altogether. Coach Bobby Dodd, the late Georgia Tech football legend, was once playing a round of golf with his buddies, when his partner needed to sink a three foot putt to win the match. After leaving the putt an inch short, the partner turned and said: “Coach I hit it will every once of strength in my body”! When the pressure is on, one’s courage can fail, which can result in costly missed opportunities, if it happens while navigating the financial markets!

    The current price weakness, which began in late January, continued this past week after an intervening bounce earlier in the week. The stock market finished near its low on Friday, and a number of objective measurements are now confirming that stocks are experiencing weakness on a level not seen since August 2019, and the fall of 2018. In the absence of objective information to the contrary, Alexander and I intend to treat the current correction as an opportunity to put excess cash to work.

    I’ve included the weekly update from the week ending January 17, 2020 as additional information outlining how we intend to use this budding weakness to our client’s advantage. Please note this general outline was written as a loose template explaining how to identify price declines as opportunities, or on the contrary rising threats to invested wealth. At this point in time, this decline appears to be developing as an opportunity, but that is subject to change as measures of supply and demand change.

    TATY   —   A REPRESENATIVE 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 137 marginally below the red zone surrounding the 140 level, as the often mentioned negative divergence (see down sloping orange line) finally won the weeks long struggle, and pulled the price lower with it. On a percentage basis, this is how divergences between the price and this strategic indicator, regardless of whether the divergence is negative or positive, are almost always resolved in favor of the indicator. Clients, and research customers, will likely see a positive divergence develop between TATY and the price, as this correction begins to end. TATY will likely bottom first, and begin to rally, before the price completes its decline creating a positive divergence between the indicator and the price. For a recent example, take a look at the month of December 2018 in the first chart above.

    At this point in the development of the correction, a TATY reading marginally below the 140 level is not a reason for any serious concern. However, a TATY decline into the caution zone surrounding the 115 level would have to be treated as an early warning that the strategic (big picture) balance in the supply and demand equation may be beginning to change in favor of supply over demand. A follow on issuance of a “Big Chill” warning, would compel Alexander and I to consider, if defensive operations in portfolios were becoming necessary.

    I’ve left the orange down sloping lines shown on the TATY chart to illustrate why it is important to pay attention to divergences, even though it may take weeks before a negative divergence grows strong enough to pull the price lower. The divergence shown on the TATY chart has been measuring the creeping loss of strength in the bidders driving the price higher, and recently the bid under the market has weakened enough to drag the price lower. Remember what TATY is measuring, while it looks just like a price chart, it is a record of the strength (or weakness), in the changing balance of supply and demand.

    This is in like manner as your physician taking a number of medical measurements being created by your body, and then presenting them in chart form. The quantified medical readings are fundamentals impacting the health of your body, but the presentation is most often in the form of a technical looking chart. My work revolves around the most important fundamental in the stock market, the measurement, and constant monitoring of the balance of the supply and demand for equities. However, the presentation of this most fundamental of all market information often leads some clients, and would be clients, to mis-construe the work as technical due to its presentation format.

    Now let us turn to the other negative divergence, the one shown by the other down sloping orange line in the lower panel of the TATY chart. The lower panel is a representation of the never ending journey of the price from premium to value, to discount to value, and back again. This round, and around circuit must be quantified in order for it to be applied in any useful way. I view the lower panel as the “LADIES” indicator, because our mothers, wives, and/or daughters are usually the most astute buyers in the family.

    Peter Lynch, the former manager of the once famous Fidelity Magellan Fund, credited his success to following his wife around stores, and then buying the stocks of the companies, whose brands his wife was buying. The premium/discount indicator in the bottom panel of the TATY chart has nothing to do with brands, but everything to do with how our mothers, wives and/or daughters usually operate in a store. If she needs one of “My Favorite Brand”, and today she discovers it is on sale two for one, then guess what happens. Ditto for the ladies I see in the check out line with their hands full of coupons, must have those extra discounts you know. I like to buy stocks for clients the way my mother, wife and/or daughters have purchased for our needs over the years  —  at a discount to value.

