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    COMPLACENCY TURNING INTO DESPERATION?

    Jan 13

    COMPLACENCY TURNING INTO DESPERATION?

    Following the dark days of 1940 and the retreat to the beaches of Dunkirk, the Battle Of Britain, and the Nazi bombings during the “Blitz”, Winston Churchill and the American High Command decided to undertake a campaign to drive the Nazis from the strategically important oil fields of North Africa being protected by the Africa Corps under the command of General Erwin Rommel. These landings in Africa would be preparation, and a testing ground, for the invasion of Europe to come later, and not too soon enough to satisfy Marshall Joseph Stalin, who was losing soldiers and civilians by the millions to three Nazi Army groups laying siege to Leningrad (St. Petersburg), Moscow and the Ukraine. British troops led by General Bernard Montgomery, and green American troops under the new command of General George Patton were eventually successful in driving the Nazis from North Africa. After a long series of retreats and setbacks the British people finally had a major victory to celebrate. Prime Minister Winston Churchill, careful to not raise expectations too high, addressed the nation on the significance of the victory in North Africa. Churchill said: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”.

    Churchill’s quote came to my mind this past week, when it was reported that a certain well known stock market pundit had observed that he was surprised not that the S&P night session futures sold off sharply when the Iran ballistic missile strike on military installations housing American troops in Iraq was announced, but that the sell off almost instantly found buyers, and the buying spilled over into the NYSE opening the next morning. The pundit said the buying appeared to be in “desperation”.

    Anecdotally stock market complacency, desperation buying, and buying out of fear of missing out often happen near the ends of legs in bull trends. These observations tend to be instruments too blunt to apply successfully to make trades, but these kinds of events do tend to precede the (temporary) exhaustion of demand, as the last buyers to be convinced throw in the towel, and buy out of a sense of frustration and desperation. Churchill knew there were many more months of war ahead, but he also knew the Allied victory in Africa was a turning point, “the end of the beginning”. The arrival of buyers out of desperation may also not be the end of this long bull run, but a prudent investor would take such an observation, made by a well known figure, as a “straw in the wind” to be alert for more, and better objective evidence that the stock market may be in need of taking a breather sometime in the first quarter?

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

    TATY is shown in the first chart above in yellow with the S&P-500 cash index overlaid in red and blue candle format.

    TATY finished the week at a modestly strong 152, but with the weeks long negative divergence (see down sloping orange line on the chart) still in place, even though the stock market touched new all-time highs again. A negative divergence can disappear due to improving demand, but most often a negative divergence in this strategic indicator will foreshadow at least a modest decline, or correction, in the price. The longer the negative divergence remains in place, the higher the odds that buyers fatigue will set in and a normal correction to re-invigorate demand may appear, perhaps to the disappointment of those buying out of desperation? For now all we know for sure is the price has been sustained by weaker demand according to the TATY measurement of supply and demand, but still enough residual demand to power the price to touch new all-time highs.

    A decline causing TATY to make a BOTTOM in, or near, the red zone surrounding the 140 level would likely be followed by additional attempts to assault new all-time highs. On the other hand, a decline strong enough to force the TATY indicator into the caution zone surrounding the 115 level may signal a change in the balance of demand over supply enough to cause Alexander and I to make a decision regarding the need to take defensive actions in client portfolios. A “Big Chill” warning would be an early warning that the supply and demand dynamic may be changing in favor of rising risks to client wealth requiring defensive action. Such an event would likely take weeks to develop, so for the time being periods of market weakness will be evaluated as opportunities to put excess cash to work.

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

    SAMMY excels at identifying re-surging demand after sellers have exhausted their desire to sell. Otherwise, it is of little value during prolonged bull trends, so it is shown above alone, and in the below with SPXL 3X S&P-500 ETF overlaid. The SPXL is for reference purposes only.

    THE BOTTOM LINE

    Strategic indicators suggest the record setting bull run has more to go, perhaps much more to go, but like breathing in and out for you and me, bull trends do not go up in a straight line. There will be declines to re-invigorate demand, and the recent appearance of buyers out of desperation may be a straw in the wind that the stock market may need to catch its breath in the form of a modest decline, or correction. The more objective reason for the expectation that the market may be nearing a period of weakness is the weeks long negative divergence in the strategic indicator TATY. Negative divergences in the TATY indicator almost always result in some market weakness. Fortunately, most of our accounts are invested, and enjoying their increase in wealth. We shall investigate any periods of weakness as opportunities to put excess cash to work in equities, as long as periods of weakness do not trigger a “Big Chill” warning.

