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    I had planned to share some information supporting my continuing angst about our Federal government’s accelerating debt spiral in this week’s update. However, the need to cover in detail the implications of the stock market’s behavior during the week just ended has compelled me to postpone sharing some of my research about the potential collision of out of control rising debt, and interest rates, which appear to be poised to rise. I’ll share the ominous numbers with clients, and research customers, at a later date.

    At the end of bull runs, and after the initial leg down in a new bear trend, bear rallies tend to form, which retrace significant percentages of the previous decline. During such rallies the bullish sentiment evident at the top begin to re-emerge among investors. This often causes investors to squander their last opportunity to preserve capital before the new bear trend re-emerges, often with a fury more violent than during the first (warning) leg down. For better or worse, we are going to ignore any such bullish emotions, and proceed to preserve client capital. Quote is from the April 7, 2020 Interim Update.

    We have opted for a strategy of preservation of client capital until such time as a series of strategic and tactical supply and demand indicators return closer to their normal ranges. This strategy involves aggressively raising cash at tactically calculated sell levels between the 38-62% Fibonacci target levels for the recovery rally of the decline to date from the February all-time high. This means we are willing to sit out any additional rally above our sell targets in order to preserve client capital from the higher probability potential gap down, and then accelerate lower implied by the 2000-2003 type form, or format, emerging bear market, which perhaps may be of a much greater magnitude, or degree. Quote is from the April 11, 2020 Weekly Update.

    The weekend update outlined the potential ratio of risks to reward in this unprecedented outlier of stock market events. We have not changed our minds. Clients should expect media and government announcements that all is well, the crisis is passing, and the economy will regain its former strength, which may give way to a sharp “V” shape recovery in the economy and the markets. They may be right, but as risk managers we do NOT like the odds, so we will continue to raise cash. And, by the bye when bear rallies expire, the next leg down tends to start with a gap, and then accelerate. I can assure investors you do NOT want to find yourself heavily invested in equities during a gap down, then an acceleration lower event. So we will risk missing some upside, to avoid possibly an acceleration lower. If we are wrong we can make up the upside we gave up, if we are right cash will enjoy a huge bull market in terms of shares it can buy as the new bear market matures. Quote is from an Interim Update, and repeated in the April 11, 2020 Weekly Update.

    The long cold nights of winter have given way to warm days of spring, and with the April showers has come a renewal of bullish sentiment. States are re-opening, rumors circulate about effective drug therapies for the Coronavirus, and statements from two domestic biotech companies, and one at Oxford in England, hold out the implied prospect of the biotech Calvary arriving sooner rather than later. One could literally feel, and watch the surge in prices on Wall Street, as the bullish sentiment evident at the February top returned, and began to exercise its power over investors small, and large.

    Screenshot 113

    Screenshot 114

    First the NASDAQ breached resistance at the 50% retracement level of the record setting bear leg down, which began after the February all-time high. Next the NASDAQ (Screenshot 114) touched the 62% level, but the S&P-500 lagged only managing to breach the 50% retracement level. However, the NASDAQ then began to decelerate, just as the S&P-500 (Screenshot 113) managed to surge marginally past its own 62% retracement level on optimistic statements by Dr. Anthony Fauci about a drug therapy, which has not yet statistically proven it can lower Coronavirus morbidity, and which studies in China has shown it to be ineffective. Happy Days are here again! Or, are they?

    Right on schedule as the NASDAQ and S&P-500 approached their 62% Fibonacci retracement levels, bullish sentiment re-emerged, which is classic counter-trend rally behavior. Countless times over the decades this phenomenon has played out in the stock market, deceiving investors into squandering their last opportunity to exit a budding bear market. The probability is favorable that once again this financial equivalent of a Greek tragedy will happen this time as well. The odds are favorable, but investors should be reminded that certainty cannot be had in this business of navigating risks in the stock market. I had hoped the market would tip its hand before the end of April, and then we could eliminate one of our two most likely bear market formats, but alas it appears the market, as it is so often prone to do, will obscure its intentions for a bit longer, but likely not much longer.

    Over the last several weeks we have been making the case that of the more than a dozen forms a bear market can take, there are two which are the most probable. These two forms have real time examples shown above in Snapshot-341 and 344, the 1989-1990 bear market in the S&P-500, and the 2000-2003 bear in the NASDAQ respectively. Since both the NASDAQ and S&P-500 have now touched their respective Fibonacci 62% retracement levels, a resolution of which pattern will win out in the current situation is likely to become apparent in the days ahead.  Please notice that I said days, as opposed to weeks.

    Previous updates have stated the NASDAQ 2000-2003 bear format had an estimated probability approaching 80%, and we see no reason to adjust that percentage, the most powerful rally in three decades off the March 23 low notwithstanding. Given the record setting decline which preceded the rally, the rebound would appear to be just a counter-balance to the degree, or magnitude, of the decline. With so many market measures registering statistical outlier type numbers, and in like manner outlier type economic numbers, a prudent investor would likely conclude that a prolonged period of distress is more likely than an instant recovery suggested by the powerful rally off the March 23 low.

    History does not favor quick development of new safe and effective drug therapies or vaccines, or quick retrenchment in still escalating and record setting unemployment numbers, or GDP measurements approaching depression era levels, and/or supply and demand metrics still in deeply oversold conditions after a powerful 62% retracement rally. And, did I mention the potential that the all-time high in the National Debt to GDP ratio (1.22), set as a consequence of winning WWII, is likely to be exceeded before the Congress is done with the various CARE rescue programs. None of this factors in the potential for the sudden emergence of the Law of Unintended Consequences, which history teaches is a very real possibility. With so many uncertainties in play, a quick recovery to “normal” seems unlikely, hence the 80% probability estimate for an ongoing bear market, potentially of large degree.