    Currently, we have TATY declining marginally below the red zone in the upper panel, and the premium/discount indicator in the lower panel finishing the week marginally below the red line at minus eight. Historically registering minus eight on the premium/discount indicator is evidence that a substantial enough discount to value is being offered by the stock market to do some buying in accounts with excess cash. Minus eight does not mean the discount is so large that the price decline will likely end immediately, nor that better prices are not yet to come. Until both TATY in the upper panel, and the premium/discount indicator in the lower panel, begin to paint out positive divergences to a still declining price the odds would still favor lower prices to come.

    However, remember we are doing grenades here in an effort to dollar cost average into a really good price relative to recent history, as opposed to attempting to get the fleeting absolute price low between the cross hairs, which is virtually impossible. So, given that a persistent decline accelerated late Friday, I used the minus eight discount level to do some buying in accounts with excess cash, because recent corrections have been fleeting, and who knows what Monday may bring. The first couple rounds of dollar cost averaging into a long position is like an appetizer,  so save some hunger for the main course to come, and if the main course is a no-show, then we took what we were offered, and enjoyed the appetizer.

    TATY has now painted out numbers consistent with those it generated during the fall 2018 correction, and the brief price weakness in August 2019. However, having dipped below the red zone surrounding the 140 level, and with the premium/discount indicator declining below minus eight, the potential exists for the development of positive divergences with a still declining price, then the appearance of objective evidence of exhausted sellers, followed by re-surging demand would likely compel us to consider putting all available excess cash to work in equities. Should TATY and SAMMY paint out a classic buy signal, then we will review the asset allocation of clients already reasonably invested to see if their exposure to equities needs to be adjusted in proportion to the strength of a new buy signal, and potentially renewed attempts to assault new all-time highs to follow. A new buy signal would likely take several days to complete, so this correction may linger for a while. If it does not linger long enough to complete the steps just described, then the implied failure to completely purge all the would be sellers from the mix could result in a potentially fragile and dangerous resumption of the previous record setting rally.

    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 re-surging demand once sellers have exhausted their propensity to sell. Exhausted sellers are a necessary condition for the stock market forming a low risks bottom, but not a sufficient one. Stock market bottoms form when there is objective evidence of re-surging demand, after sellers have exhausted their desire to sell. During prolonged rallies SAMMY is virtually worthless. However, once the strategic indicator TATY bottoms, then begins to rally, and then establishes a positive divergence to a likely still declining price, SAMMY tends to become an extremely important indicator. SAMMY’s history is one of consistently alerting investors that buyers are returning to the market in size to scoop up perceived bargains. When this occurs SAMMY literally leaps higher, as if it were shot out of a cannon. This kind of indicator behavior tends to confirm that a low risks bottom has formed, or is likely to form in a matter of hours, or possibly days.

    When SAMMY paints out evidence of re-surging demand, this is the signal for investors to complete their last round(s) of dollar cost averaging purchases of equities. Objective evidence of exhausted sellers followed shortly there after by evidence of re-surging demand usually results in the commencement of a new leg higher in the previous uptrend, or the establishment the first leg up in a new bull market, if the signal happens as a bear market is ending. A generally accepted definition of a bear market is a decline from top to bottom of twenty percent, or more.

    Currently there is some evidence that sellers are on the road to exhausting their propensity to sell, but at this point it appears too soon for SAMMY to issue a buy signal given the lack of a positive TATY divergence with the still weakening price.

    THE BOTTOM LINE

    The most significant price decline vis-à-vis our indicators since August 2019, and the fall of 2018, is underway. We intend to use this weakness in the price to put excess cash to work, as our proprietary indicators uncover opportunities to dollar cost average into a potentially low risks position. Should a classic TATY/SAMMY buy signal be issued, all client accounts will be reviewed to see if they are candidates for an increase in equity exposure. Given the current stage of development of the correction, and the chart gymnastics required to be completed before a buy signal can be generated, a final round of dollar cost averaging may not be commenced for several more days.

    I apologize for the length of this update. Given the infrequent low risks buying opportunities over the last several months, I want to use this current correction as a real time refresher course for clients of long standing, and as a teaching opportunity for new clients just beginning to learn about our approach to managing risks. Now that clients have two detailed templates about how this correction is likely to develop, complete, and then become a foundation for the next leg up of the previous rally, I intend to return to our more succinct format in the weeks to come.