     

    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.

    Jan 6

    Pragmatist Versus Manager

    Decades ago one of my Georgia Tech professors was making a point about managing a business, when he related the following anecdote after a class mate described himself as a “pragmatist”.

    A certain school system was searching for a replacement for its retiring superintendent. A member of the board lobbied for a well-known and popular candidate already employed by the school system, which had an outstanding record as a pragmatic problem solver. Another candidate with a strong resume’ as a management professional was eventually passed over, but was then hired by a competing school system known to be having serious problems. My professor then asked the class whom they would have hired. After some discussion, the class served up the answer the professor said should be obvious.

    Management Science teaches POC, which translates as the three management functions: Plan, Organize and Control. The professor went on to say that the pragmatist encountered few difficulties early on in his tenure, as his predecessor had planned well, and had retired with his school system in very good shape. However, as time passed the pragmatist began to be over run with problems to solve, because he was a particularly poor planner.

    The passed over candidate encountered immediate, and serious, difficulties early on at the competing school system, as his predecessor had left under pressure from his board for poor performance. However, as time passed the professionally trained manager was able to implement his plans for the system’s future, re-organize his staff and teachers with very talented and dedicated people. And, he brought the initial chaos under control with procedures designed to gain and maintain management control system wide. The professor finished by saying that pragmatists will always have plenty of problems to solve, but professionally trained managers are responsible for planning, organizing and controlling organizations in a manner, which minimizes problems.

    So what is the point of sharing this classroom anecdote?  Alexander and I are charged with the fiduciary responsibility of maintaining, and growing, your wealth with as little risks as possible. As part of our responsibility we must plan ahead for financial developments of the negative kind, which may adversely affect your portfolio. Over the past many weeks we have been mentioning the possibility that 2020 may be a year of increasing volatility, and the attendant risks and opportunities inherent in an environment of rising market volatility. Well 2020 is upon us, and so far the environment is one not of volatility, but complacency on an epic scale.

    Weeks on end of a creeping bull trend and (marginal) new all-time highs has seemed to inoculate investors from even the suggestion that financial risks still exist. In fact, this re-enforcement of the bull belief system is understandable after the completion of a decade without a recession, and the longest equity bull run on record. After a decade of this record setting bull trend is the stock market finally ready to put on a demonstration the late Paul Desmond’s observation that “low volatility begets high volatility, and high volatility begets low volatility”? The current complacency of professional investors would seem to suggest extraordinary vigilance will likely be a prudent plan in 2020.

    We are not in the predicting business, as we prefer to leave that most difficult of arts to those, which claim to have that talent. However, we expect our proprietary market tools to perform successfully during a continuing bull trend with attendant low volatility, if the stock market serves up that kind of environment in 2020. Or, even better performance would be likely, if the market turns bearish with a vengeance, as there will likely be opportunities to buy at discounts to value, as a newly minted bear would destroy the wealth of buy and hold investors. You see we believe in planning and organizing in advance, so we can be in control before the market serves up its next big move, bull or bear!

    TATY   —   A REPRESENATIVE 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 at 149 down a bit more from last week in spite of the price touching new all-time highs. The negative divergences (down sloping orange lines on the TATY chart) mentioned over the last several updates remains in place, which suggests the bid under that market remains strong enough for the price to attempt assaults on new all-time highs, even as demand continues to wane. However, with TATY just now entering the red zone surrounding the 140 level, the bid under the price may still have enough residual strength to drive the price toward another all-time high, but do not count on it, before a decline strong enough to re-invigorate demand arrives.

    As long as TATY continues to make BOTTOMS in, or near, the red zone, then the price is likely to continue attempts to assault new all-time highs. A decline in the TATY indicator strong enough to paint numbers into the caution zone surrounding the 115 level would likely be an early warning that supply was beginning to overtake demand. Such an event would likely take weeks to develop, and would cause Alexander and I to consider having to make defensive adjustments to portfolios. A TATY decline in the neighborhood of the red zone, which is followed by a SAMMY tactical buy signal would be investigated as a possible buying opportunity, subject to objective confirming evidence.

