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    PRESERVATION OF CAPITAL

    I cannot remember a time when I have been more frustrated with the stock market, than during these past few weeks. I hope the market breaks out of its summer doldrums, and then confirms that a new bull market began at the March 23 low, which would cast me in the role of having been overly cautious in our quest to preserve client capital. We have encountered consistently adverse statistical outlier type economic readings, and uncertainties including an important election, and a global pandemic on a scale not seen since the Spanish Flu of 1918. The pandemic has caused negative economic metrics, and unemployment numbers not seen since the Great Depression. And, the economic numbers seem poised to perhaps take a sharp turn for the worst soon, because various government economic emergency measures will begin to expire at the end of this month. The cessation of the supplemental $600 per week unemployment insurance alone will cause millions to confront some very difficult choices, and in the process likely negatively impact aggregate demand in our economy literally overnight.

    Home owners with mortgages, and renters, are struggling to pay their mortgages, or rents, and some of the numbers Alexander and I are seeing come cross the tape suggest the potential, probability really, of a coming huge wave of mortgage defaults, and rental housing evictions. For example, Bank of America just posted some very scary numbers after hours, which may be the first “straws in the wind” confirming an approaching economic storm, which has been artificially delayed due to various government aid programs passed in response the COVID-19 crisis. The promise of an efficacious vaccine, or effective therapy for the virus still  seems months down the road, even as the number of cases, and unfortunately deaths, are soaring during a time when a hot weather respite was suggested to be coming by some in power. States are mandated by law to balance their budgets, and that means some, if not all, will have to shed substantial numbers of needed essential service employees. For example, here in Florida the Governor is cancelling contracts with outfits, which ironically process unemployment claims at a time when Florida has been in the news for lagging way behind in unemployment claims processing. In a State which has one of the higher rates of unemployment, one would think cutting jobs related to processing claims would be one of the last areas to consider cutting jobs. Yes, confirmation of a new bull market would be welcome news given the current environment burdened with so many uncertainties. However, for weeks now the stock market has been able to disguise its bull, or bear, intentions; and this week was no exception, as the bulls and bears wrestled in a slow moving narrowing range.

    This past week the bulls actually managed to press the price of the S&P-500 to a new intra-day recovery high at 3238, but then failed to close above the 3232 closing high touched back in June (Screenshot ABOVE). Today, Friday July 17, the price again pressed above the recovery rally closing high at 3232 during the last thirty minutes of the session, but then sold off into the close finishing again below the 3232 resistance. The bears on the other hand tested ratcheting higher support levels all during the week, but on every attempt were rebuffed by the sudden appearance of motivated bidders. Some of the first indications that this is a disguised bear market will be the sequential violation of the Fibonacci support zones still shown from previous weeks on Screenshot-143. If you are not suspicious some of this week’s sudden bidders were not doing so at the request of the Fed, then I’d like to make you a deal on a certain bridge in Brooklyn.

    So, another week is in the book with no confirming evidence that the rally is a leg up in a new bull market, which will eventually touch new all-time highs, or is just a recovery rally in an on-going bear market, possibly on a scale of the 2007-2009 debacle, or even greater. I have been a witness to accelerating wealth destruction at lesser scale, or degree, than the potential implied in this statistical outlier situation, and that sobering experience continues to compel us to opt for preservation of capital, until evidence to the contrary arrives to compel us change our defensive stance.

    The risks are not just the implied potential for wealth destruction in second legs down in major bear markets, but the swift and accelerating nature of those types of declines, which in some past examples have caused investors to wait for a bounce to sell. Unfortunately, global recognition often causes the eventual bounce to arrive at much lower prices, which can then cause investors to fear that they may be selling into a bottom, resulting in even more delay. This is why the final bottom often arrives in an environment of panic, resulting in free falling prices, as the pain becomes so great that investors are willing to sell, even as the price is crashing. Anyone which has managed money for a few decades has heard the story of stock brokers taking phone calls from distressed and panicked clients saying “just get me out”, or meeting with clients afraid of opening their investment account statements during a major bear market.

    If our continuing caution turns out to be the best choice for our clients, then please know we shall not take any pleasure in being right. The re-awakening of the napping bear would likely devastate the savings, and much needed retirement funds of young and elderly alike, and it has been my experience down through the years, that clients tend to need their funds, just when the markets are mis-behaving, and performing at their worst. Hence, our continuing respect for the possibility that the recovery rally is accomplishing what bear markets always do, which is to cause investors to be buying, when they should be making the most of their likely last opportunity to take some profits before the bear causes them to swiftly evaporate.

    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 well below its normal operating range during a bull trend, even with the price of the recovery rally walking all over its closing high during this past week. And, sharp eyed investors will notice that although the recovery rally has been testing its closing high, TATY is now beginning to develop a negative divergence with the price. This is another example of the “outlier” nature of the market these days, as TATY has NEVER developed a negative divergence after failing to pull the price higher like gravity of a larger mass does on a smaller during a rally phase. I will take this abnormal and atypical behavior as a warning that the recovery rally is likely a trap for overly optimistic investors. And, numerous sentiment measures are registering near record, or unprecedented levels of bullish sentiment with the price still short of its all-time high.

    Sentiment may very well be a blunt instrument, but it is also one with a consistent history of reaching extremes bullish (or bearish) coincident, or nearly coincident, with significant turns in the stock market. No indicator is perfect in this business of managing risks and uncertainty, but to ignore the long history of sentiment extremes is like ignoring your fire alarm in the wee hours of the morning  —  the consequences may be serious.

    THE BOTTOM LINE

    The stock market continued to drift in a dog days of summer range this past week, refusing to yield up confirmation of its intentions bull, or bear. This frustrating and potentially dangerous drift in a range is likely to completely change sooner rather than later, when the rally breaks out to new recovery rally highs. Or, on the contrary, when sequential levels of support begin to be assaulted, and then violated, possibly in an accelerating manner lower. The former on short covering as the rally begins to assault the former all-time high, and the latter as recognition spreads that investors have trapped themselves in a bear market, which is beginning a new leg down.

    Given the penalties for being wrong are likely multiples for the bear case relative to the bull, we will continue to opt for preservation of capital, until evidence to the contrary arrives to compel us to change to maximizing return with as little risks as possible.

    Please be safe, as numerous experts continue to caution that our global ordeal with the COVID-19 remains only in the early innings. As my wise and often succinct father used to say: “Your health IS your 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.

    ByOptimist Capital

    Optimist Capital Institutional Wealth Management for All

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