     

    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.

     

    REFERENCES FROM ABOVE BELOW:

     

    CLIENT AND RESEARCH CUSTOMER STOCK MARKET UPDATE FOR THE WEEK ENDING JANUARY 17, 2020

    The stock market inched its way to new all-time highs this past week, as investors continue to exhibit an absolute conviction that good economic times are here to stay. Complacency, extreme bullish sentiment readings, and fear of missing out on the rally remain the order of the day. This situation reminds me of the old stock market cliché that says: “The stock market can remain irrational longer than you can remain liquid”. The status quo may continue, but in this business of managing financial risks to client wealth bullish extremes often appear toward the end of bull legs, and bearish extremes tend to appear near the end of bear legs.

    Alexander and I are in the risk management business, and we do not attempt to forecast future movements of the price in the stock market. We will leave stock market predictions to those, which believe they have the requisite skill, talent and expertise, to be successful at that most difficult of arts. However, objectively measuring the ever changing balance of supply and demand in the equity market, and then setting those measurements into a historical reference is something we do routinely with proprietary indicators designed specifically to account for the ever changing balance of supply and demand created by countless transactions on the NYSE, and in the global derivative markets.

    Human nature tends to repeat in the crucible of the stock market, and this makes comparison of objective measurements of human nature in action over time in the markets a worthwhile, and potentially profitable exercise. So today, very likely well in advance of a major stock market top, I’m going to briefly describe how the next major top will likely form vis-à-vis the tools we share with clients every week. I will bring you up to date on the current status of these supply and demand tools in the two sections to follow, and at the end of each section I’ll describe how these tools will likely configure their readings during a routine correction to re-invigorate demand, and/or how these tools will likely configure themselves as the next major top builds out. At this point, history suggests there will be at least one (or more) corrections prior to the formation of the next major top.

    TATY   —   A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

    TATY is shown above in yellow with the S&P-500 cash index overlaid in red and blue candle chart format. TATY finished the week up a bit at a strong 154. However, TATY continues to paint out a negative divergence with the price, which is touching new all-time highs. Negative divergences almost always result in the price entering a correction, but not always. Demand can gather strength during negative divergences, which can erase the divergence, but these events tend to be rare. Once buyers fatigue sets in, which appears as the negative divergence, that fatigue tends to go to completion in the form of a correction to set up lower prices, which in turn stimulates investors to act on their latent desire to buy at what appears, in the light of recent history, to be bargain prices.

    In environments of bullish extremes like currently, corrections may appear to come out of the blue, and may be quite uncomfortable and nasty, but fleeting. History suggests investors may encounter just such a price decline during the first quarter, or as the positive seasonal bias begins to wane around Easter. As long as the next significant price decline results in a corresponding bottom in the TATY indicator in, or close to, the red zone surrounding the 140 level, then we shall treat such a decline as a potential opportunity to put excess cash to work. A price decline with a corresponding configuration in the TATY indicator would strongly suggest a continuation of the bull trend, and possibly renewed assaults on new all-time highs.

    However, a price decline strong enough to drive TATY readings into the caution zone surrounding the 115 level would be a warning to Alexander and I that the dynamics of the supply and demand balance may be changing enough to compel us to consider, or even take defensive action in client portfolios to protect accumulated profits, and/or protect client wealth from risks rising to levels, which may not be prudent for conservative investors. The chart gymnastics required for the supply and demand indicators to complete the requisite patterns would likely take weeks, so in the near term we shall investigate declines as opportunities to put excess to work with lower risk entries.

    SAMMY   —   A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

    SAMMY is shown above in the second chart alone, and in the third with the SPXL 3X S&P-500 ETF overlaid. The SPXL three times leveraged S&P-500 ETF is for reference only.

