THE BOTTOM LINE
An internationally famous big bear on the stock market is making a strong case within his methodology for an imminent stock market collapse, possibly beginning with a crash sequence. He may be right, but the history of the formation of major tops in the stock market does not currently support the bear case with favorable probabilities. While some indicators have become mixed in the short term, longer term the evidence of enough decay in stocks participating in the bull trend leading to an exhaustion major top is just not being supported by the condition of multiple supply and demand indicators.
However, this does not mean that the stock market may navigate the remainder of 2021 without increasing volatility, and possibly a nasty correction to reinvigorate demand. On the contrary, we are in the post favorable seasonal period of the calendar, and both our own, and Lowry Research indicators, have become mixed in the short term. Should interest rates resume their recent sharp rise, then the balance of 2021 may experience a volatile ride in the equity market.
Please note that a close below the horizontal red dashed line on Screenshot-233 at S&P-500 4056 may potentially result in a quick and scary decline to support surrounding the S&P-500 3850 level at which point we would have to analyze, if a buying opportunity was at hand, or if a larger correction may be getting underway. On the contrary, a rally above S&P-500 4190 on a closing basis, confirmed by a series of supply and demand indicators, would imply an attempt to assault new all-time highs may likely follow.
The S&P-500 made an all-time high on May 7 (Screenshot 233 just below), and then promptly sold off. Two recovery rallies have so far failed to gain enough strength to touch new all-time highs having been repelled at approximately the S&P-500 4180 level (Screenshot 233 Dashed Horizontal Orange Line). Volatility has also increased in accordance with our recent warnings to investors. A case can be made for more of the same, as it appears the rally must make new all-time highs soon, or investors may become frustrated and begin to take some profits.
Lowry Research supply and demand metrics remain favorable in the aggregate, but have become mixed in the short term lending credibility to our outlook for increasing volatility, especially should interest rates resume their recent sharp move higher. In fact, a well-known bear, which has an international reputation, is now calling for a collapse in stock prices, perhaps even beginning with a crash sequence. He may be right, and within his discipline he is making a very compelling case.
However, it remains to be seen if some short term mixed supply and demand metrics in the Lowry Research system may begin to change more toward the negative, but for the time being the big bear case is not being confirmed by our own measures of supply and demand, nor by Lowry’s. All we can say at the moment is that we are expecting a volatile summer and fall, as investors ponder the prospects for inflation and rising interest rates in a grossly over-valued stock market.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in Snapshot-276 in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week at 139 marginally below the red zone surrounding the 140 level.
As mentioned previously several times, if TATY begins to oscillate with bottoms forming in, or near the red zone, and tops forming near the blue zone at the 160 level, then this would be a big plus for the continuation of the current leg up in the rally off the March 23, 2020 low. On the contrary, the formation of a “Big Chill” warning would be a huge boon to the bear case, and make more likely the potential for the bear case to begin with a crash sequence. Can the big bear case happen, and even potentially begin with a crash sequence, well of course it can, if given the arrival of enough spontaneous uncertainty, but history does not support the favorable probability of such events.
Paul Desmond’s long study, and then publication, of how major tops form in the stock market debunked the notion that bear markets just appear out of the blue, and on the contrary materialize usually only after long periods of decay in the numbers of stocks participating in the bull trend. Eventually this creeping decay process reaches a tipping point and a bear market emerges. The odds appear to be increasing that a period of weakness may be needed to reinvigorate demand, but current Lowry measures of supply and demand remain favorable for demand over supply. And, although our own metrics have also become mixed in like manner as Lowry, a mixed picture is not necessarily a big enough negative to justify defensive action, but like everything related to the stock market it is subject to change.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above in Screenshot-232 in yellow with the S&P-500 overlaid in red and blue candle chart format. The large negative divergence represented on the chart by the orange dashed down sloping line remains just as it has ever since the March 23, 2020 low. After a brief spike higher when the price touched a new all-time high on May 7, SAMMY weakened and remains weak signaling the prospect for near term volatility, and adding a puzzle piece to the mixed picture among indicators. As long as this yawning negative divergence fails to confirm the price making new all-time highs, then the potential for volatility will likely remain, frustrating and aggravating as that may be.
Please stay safe!