    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 leveraged S&P-500 ETF overlaid. The SPXL three times leveraged S&P-500 ETF is for reference only.

    SAMMY excels at identifying resurging demand after sellers have exhausted their propensity to sell. However, during sustained rallies SAMMY is of little value. It is shown in this update for information only.

    THE BOTTOM LINE

    The new year 2020 has arrived with evidence that professional investors are very complacent about the prospects for the continuation of the record setting bull market in stocks. Complacency has resulted in disappointing results in the past, and may again given the longevity of the recovery post-2009. However, complacency is a very blunt market tool, which requires confirmation from other more accurate indicators to confirm danger to investor wealth may be on the rise.

    We have several new accounts mostly in cash coming over to us. We shall get these accounts invested as low risks opportunities are identified by our proprietary indicators. Recent declines have been shallow and intra-day fleeting, which makes putting excess cash to work in a low risks circumstance very challenging. However, with the advent of this new year there have also been some increasing signs that volatility may be on the increase, and may become a more significant factor as the positive seasonal from roughly Halloween to Easter begins to wane, as the calendar marches toward Easter?

    Alexander and I wish all of you a very Happy and Prosperous New Year!

     

    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.

    Dec 30

    WILL 2020 BEGIN WITH A DECLINE?

    The stock market has been inching higher in slow holiday trading touching new all-time highs in the process. However, as previously mentioned in these weekly updates, a number of key strategic and tactical supply and demand indicators have been negatively diverging with the price for some time now. What this means is the residual bid under the stock market remains strong enough to power the price to new all-time highs, but the bid continues to weaken as the price is inching higher. I suspect the price may hold up through the next two market days, and may even attempt new all-time highs as 2019 comes to an end, but the first days of 2020 may see some selling come into the market.

    The stock market has experienced outsized gains during 2019, even in the face of what would have likely been too much disturbing news in a different era. Given the prodigious markup of equities year-to-date, it is likely investors are all too willing to wait another couple days before cashing out some of their profits, in order to avoid any tax consequences until next year. The negative divergence in a number of indicators, shown on the charts above as down sloping orange lines, suggests the first days of 2020 are likely setup for some profit taking. A stock market decline on profit taking would likely paint out an opportunity for us to put excess cash to work in a low risk circumstance, since the strategic big picture remains favorable for demand in the superior position to supply.

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

    TATY is shown above in the first chart in yellow with the S&P-500 overlaid in red and blue candle format. TATY finished the week at 151, down a bit from last week, but still above the important red zone surrounding the 140 level.

    As long as TATY continues to paint out BOTTOMS in, or near, the red zone surrounding the 140 level, then the price is likely to continue to attempt assaults on new all-time highs. However, investors should be alert to the possibility that the post-holiday period may experience a price decline to re-invigorate demand. A mild decline would likely only drive TATY into, or marginally below, the red zone. A price decline strong enough to drive TATY into the caution zone surrounding the 115 level, would be an early warning that the dynamics of the supply and demand balance for stocks may be shifting in favor of supply over demand. Obviously, any post-2019 decline strong enough to register TATY numbers in the caution zone may result in defensive actions being considered in portfolios.

    As my late friend and mentor, Paul Desmond, would sometimes remark: “Low volatility begets high volatility, and high volatility begets low volatility”. For the most part 2019 has seen an exceptionally low volatility market, as the price has done a week after week slow grind higher. Paul Desmond’s comment may experience more currency than usual given that 2020 is an election year, and it has been many weeks now since the last “global crisis”, so investors should be aware the clock may be ticking on increased volatility in the year ahead.

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

    SAMMY is shown above alone, and below with the SPXL 3X leveraged S&P-500 ETF overlaid. The SPXL is for reference only.

    SAMMY excels at identifying resurging demand after sellers have exhausted their propensity to sell. SAMMY is a wonderful tool for locating low risk entries during, and after, significant declines. SAMMY is shown for information only, since it is of little value during persistent rallies. However, investors should also be aware that SAMMY is negatively diverging with the price, as indicated by the down sloping orange line on the SAMMY chart. So in conclusion for this section, negative indicator divergences exists at both the strategic and tactical levels, which implies the potential for some post-holiday market weakness.