    SAMMY has one purpose in life, which is to identify re-surging demand after sellers have exhausted their propensity to sell. Exhausted sellers are a necessary condition for a significant stock market bottom, but not a sufficient condition. To complete a bottoming process there has to be evidence of exhausted sellers, which is followed in a reasonable amount of time by evidence of re-surging demand. When both conditions are met, the probability of a new bull leg developing is extremely high. SAMMY is virtually worthless once it has signaled re-surging demand. So for now with a rally underway for weeks, SAMMY is shown for information only, and is of little value. However, as the next significant bottom forms, SAMMY will likely become critically important to us as a risk management tool for getting clients significantly more invested in stocks. At that next significant bottom I expect SAMMY to leap higher while painting out a bar on its chart completely above the previous bar. SAMMY looks like it has been shot out of a cannon when investors return in size, even as the price often is making new lows.

    THE BOTTOM LINE

    Timing the market is not part of anything we do at Optimist Capital, as we are strictly risk managers. However, in this update days, weeks, or possibly months before the next significant event in the stock market, we have described to our clients what we will do to manage the risks to your wealth, and how we will do it using objective market generated information from the NYSE, and the derivative markets. Opinions are subjective, and rife in this business, and tend to cause confusion, so all our actions are the result of taking into account what the markets are telling us about themselves through the objective information they generate. That information is then put into a strategic plan, which is implemented with the application of a tactical plan. This approach has been shown over time to allow us to grow wealth while minimizing risks. So now our clients know likely well in advance of us taking any actions what we will do, and how we will do it, in order to grow your wealth with the least risks possible.

    Jan 27

    OF PILOTS AND MARKETS

    Once upon a time just out of Georgia Tech, I had the good fortune to have a former Navy pilot as one of my flight instructors. Dick Aycock taught would be pilots to carefully prepare for every flight, and to know their aircraft so well that emergency procedures could be executed immediately should they become necessary. Another Navy pilot turned NASA Astronaut once said: “that landing on the moon was the second biggest thrill of his life”. A reporter asked what could possibly top landing on the moon? The Astronaut replied: “landing on the pitching deck of an aircraft carrier at night in high seas”! Dick Aycock had been a carrier pilot, and his dedication to being prepared in the air, and to strict adherence to proper flight procedures and training, later landed him a job as the chief pilot for Flowers Industries fleet of corporate jets. Flowers Industries (FLO NYSE) is the largest baking enterprise in the United States.

    I remember Dick taking me through emergency procedures over and over in Cherokee 140 Fox Lima, and Cherokee 5225 Tango, while teaching me to believe the instruments in front of me instead of the sensations my body was telling me. He often said that as a species evolution had not prepared us to operate in three dimensions, as our two dimension evolved brains would lie to us, when that vertical dimension was added to the mix. So hours of training “under the hood” with no view allowed of the horizon outside the aircraft did dramatically illustrate the necessity of believing the instrument panel, and not the sensations coming from my two dimension evolved body.

    This kind of intense training can be, and has been, the difference between life and death for many pilots. Young John Kennedy flying to Martha’s Vineyard in a Cherokee Arrow comes to mind, as haze obscured the horizon, and too few hours “under the hood”, and/or lack of instruction to turn on the on board auto-pilot had a tragic result in the sea for the young Kennedy, his beautiful wife, and her best friend. When a pilot cannot see even the propeller of his, or her, aircraft due to weather, then belief in one’s instruments can be the difference between screaming out of the sky nose down, and inverted at cruise power, or keeping the wings level while maintaining your clearance altitude, and approved heading from ATC (Air Traffic Control).

    The phrase often repeated among pilots telling stories in a hanger somewhere is that there are bold pilots, and there are old pilots, but there are no old bold pilots! Navigating the risks of piloting an aircraft in crowded skies subject to sudden changes in the weather is not unlike navigating the risks to increasing wealth in the financial markets. Both are done best, and with the least risks, when preparation, training, discipline, experience and belief in one’s proven instruments are constantly applied to the challenge.

    TATY   —   A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

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

    The often mentioned lengthy negative divergence in the TATY indicator (down sloping orange line on the chart) appears to have finally begun to exert enough pressure on the price to result in some weakness. At this point the price decline is only marginal, and TATY remains above the red zone having finished the week at 146. Recent price dips have been brief, and mostly of the intraday variety. So, it remains to be seen if this past week’s sharp decline in the price, and in several supply and demand indicators, are the beginning of a multi-day, or multi-week decline, or just another brief and fleeting dip in the price before another attempt to assault new all-time highs. So what are we to do? For the answer, please read on.