    Snapshot-344 shows the NASDAQ 2000-2003 decline, and if something similar is at work now, then the next leg down is likely to be equal, or greater, in persistence and ferocity as the first leg down, and will likely take out the March 23, 2020 low. I suspect there is about a one in three chance that this leg down may include a crash sequence, when institutions recognize the bear is likely just beginning, and then rush to sell all at the same time. That sequence of events may also trigger additional pile on selling from so called program trading. This potential, although a low probability, was a huge factor in compelling me to aggressively raise cash. Once a crash sequence is triggered, then it is often too late, or too difficult, to protect client wealth. The NASDAQ 2000-2003 bear form is obviously the worst case, but until evidence to the contrary arrives we will favor preservation of capital in all our strategies and tactics.

    Now let us take a look at some important support levels for the counter-trend rally in the S&P-500. An S&P-500 close below 2727 would serve as an early warning that the counter-trend rally may have expired. An S&P-500 close below 2655 would likely confirm the rebound rally was complete, and an S&P-500 close below 2444 would likely confirm a continuation of the bear market into a new leg down. A breach of 2655 and 2444 would imply the rising probability of an acceleration lower, or perhaps even potentially the initiation of a crash sequence. These are the key levels to watch in the worst case 2000-2003 NASDAQ form bear market suggested by Snapshot-344.


    Snapshot-341 represents the other format this bear market may be following. This is the 1989-1990 bear in the S&P-500, which implies the current bear market likely ended at the March 23, 2020 low. If the bear market ended on March 23, then the first rally leg in the new emerging bull trend very likely ended this past week. An examination of Snapshot-341 shows that its first leg up, after its October 1990 bear market ending low, expired in late November, or early December 1990. That first leg up in the new emerging bull leg was retraced by a decline, which tested the previous low during January 1991. In our current situation, if the bear market ended on March 23, 2020, and the first leg up in an emerging new bull leg up ended this past week, then in like manner as 1990 a decline to test the March 23, 2020 low should be beginning now.


    Please take a look at Screenshot-115, which is of the S&P-500 through Friday’s close in daily format. Fibonacci is at work all the time in nature, and the markets. So I’ve placed a Fibonacci grid over the S&P-500 daily chart to give us some potential reference on where the decline, which began on Thursday, may end during an expected test of the March 23 low. These targets are 2663, 2573 and 2483. Sharp eyed investors will notice right away that the 2663 level is remarkably close to the 2655 support mentioned regarding the NASDAQ 2000-2003 type bear market form, and ditto for the 2483 and 2444 respective levels of the two different bear market forms, or formats. The support surrounding 2483 has been previously tested, making it particularly interesting. The market’s behavior around these key levels, should the price approach them, may be critical in eliminating one of the potential prototypes for the current bear. However, investors should realize that we are discussing the two most likely formats, when more than a dozen are available for the bear to choose from. Even so, the Fibonacci calculations would also likely be close for the bear forms not being discussed.

    The open question regarding did the bear market end on March 23, 2020 and Happy Days are here again, or did a bear market of potentially massive degree, or magnitude, complete only its first leg down of several powerful legs down yet to come, will potentially be answered in the days ahead by the market’s behavior, should the support levels shown in the preceding paragraph be tested. In the emerging new bull trend case the March 23, 2020 low will be tested, but not breached. In the developing large degree bear case all the support levels will be breached, and then finally the March 23, 2020 low will be breached, as the bear becomes increasingly recognized, and global investors rush to hit the sell button. Investors can gain a sense of how swift this kind of decline may be by looking at what happened after the NASDAQ rebound rally expired into a double top in July and August of 2000 (Snapshot-344).


    TATY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format, Snapshot-351.

    TATY finished the week at a grossly oversold 100 level after failing to even rally back into the caution zone surrounding the 115-125 level. This is another statistical outlier, as this indicator has never behaved in this way, since its creation over three decades ago. TATY is just one of many supply and demand indicators, which failed to lead the price higher off the March 23 low. This atypical behavior has consistently implied that these families of indicators were not signaling a return to normal, and we should be skeptical of the powerful, but likely bear rally off the March 23 low. This is another reason we believe the odds remain in favor of a developing bear, and not in favor of an emerging new bull trend. Abnormal, atypical and statistical outlier events on multiple levels of uncertainty have compelled us to take defensive actions in client portfolios to preserve capital.


    The rally off the March 23, 2020 low appears to have peaked this past week in the S&P-500 and the NASDAQ. This implies the potential for a test of the March 23 low, which in turn will likely determine which of the two bear market forms, or formats, we have been discussing will survive. A successful test of the low, especially if the decline stops close to one of our projected Fibonacci support levels, would imply another leg up strong enough to take out this past week’s high, and then potentially an assault on new all-time highs. On the contrary, successive breaches of the support levels identified in this update accompanied by increasingly negative market measurements, and/or acceleration lower, would tilt the odds in favor of a protracted bear market potentially of very large degree, or magnitude. We are prepared to turn either outcome to advantage for our clients.

    The days ahead as the calendar turns deeper into spring, and then toward summer, are likely to be some of the most critical, and potentially the most profitable, since the 2007-2009 financial crisis, and Great Recession.

    Please stay safe!


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

    ByOptimist Capital

    Optimist Capital Institutional Wealth Management for All

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