    THE BOTTOM LINE

    A number of key supply and demand indicators have developed negative divergences to the price of the S&P-500, which has continued to touch new all-time highs. We are suspicious that investors may want to claim some of their hard earned profit early in the new year, postponing taxes on their gains into 2020. The negative divergences, and the potential for profit taking early in 2020, may be a setup for a decline early in 2020. Unless objective evidence to the contrary were to arrive, we will treat any price decline early in 2020 as a low risk opportunity to put excess cash to work in equities. We have market tested tools for identifying low risk opportunities to be buyers of stock, so if our conditions are met vis-à-vis our proprietary indicators, then we will be buyers.

    “Low volatility begets high volatility, and high volatility begets low volatility”, so investors should be aware that 2020 may experience a significant increase in market volatility relative to 2019.

    All of us at Optimist Capital wish you a very Happy and Prosperous NEW YEAR!

     

    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.

    Dec 23

    DOUBLE SHOT OF MY BABY’S LOVE & FREE FALLIN

    This past week as the stock market slowly squeezed out one new all-time high after another, and the people’s House voted in favor of impeaching the current occupant of 1600 Pennsylvania Avenue, I found myself remembering how this long bull run had begun back in March of 2009. Some of my market savvy colleagues may take technical issue with the beginning date, as they may prefer to characterize this bull run leg as commencing later following the bottom of one of the corrections along the way, because there have been some serious stock market dips post the 2009 bottom.

    For example, there is no question that the correction, which began in 2015, made a significant bottom in February of 2016, and the February 5, 2018 crash like decline, which wiped out the XIV Volatility ETF, was really nasty as well. Especially, if you were long any of those XIV derivative instruments, when Credit Suisse hung those owning the exotic XIV product out to dry. However, this weekly update is targeted at retail clients simply to keep them informed as to what we are doing with their wealth and why. So, pros and clients wishing to talk shop can drop by our office across the breezeway from Carmine’s anytime, and we can talk stock market for as long as you want, and perhaps longer than you want, such is our passion for what we do.

    Let us just keep this simple and say that this historic economic recovery, and the coincidental bull run, began from that biblical S&P-500 low of 666 in March of 2009. And, for those wishing to know a reason, what follows works as well as any explanation from a historical point of view, and may be an echo of the period of real prosperity following World War II. You see the stock market has enjoyed a “Double Shot Of Love” (The Swinging Medallions) compliments of the Fed and the Congress, when the “Free Fallin’ (Tom Petty) bear market of 2007-2009 accelerated after the collapse of Bear Sterns, and Lehman Brothers, in the fall of 2008.

    The dis-inflationary trend existing before the events of late 2008 became an outright deflation, as the equity bear market took on some of the aspects of a panic. In response to the growing crisis, the Fed liquified the system in an extraordinary effort to prevent a cascading failure of the banking system. The Fed continued to spike the banking system with liquidity for months after. Capital goes where it is treated best, and a significant percentage of the re-liquification funding flowed into the stock market, a process taking years. When it was all done, the debt to GDP ratio had reached its second highest level in history. The debt taken on as a consequence of winning WWII remains the record high debt to GDP ratio.

    Deficit spending during times of commodity shortages and strong industrial and consumer demand results in inflation, a big problem the late Paul Volker, Fed chairman from 1979 to 1987, was fighting as deficit spending contributed to the already rampant inflation. This was a period before industry had the sophisticated high powered computers guiding corporations today. These days “just in time inventory” has made stock piles of basic materials for manufacturing a much smaller factor. Back then the order of the day was too many dollars chasing too few goods, which bid up the price of everything. And, we were not energy independent back then making our economy vulnerable to instability in the Middle East, as the oil cartels held us hostage. So, in that era deficit spending, which added liquidity to the banking system, tended to flow not into equities, but rather into goods and services, which in turn created galloping inflation. Volker responded by jacking up interest rates sharply, which eventually collapsed the inflationary spiral. This situation is the polar opposite of conditions today where inflation, so far, has been a non-factor resulting in too many dollars in the liquified monetary system finding a home in the equity market.