    Alexander and I will do what all successful pilots do, which is to apply our preparation, training, discipline, experience and belief in our instruments to maximize the risk adjusted return for our clients. So what does that look like applied to current conditions? For new clients coming over to us from other money managers heavily in cash, we will begin to carefully dollar cost average some of the excess cash into equities, but not in an aggressive fashion, until there is some evidence that the price is declining from a premium to value, on the way to approaching a significant discount to value. History has demonstrated that making new purchases of equities only when there is objective evidence of the price being at a discount to value exposes client wealth to minimal risks, while increasing the odds significantly that a new purchase will eventually be profitable.

    The deeper the discount to value as shown on the premium/discount to value indicator in the lower panel of the TATY chart the better. In the near term I’d like to see TATY make a bottom in, or near, the red zone surrounding the 140 level, while the premium/discount indicator in the lower panel declines below the red line at minus eight, and then rallies above the green line at minus three. Should TATY complete these kinds of chart gymnastics while the price is still touching lows for its current decline, then we would be compelled to consider aggressively putting excess cash to work, subject to evidence of resurging demand from our family of tactical indicators.

    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 in the third chart. THE SPXL is for reference only.

    SAMMY does a remarkable job of detecting resurging demand after sellers have exhausted their propensity to sell. Exhausted sellers are a necessary condition for a stock market bottom, but not a sufficient one. In order to complete a bottom there must be objective evidence of resurging demand shortly after evidence that the sellers have exhausted their desire to sell. SAMMY has a history of having the appearance of being “shot out of a cannon” when buyers return in size to scoop up perceived “bargains”.

    Human beings are inclined toward repetitive behavior, and this causes the sequence of events described above to result in low risks buying opportunities over and over again. However, please note this sequence is NOT time based, but rather it is discount to value based. We do not know how to “time” the market, but by combining a statistically valid strategic risk evaluation, and an objective discount to value determination, with the successful identification of exhausted sellers, and then resurging demand, the risks associated with the new purchase of equities can be minimized, regardless of valuation, or the current level of the market as measured by the S&P-500.

    THE BOTTOM LINE

    Both the price, and a series of supply and demand indicators, are showing evidence of weakness. It is much too soon to determine, if this is the beginning of a multi-day, or multi-week, bout of weakness; or just another fleeting decline before another attempt to assault new all-time highs. However, in either case, we are putting some excess cash to work in new accounts heavy in cash, and will aggressively put excess cash to work in accounts already reasonably invested, which have a bit of excess cash, if the stock market serves up an opportunity to put excess to work with a minimum of risks, as measured by our proprietary indicators. Obviously, the days ahead should yield an answer to the question of fleeting decline, or a significant low risks opportunity to put excess cash to work.

     

    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.

    Jan 21

    OBJECTIVELY MANAGING RISKS

    The stock market inched its way to new all-time highs this past week, as investors continue to exhibit an absolute conviction that good economic times are here to stay. Complacency, extreme bullish sentiment readings, and fear of missing out on the rally remain the order of the day. This situation reminds me of the old stock market cliché that says: “The stock market can remain irrational longer than you can remain liquid”. The status quo may continue, but in this business of managing financial risks to client wealth bullish extremes often appear toward the end of bull legs, and bearish extremes tend to appear near the end of bear legs.

    Alexander and I are in the risk management business, and we do not attempt to forecast future movements of the price in the stock market. We will leave stock market predictions to those, which believe they have the requisite skill, talent and expertise, to be successful at that most difficult of arts. However, objectively measuring the ever changing balance of supply and demand in the equity market, and then setting those measurements into a historical reference is something we do routinely with proprietary indicators designed specifically to account for the ever changing balance of supply and demand created by countless transactions on the NYSE, and in the global derivative markets.

    Human nature tends to repeat in the crucible of the stock market, and this makes comparison of objective measurements of human nature in action over time in the markets a worthwhile, and potentially profitable exercise. So today, very likely well in advance of a major stock market top, I’m going to briefly describe how the next major top will likely form vis-à-vis the tools we share with clients every week. I will bring you up to date on the current status of these supply and demand tools in the two sections to follow, and at the end of each section I’ll describe how these tools will likely configure their readings during a routine correction to re-invigorate demand, and/or how these tools will likely configure themselves as the next major top builds out. At this point, history suggests there will be at least one (or more) corrections prior to the formation of the next major top.

