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    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 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 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 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.



    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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