    The first shot of liquidity came in the form of the massive Federal bail out of the banking system during, and following, the Great Recession of 2007-2009. And, as that infusion of excess liquidity had just about run its stimulus effect along came the 2016 election, and the second shot of stimulus hit the monetary system in the form of a massive tax cut mostly for the wealthy. This “second shot of my baby’s love” rang in with a price tag of around a trillion dollars in deficit financing. Fortunately, this second shot entered the financial system, when the United States is essentially oil independent, and the application of high powered computers with just in time inventory programs has virtually eliminated the bottlenecks of the past, which caused artificial shortages of key materials, which in turn contributed to excess liquidity bidding up the price of goods and services, and so on. The United States, and its trading partners around the world,  have been able to avoid the consequences of massive, and exponentially growing deficits, because low inflation has contributed to a continuing low interest rate environment. Alas, in economics one can postpone paying the piper, but eventually the piper must be paid.

    I got a newsletter teaser this week from an outfit promoting its research. Inside the teaser was a bullet point which caught my eye. The point was that due to the creeping bull market touching new all-time highs almost daily, fund managers were responding by putting all their cash into the equity market. The teaser made a big point that although this may not be a signal that top tick had been touched in the bull market, it was nonetheless a big negative historically, as a sign that a major top may be brewing. The theory is when the financial houses, and fund managers are all in, where is the cash going to come from to power the equity market higher? This is a very good question, and the premise it is based on is sound. Unfortunately, it is a very big financial world out there containing multiple pools of asset classes, which are in flux every day. These global factors make measuring the actual availability of cash to power one market versus another a very difficult calculation. However, the observation that historically low cash on hand at funds is a warning shot that volatility may begin to rise right on schedule ahead of the election.

    The bottom line on this history lesson is that the impact of deficit spending in the Volker era on the economy is very different than our current era of massive deficit spending. That difference is that in the Volker era the penalty for fiscal malfeasance was almost immediate in terms of rapidly rising interest rates. These days for all the factors previously mentioned, and more, the penalty in terms of rising interest rates has not yet occurred. In the Volker era it took Treasury rates in the high teens to quell inflation. In the current era I’ve seen numbers in print, which have made the case that a return to nominal interest rates in the five to six percent range would result in most of the revenue from the income tax being consumed by debt service. This enormous potential financial vulnerability brings to mind that radio call from Apollo 13, “Houston we have a problem”.

    Alexander and I are in the risk management business. We measure and assess the risks to client wealth daily, and all our investment decisions are powered by our assessment of the trade off between risks and rewards. Recently a new client coming over to us mostly in cash wondered why we had not invested all his account, because obviously the popular indexes were touching new all time highs. This daily re-enforcement that all is well had given the new client a fear of missing out on the rally.

    Yes our indicators continue to reflect an environment of demand being in the superior position to supply, yes the stock market is creeping higher almost daily, but remains less than 300 S&P 500 points above its 2018 high. Yes interest rates remain historically low, but the vulnerability (economic penalty) to even a marginal rise in rates has maybe never been greater. So the need for risk management and maintaining our discipline remains critical. In our world this means that we must buy equities for clients as the risk/reward becomes favorable. Buying equities when they carry a fat premium to value is an invitation for the client to have to wait months to get back even, should the market experience only a minor correction. When the market is touching new highs it is easy to forget that bull markets move higher in very small steps, but corrections take the express elevator down quickly wiping out months of slow appreciation. The former is driven by fluffy, and gossamer like optimism, and the latter by fear, and fear is a primal and powerful emotion relative to optimism.

    When times are good it is well to remember that eventually the piper must always be paid!

    TATY   —   A REPRESENATIVE 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 format. TATY finished the week at 154 with the previously mentioned negative divergence still in place. More often than not negative divergences in this indicator, which continue to linger, do result in some price weakness. TATY is telling us that while the price of the S&P-500 is touching new highs the power of the bids driving the price higher is fading. If the bid under the market continues to weaken according to TATY, then at some point the bid becomes too weak to sustain the rally, and of course a period of decline follows to re-invigorate demand. This is as normal for markets as breathing in and out is for you and I. The current negative divergence may disappear due to strengthening demand, but usually the market has to put on a bit of a “sale” to re-invigorate demand, so for now we will continue exercise patience, until there is a sign that equities are going on “sale”.