    TATY   —   A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

    TATY is shown above in yellow with the S&P-500 cash index overlaid in red and blue candle chart format. TATY finished the week up a bit at a strong 154. However, TATY continues to paint out a negative divergence with the price, which is touching new all-time highs. Negative divergences almost always result in the price entering a correction, but not always. Demand can gather strength during negative divergences, which can erase the divergence, but these events tend to be rare. Once buyers fatigue sets in, which appears as the negative divergence, that fatigue tends to go to completion in the form of a correction to set up lower prices, which in turn stimulates investors to act on their latent desire to buy at what appears, in the light of recent history, to be bargain prices.

    In environments of bullish extremes like currently, corrections may appear to come out of the blue, and may be quite uncomfortable and nasty, but fleeting. History suggests investors may encounter just such a price decline during the first quarter, or as the positive seasonal bias begins to wane around Easter. As long as the next significant price decline results in a corresponding bottom in the TATY indicator in, or close to, the red zone surrounding the 140 level, then we shall treat such a decline as a potential opportunity to put excess cash to work. A price decline with a corresponding configuration in the TATY indicator would strongly suggest a continuation of the bull trend, and possibly renewed assaults on new all-time highs.

    However, a price decline strong enough to drive TATY readings into the caution zone surrounding the 115 level would be a warning to Alexander and I that the dynamics of the supply and demand balance may be changing enough to compel us to consider, or even take defensive action in client portfolios to protect accumulated profits, and/or protect client wealth from risks rising to levels, which may not be prudent for conservative investors. The chart gymnastics required for the supply and demand indicators to complete the requisite patterns would likely take weeks, so in the near term we shall investigate declines as opportunities to put excess to work with lower risk entries.

     

    SAMMY   —   A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

    SAMMY is shown above in the second chart alone, and below with the SPXL 3X S&P-500 ETF overlaid. The SPXL three times leveraged S&P-500 ETF is for reference only, certain quirks related to its derivative construction can result in tracking errors with its S&P-500 benchmark over time.

    SAMMY has one purpose in life, which is to identify re-surging demand after sellers have exhausted their propensity to sell. Exhausted sellers are a necessary condition for a significant stock market bottom, but not a sufficient condition. To complete a bottoming process there has to be evidence of exhausted sellers, which is followed in a reasonable amount of time by evidence of re-surging demand. When both conditions are met, the probability of a new bull leg developing is extremely high. SAMMY is virtually worthless once it has signaled re-surging demand. So for now with a rally underway for weeks, SAMMY is shown for information only, and is of little value. However, as the next significant bottom forms, SAMMY will likely become critically important to us as a risk management tool for getting clients significantly more invested in stocks. At that next significant bottom I expect SAMMY to leap higher while painting out a bar on its chart completely above the previous bar. SAMMY looks like it has been shot out of a cannon when investors return in size, even as the price often is making new lows.

    THE BOTTOM LINE

    Timing the market is not part of anything we do at Optimist Capital, as we are strictly risk managers. However, in this update days, weeks, or possibly months before the next significant event in the stock market, we have described to our clients what we will do to manage the risks to your wealth, and how we will do it using objective market generated information from the NYSE, and the derivative markets. Opinions are subjective, and rife in this business, and tend to cause confusion, so all our actions are the result of taking into account what the markets are telling us about themselves through the objective information they generate. That information is then put into a strategic plan, which is implemented with the application of a tactical plan. This approach has been shown over time to allow us to grow wealth while minimizing risks. So now our clients know likely well in advance of us taking any actions what we will do, and how we will do it, in order to grow your wealth with the least risks possible.

     

    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.

    Jan 13

    COMPLACENCY TURNING INTO DESPERATION?

