My late father, Haywood Adams, was a member of what Tom Brokaw wrote about as “The Greatest Generation”. Daddy once admonished me to “never attempt to argue facts with a person’s beliefs, because their beliefs will always trump your facts”. Daddy, having grown up poor and seriously under-educated in rural Ochlocknee (Georgia) during the Great Depression, was nonetheless admired for his wisdom. Webster’s Dictionary once defined wisdom as “applied knowledge”, and Haywood Adams excelled at the application of what he knew, which is why I suspect this quiet, and wise man, has three generations which also bear his name; Gregory Haywood, Caroline Haywood and Pace Haywood. I suppose it is natural this time of year for our minds to remember those, which have had a profound influence on our lives, and as the drama in the Congress played out this past week, I was reminded of Daddy’s observation. The real struggle in politics is always about power, and that struggle was on public display this past week in the people’s House as one party argued facts, and the other stridently argued their beliefs. So for only the third time in our country’s history the House has voted out Articles of Impeachment for a sitting president, and yet the stock market simultaneously touched new all-time highs in the popular indexes. And, the current balance of demand remains in the superior position to supply according to our proprietary indicators.
Financial institutions spend countless millions of dollars on research, when the stock market is actually driven by investors beliefs about future expectations, which are extremely difficult to ascertain. I once knew a professional money manager, which regularly attended the daily investment committee meetings I chaired. When I was hired away by another firm, I was disappointed that I would no longer have this long time pro in the meetings I would be chairing at my new firm. You see this gentleman had to be convinced by copious facts before he could become comfortable enough to buy, or sell, in size for clients, which almost invariably resulted in him buying close to tops, and selling close to bottoms. He was often a wonderful “tell” that a turn in the market may be at hand. He never really became comfortable with the notion, that the stock market discounts the future, and is driven not by the facts of what is known, but by beliefs about future expectations. The gentleman has lots of company in this challenging business of managing opportunities and risks for clients, which is too dominated by those excelling at relationship building, and other pros with the requisite experience, proprietary tools, and skills to produce superior risk adjusted returns not so much.
Daddy knew how to fight the Japanese during his four beach landings over four years of island hopping in the Pacific. He knew how to lead his men to drain and repair flood prone tropical runways while under enemy attack, so our war planes could land, which in many cases had already departed their carriers at sea. This was no small task, since there was no piping available for the drains, so he innovated by putting ordinance crews to work using primer cord to cut out the heads and bottoms of empty 55 gallon Avgas drums, and another crew to work welding the drums together into large pipes for the make shift drains. He knew how to lead a small group of volunteers to get an artillery piece backed up a mountain with a bulldozer, and in place in time to take out a large Japanese rail gun hidden in an opposing mountain. The previous artillery crew had been wiped out, when the Japanese got off the first round. Having found the previous artillery crew’s over and short “book”, when the Japanese gun began to emerge from its protective tunnel, it was greeted with a round that found its mark. That operation, executed under the cover of darkness, earned him the Bronze Star, although he never talked about it. He never knew his observation that beliefs trump facts, would also be applicable as a key to understanding one of the nuances of successful investing. The wonderful thing about wisdom is it often plays well in multiple venues.
So what is the point of this bit of unique history, and what does it have to do with your investments? The answer is, as it has been for quite a while now, is to ignore the evening news regardless of how bad it may become, and ignore the rich valuation of the stock market, as long as the beliefs of investors continue to drive numbers in our proprietary supply and demand indicators, which show that demand remains stronger than supply. The law of supply and demand is the only absolute in this business of managing opportunities and risks, and supply and demand is driven by beliefs about the future, which will always tend to trump facts.
TATY — A REPRESENATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in yellow with the S&P-500 index overlaid in red and blue candle chart format.
TATY finished the week well above the red zone surrounding the 144 level at 153. As long as TATY paints out BOTTOMS in, or near, the red zone the odds will remain favorable for additional attempts to assault new all-time highs. However, investors should note that the negative divergence (orange down sloping line) between the indicator and the price remains. Negative divergences can linger for weeks before the price responds in the negative, or alternatively negative divergences can simply disappear as a response to strengthening demand. The rally is overbought and extended, so a decline to re-invigorate demand would be plus in my view, and perhaps an opportunity to put excess cash to work in equities. Unless the divergence grows sharply more negative quickly, then investors may reasonably expect more assaults on new all-time highs.
SAMMY — A REPRESENATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown in the second chart above alone, and below with the SPXL 3X S&P-500 ETF overlaid. The SPXL is for reference only.
SAMMY has an enviable record of identifying resurging demand after sellers have exhausted their propensity to sell. Please note that so far this tactical indicator is also displaying a negative divergence to the price. The negative divergence is shown on the chart as a down sloping orange line. The divergence may disappear, if demand grows stronger and supply weaker, but for the time being both the negative divergence in the family of strategic and tactical indicators need to watched carefully for signs that the divergence between the price and the indicators may be growing more critical.
THE BOTTOM LINE
Given the current balance favoring demand over supply, investors can reasonable expect more attempts to assault new all-time highs, unless the nominal negative divergence on both the tactical and strategic indicators grows more serious. As long as our supply and demand indicators continue to favor demand over supply, then investors may continue to ignore the cacophony of daily negative news, and the increasingly rich valuations of stocks, because investors are acting on their beliefs that the economic future is bright, and not the history and facts, which suggests growing threats with the potential to cast long shadows over the ongoing longest economic recovery on record.
All of us at Optimist Capital wish all of you Happy Holidays with family and friends.
Regards, 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.