    As long as TATY continues to paint out BOTTOMS in, or close to, the red zone surrounding the 140 level the probabilities favor assaults on new all-time highs. A TATY decline into the caution zone surrounding the 115 level would be a first warning that the dynamics of the supply and demand balance may be changing in favor of supply over demand. The appearance of a “Big Chill” warning would be hard evidence that Alexander and I need to begin defensive operations in client portfolios. The sequence of events necessary for the issuance of a “Big Chill” warning would likely take weeks to develop.

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

    SAMMY is shown above in the second chart alone, and below with the SPXL 3X leveraged S&P-500 ETF overlaid. SAMMY has an superb record of identifying re-surging demand after evidence has arrived that sellers have spent their fury, and exhausted their propensity to sell. SAMMY is key for us to decide to be aggressive buyers after sellers have driven the price of equities into deep discount to “value”. These favorable conditions identified by the TATY strategic family of indicators in combination with the SAMMY family of tactical indicators almost always result in low risks purchases in the equity markets.

    SAMMY exists to register resurgent demand as it is happening, and as such is virtually worthless for any other purpose. However, investors will notice that SAMMY is also sporting a negative divergence to the price of the SPXL ETF. And, like the negative divergence in the TATY indicator, it may disappear if demand strengthens. However, it almost always takes some decline in the price to re-invigorate demand enough to erase the negative divergence. We are prepared to be buyers as long as TATY signals the strategic big picture remains favorable for demand over supply, and SAMMY then flashes a buy signal once evidence that a significant price decline has ended.

    THE BOTTOM LINE

    Today’s update walked investors through a comparative between the situation existing in the Volker inflation era and today’s interest rate environment. The conditions vis-à-vis the implications for the impact of rising interest rates on the economy, and by inference the stock market, could not be any more different. In the Volker era it took huge moves in rates to quell raging inflation. Today a relatively modest increase in nominal rates has the potential to deliver a very dangerous blow not only to the economy of the United States, but globally due to the massive debt accumulated by our nation, and others. The United States in particular is vulnerable to decisions by China, which owns massive amounts of our Treasury bonds (debt). The looming election, and the risks attached to the Congress’ fiscal malpractice, make risk management a paramount concern for our client portfolios.

    Anecdotal information about low cash balances in funds may mean the fuel required to drive equity prices higher could be beginning to run low. We shall watch our proprietary indicators carefully for evidence that the bull trend is moving from fatigued to something more serious. And finally, if conditions worsen and volatility increases sharply and dramatically, then the environment for “buy and hold” investors will become predatory, and extremely dangerous to the wealth of buy and hold investors. However, such an environment is actually a boon to those nimble few, which are prepared to navigate the acceleration in price change attendant with bear markets. Alexander and I believe that increased volatility equals increased opportunity to exceed the performance of the popular stock indexes, and the potential to increase the wealth of our clients significantly.

    Finally, Happy Holidays to all!

     

    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.

    Dec 16

    Facts Versus Beliefs

    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.

    Holiday Village
    Dec 9

    RUN AWAY BULL?

    Last week’s update was on the topic of “the pause which refreshes”, and advised investors to not be surprised, if the stock market encountered some weakness in the range of 3 to 8% before assaulting new all-time highs. On Tuesday the Dow plunged over 400 points intraday, and appeared well on the way to a much needed consolidation, or brief correction. However, by Friday’s close the popular stock indexes had recovered to slightly below new all-time highs leaving those of us with some cash needing to be invested a bit frustrated that the very brief decline did not give us a classic buying setup vis-à-vis our proprietary indicators. We prefer to be buyers when measurable evidence of exhausted sellers is followed by resurging demand. And, which is also confirmed by measurable evidence that the price has been compressed below “value”, which in turn creates a very low risk buying opportunity.

    In strong bull trends corrections tend to be shallow and brief, which has the effect of not allowing would be buyers an opportunity to join the bull party at a significant discount. Stock market psychology is a bit upside down in that rising prices tend to create more buyers, when in other disciplines it tends to take declining prices to attract larger pools of buyers. It is not unusual in the history of the equity markets for bull trends to accelerate as prices rise, and in some cases this acceleration phenomenon can sometimes result in what is known as blow off tops at very elevated valuations, as buyers finally exhaust themselves.

