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    CHANGE IN CHARACTER, BUT NOT TREND

    Jul 26

    CHANGE IN CHARACTER, BUT NOT TREND

    THE BOTTOM LINE

    Volatility, as expected, has increased over the past several days, and investors should expect more of the same.

    Lowry Research and our own proprietary indicators are suggesting more and more stocks are failing to keep pace with the popular stock indexes, which touched new all-time highs this past week. This “peeling away” phenomenon is especially prevalent in the Russell 2000 index, which is heavy with small capitalization stocks, but this “peeling away” is now also slowly spreading to other indexes.

    Negative divergences on both weekly and daily formatted charts have begun to appear more frequently, and have been followed by quick declines, then assaults on new all-time highs. The weight of the evidence is suggesting that the Paul Desmond analogy of leaves falling from trees as winter approaches may be past the Labor Day marker, and deep into October approaching the Halloween marker. This progression is developed enough to begin to carefully watch for confirming evidence in the form of a TATY “Big Chill” warning, which would be a clarion call for defensive action in portfolios.

    One internationally famous bear is calling for a top, which will be followed by a swift and persistent “crash” sequence, and he may be right. However, this is an odds game, and the odds favor the development of a “Big Chill” warning prior to a crash sequence getting very far into development, even if a major top is now under construction. Vigilance required!

    Change in Character

    Paul Desmond, the late president of Lowry Research Corporation, often compared the formation of major tops in the stock market to the process of summer turning into fall, and fall into winter, when at the outset of the process leaves would imperceptibly fall from trees beginning say shortly after Labor Day, and by Halloween perhaps the falling leaves would become noticeable, and by Thanksgiving were raining down in volume, and finally by Christmas the trees were bare, or almost so. The process in the stock market is much the same as individual stocks, like the leaves on a tree, begin to fall away from the still rising popular stock indexes, slowly at first, but then accelerating in “a poco a poco” like fashion, as the bull trend approaches the end, and starts to roll over into a new bear market. Paul wrote an award winning “White Paper” about this phenomenon, which is still available free on the Lowry website, for those of you wishing to know more detail.

    Last week’s update took into account the growing negative divergences in a number of supply and demand indicators, and suggested the Friday persistent decline in the price may trigger a crossing of Lowry’s Selling Pressure Index into the superior position above the Buying Power Index with the resumption of trading this past week, and that did happen on Monday, only to be reversed by Tuesday’s strong rally. Once again the pattern of the last several months was repeated, as a brief and dramatic decline was shortly met by aggressive bidders, which by today (Friday) had driven the price back to new all-time highs. However, today’s new all-time highs left in place new negative divergences, at least for the moment, which perhaps may be preliminary signals of a change in character in the stock market, which may in turn eventually begin to warn of the arrival of some aspects of the formation of a major top.

    Screenshot (256)

    Screenshot-256 shows the S&P-500 through Friday’s close in daily format.

    TATY   —   A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

    snapshot-285

    TATY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format in Snapshot-285. TATY finished the week at 144 after failing to decline into the caution zone surrounding the 115-125 level, which also means the first step in a new “Big Chill” warning was never triggered, but a negative divergence does remain in place represented by the down sloping turquoise line on the chart.

    Last week’s update asked the question, if a major top could occur without TATY flashing a “Big Chill” warning first. The answer was “yes this is the stock market and anything can happen, but the odds do not favor such an event”. Of course that is still the case, as TATY has been very consistent in issuing “Big Chill” warning before major tops, and before tops in rebound rallies during bear markets, which obviously can be an edge for those wishing to sidestep the worst parts of bear markets.

    In the current situation with Lowry indicators suggesting fading strength in demand and growing supply, and more bears beginning to appear in the financial media, there appears to be a change in the character in the stock market. However, given the consistency of TATY “Big Chill” warnings down through the years, I’m inclined to not take any dramatic defensive action before a “Big Chill” warning appears and is completed. And, since TATY is a weekly strategic indicator, then that signal would not likely appear until some time in the fall, and may not catch the exact top, but more likely the rebound after the major top has given way to the first leg down in a new bear trend.

    Considering the weight of all the currently available evidence, for those of you following the Paul Desmond “leaf” model of how tops form, then the stock market is likely past Labor Day and nearing Halloween, where the evidence of change may likely begin to accumulate more quickly, just as the leaves begin to fall in greater volume as the calendar leaves September behind, and grows deeper into October. This means Lowry Selling Pressure would need to continue to grow stronger, and correspondingly Buying Power weaker, as TATY works through the chart gymnastics required to complete a “Big Chill” warning.

    SAMMY   —   A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

    Screenshot (254) Weekly

    SAMMY is shown above in Screenshot-254 (Weekly) and below Screenshot-257 (Daily) in yellow with the S&P-500 overlaid in red and blue candle chart format. The long time negative divergence with the February 2020 then all-time high remains on the chart as a dashed orange down sloping line. The negative divergence, which formed just prior to the February 2020 all-time high also remains shown as a down sloping dashed magenta line. And, for the time being a very short term negative divergence formed this past week, which is also shown as a down sloping dashed magenta line. This new negative divergence is further evidence of a change in character in the stock market.

    Screenshot (257) Daily

    SAMMY is shown in Screenshot-257 in daily format, and illustrates this indicators tactical ability to often foreshadow declines, when it builds a negative divergence to the rising price. The dashed magenta down sloping line was under construction recently, as the price was touching a new all-time high, which gave way to the decline of Friday a week ago through this past Monday. The up sloping green line shows the price post Monday, as it was on the way to another all-time high.

    Investors will also notice that SAMMY is not following the price higher, which has begun a new negative divergence represented by the down sloping orange dashed line. If this new negative divergence remains in place, then the current rally to new all-time highs will likely come under pressure. All this implies potentially more volatility ahead at the least, and perhaps another attempt in the offing to drive TATY into the caution zone surrounding the 115-125 level, the first required step toward the eventual issuance of a new “Big Chill” warning. At the least this developing negative divergence suggests more leaves are falling from the trees, returning to the Paul Desmond analogy.

    The Chinese say: “May you live in interesting times”, and a case can be made that the stock market may be on the cusp of “interesting times”.

     

    Please be safe!

     

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