    Following the dark days of 1940 and the retreat to the beaches of Dunkirk, the Battle Of Britain, and the Nazi bombings during the “Blitz”, Winston Churchill and the American High Command decided to undertake a campaign to drive the Nazis from the strategically important oil fields of North Africa being protected by the Africa Corps under the command of General Erwin Rommel. These landings in Africa would be preparation, and a testing ground, for the invasion of Europe to come later, and not too soon enough to satisfy Marshall Joseph Stalin, who was losing soldiers and civilians by the millions to three Nazi Army groups laying siege to Leningrad (St. Petersburg), Moscow and the Ukraine. British troops led by General Bernard Montgomery, and green American troops under the new command of General George Patton were eventually successful in driving the Nazis from North Africa. After a long series of retreats and setbacks the British people finally had a major victory to celebrate. Prime Minister Winston Churchill, careful to not raise expectations too high, addressed the nation on the significance of the victory in North Africa. Churchill said: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”.

    Churchill’s quote came to my mind this past week, when it was reported that a certain well known stock market pundit had observed that he was surprised not that the S&P night session futures sold off sharply when the Iran ballistic missile strike on military installations housing American troops in Iraq was announced, but that the sell off almost instantly found buyers, and the buying spilled over into the NYSE opening the next morning. The pundit said the buying appeared to be in “desperation”.

    Anecdotally stock market complacency, desperation buying, and buying out of fear of missing out often happen near the ends of legs in bull trends. These observations tend to be instruments too blunt to apply successfully to make trades, but these kinds of events do tend to precede the (temporary) exhaustion of demand, as the last buyers to be convinced throw in the towel, and buy out of a sense of frustration and desperation. Churchill knew there were many more months of war ahead, but he also knew the Allied victory in Africa was a turning point, “the end of the beginning”. The arrival of buyers out of desperation may also not be the end of this long bull run, but a prudent investor would take such an observation, made by a well known figure, as a “straw in the wind” to be alert for more, and better objective evidence that the stock market may be in need of taking a breather sometime in the first quarter?

    TATY   —   A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

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

    TATY finished the week at a modestly strong 152, but with the weeks long negative divergence (see down sloping orange line on the chart) still in place, even though the stock market touched new all-time highs again. A negative divergence can disappear due to improving demand, but most often a negative divergence in this strategic indicator will foreshadow at least a modest decline, or correction, in the price. The longer the negative divergence remains in place, the higher the odds that buyers fatigue will set in and a normal correction to re-invigorate demand may appear, perhaps to the disappointment of those buying out of desperation? For now all we know for sure is the price has been sustained by weaker demand according to the TATY measurement of supply and demand, but still enough residual demand to power the price to touch new all-time highs.

    A decline causing TATY to make a BOTTOM in, or near, the red zone surrounding the 140 level would likely be followed by additional attempts to assault new all-time highs. On the other hand, a decline strong enough to force the TATY indicator into the caution zone surrounding the 115 level may signal a change in the balance of demand over supply enough to cause Alexander and I to make a decision regarding the need to take defensive actions in client portfolios. A “Big Chill” warning would be an early warning that the supply and demand dynamic may be changing in favor of rising risks to client wealth requiring defensive action. Such an event would likely take weeks to develop, so for the time being periods of market weakness will be evaluated as opportunities to put excess cash to work.

    SAMMY   —   A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

    SAMMY excels at identifying re-surging demand after sellers have exhausted their desire to sell. Otherwise, it is of little value during prolonged bull trends, so it is shown above alone, and in the below with SPXL 3X S&P-500 ETF overlaid. The SPXL is for reference purposes only.

    THE BOTTOM LINE

    Strategic indicators suggest the record setting bull run has more to go, perhaps much more to go, but like breathing in and out for you and me, bull trends do not go up in a straight line. There will be declines to re-invigorate demand, and the recent appearance of buyers out of desperation may be a straw in the wind that the stock market may need to catch its breath in the form of a modest decline, or correction. The more objective reason for the expectation that the market may be nearing a period of weakness is the weeks long negative divergence in the strategic indicator TATY. Negative divergences in the TATY indicator almost always result in some market weakness. Fortunately, most of our accounts are invested, and enjoying their increase in wealth. We shall investigate any periods of weakness as opportunities to put excess cash to work in equities, as long as periods of weakness do not trigger a “Big Chill” warning.

     

    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.