    We are not in the predicting business, as we prefer to leave that very difficult exercise to those, which believe they have the ability to know the future. However, this past week’s almost instantaneous encounter with motivated buyers after such a shallow, and brief dip in the price, makes me inclined to take into account the possibility that this record setting bull trend may have a strong enough residual bid under it to power an acceleration higher, the news and rich valuation be damned? Please note that taking into account a possibility is not the same as stating the probabilities favor such an outcome.

    Objective measures of the balance of supply and demand continue to favor demand over supply, so yes the probabilities continue to favor assaults on new all-time highs, but at this point the notion of an accelerating bull trend higher is just one of a number of possible pathways to new all-time highs.

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

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

    TATY finished the week at 154, which is well above the red zone surrounding the 140 level. As long as this strategic indicator paints out BOTTOMS in, or close to, the red zone the bull trend is likely to continue to attempt new all-time highs. An excursion by this indicator into the caution zone surrounding the 115-125 level would be our first warning that the balance of supply and demand may be changing enough to cause supply to over take demand. If this condition was met, and then followed by the completion of a “Big Chill” warning setup, then Alexander and I would be compelled to consider taking defensive action to preserve accumulated profits, and/or protect client wealth from rising risks of a significant decline, or in the extreme a budding bear market.

    Please note that the premium/discount indicator shown in the lower panel of the TATY chart was not driven much below the zero line by this past week’s shallow, and brief decline. Low risk buying opportunities are defined by the premium/discount indicator being driven below the minus eight level (red line) and then beginning a recovery back to the minus three level (green line), and then on to above the zero line. When this condition is met, and the SAMMY tactical indicator shows evidence of resurging demand, often a very low risk buying opportunity has arrived. As my former friend and mentor, Paul Desmond of Lowry Research, used to opine bottoms require evidence of exhausted sellers followed by evidence of resurging demand. In the current case Tuesday’s decline was so fleeting that it never painted out the required setup for us to deploy all the new cash coming into our firm.

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

    SAMMY is shown above alone, and below with the SPXL 3X leveraged S&P-500 ETF overlaid. The SPXL is used for reference only.

    SAMMY is interesting this week. TATY failed to paint out the conditions we needed to be buyers, as the premium/discount indicator never got anywhere close to a significant discount to value, but SAMMY did register some evidence of resurging demand. And, as a counter-balance to the possibility of an acceleration higher, SAMMY developed a big negative divergence with the rallying price as the week wore on. Careful inspection of the SAMMY chart shows the SPXL ETF nearly touching a new high, like most of the popular stock indexes, but the SAMMY indicator is not even close to its previous high. This is called a negatively diverging indicator to the price. Investors want the price confirmed by indicators, not the indicators negatively diverging as SAMMY is in the current case.

    This condition suggests Tuesday’s plunge may be just the first leg down in a “flat” or “irregular” correction, which needs another leg down to complete the correction at, or marginally below Tuesday’s low. Yes, it really is complicated in the short term, but not in terms of the big picture, which is the odds favor new all-time highs soon, or after the completion of another leg down in a shallow correction. Investors should be aware that if there is another leg down to come in an ongoing correction, then it is likely to be quite nasty, violent and fast. A nasty, violent and fast leg down would likely create the conditions we need for a low risk buying opportunity, so if between now and the end of the year the market literally looks as if it is “falling out of bed”, then please do not be concerned, as what is actually happening is opportunity disguised as a brief panic, perhaps in reaction to some news driven event. This kind of situation would likely purge any would be sellers from the investor mix, and give the buyers a chance to tighten their grip on the stock market.

    THE BOTTOM LINE

    While the road to new all-time highs may take some unexpected twists and turns, the balance of supply and demand still favors demand over supply, so the odds are favorable that the stock market is on the road to new all-time highs late, or soon.

     

    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.

    Dec 2

    TIME FOR A PAUSE WHICH REFRESHES?

    Recent updates have advised investors to ignore the steady drumbeat of bad news, because our objective measurements of the balance of supply and demand for stocks favored demand over supply. As long as demand remains in the superior position to supply the price will likely continue attempts to assault new all-time highs, regardless of the negative trending evening news and/or historically rich valuations for equities.

    Warren Buffett, who made his name as a Graham and Dodd value investor, has recently been in the news, because he nixed a take over deal for a tech company over concern that the bidding had become too rich. He is also rumored to be sitting on more than one hundred billion in cash, because he finds little “value” in the stock market. His concerns definitely apply to buyers of individual equities, but we are index ETF investors, and indexes usually continue to rise after valuations have become rich by historic standards, because institutions tend to put cash into the stock market as soon as it is received. This institutional investing bias tends to be good for them, but not so much for their investors unfortunate enough to arrive near a bull market top.

    The stock market is up over twenty percent this year, so a pause to refresh and re-invigorate demand should not come as a surprise. The sudden appearance of a budding bear market would be a surprise, as the current balance of supply and demand for equities still favors demand over supply making the sudden appearance of a bear market a relatively low probability, Mr. Buffett’s angst notwithstanding.

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

    TATY finishes the week at 150 a bit off its peak reading of recent weeks, but still well above the red zone surrounding the 140 level.  TATY is shown in the first chart above in yellow with the S&P-500 overlaid in red and blue candle chart format. As long as TATY continues to paint out BOTTOMS in, or near, the red zone assaults on new all-time highs will remain a viable probability. An excursion into the caution zone surrounding the 115-125 level would be the first sign that the balance favoring demand over supply may be changing. A follow on issuance of a “Big Chill” warning would likely be a call to action to protect accumulated profits, and/or wealth. The required market gymnastics to paint out a “Big Chill” warning would likely take weeks to complete.

    The bottom line for this section is TATY has backed away from its recent highs, but continues to confirm that demand remains in the superior position to supply.

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

    SAMMY is shown above, and below with the SPXL 3X S&P-500 ETF overlaid. The SPXL three times leveraged ETF is for reference only, due to its leverage, and certain quirks related to its construction, which may cause tracking errors against its benchmark over time. SAMMY has an outstanding record of identifying resurging demand after periods when sellers have exhausted their desire to sell. SAMMY is of little value otherwise, as so far I’ve not found it particularly useful in warning of impending tops. Consequently, SAMMY is shown above for information only, but it will become extraordinarily valuable again following the next decline in which sellers become exhausted.

    THE BOTTOM LINE

    The stock market is extended, overbought, and due for a pause that refreshes. However, unless measures of supply and demand shift swiftly and significantly, then investors may reasonably expect more attempts to assault new all-time highs in the days, and possibly weeks to come, regardless of how negative the news, or how rich valuations become. The news, nor valuations, determine the price level of the stock market, as the price is determined by the absolute bedrock of the capitalistic system, which is the law of supply and demand. Currently our proprietary measures of supply and demand continue to favor demand over supply.

    If a pause to refresh and re-invigorate demand does occur, and if this pause takes the price down say in the 3-8 percentage range, and during which a new SAMMY buy signal is issued, then we will be prepared to put new cash, and/or excess to work in the equity market on our own terms. We have entered what is historically a seasonally favorable period of weeks, so we shall be inclined to act on any SAMMY buy signal following evidence of the price having declined below “value”, sellers having become exhausted, and resurging demand triggering a SAMMY buy signal. Such a series of events would suggest a new leg of rally was getting underway. Which has the potential to reward equity investors regardless of the negative news, and/or rich valuations.

    HAPPY HOLIDAYS!

     

    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.

    Nov 25

    SOME ECONOMIC HISTORY YOU MAY NOT KNOW?

    In late September 1977, my new bride and I began an extended Honeymoon trip that would take us to Atlanta, New Orleans, Las Vegas and then on to stops in San Francisco, Monterey, and finally a grand tour down the beautiful Big Sur coast highway to San Luis Obispo, and a return back to San Francisco up through the California valley. We visited the Hearst Castle in San Luis Obispo, where the tour guide remarked that everything, which looked like gold was gold, including the faucets in the bathrooms, and the fixtures in the huge swimming pool. William Randolph Hearst was so wealthy that he had full grown trees floated in on barges, transported to the Castle, and then re-planted, because he knew he would not live long enough to see newly planted trees reach maturity.

    Hearst had made his fortune in the newspaper business, and re-invested his initial wave of wealth in thousands of acres of seemingly low value real estate, upon which there was soon discovered vast deposits of oil, and later uranium. Hearst became immensely wealthy during a period in United States history, when there was little taxation. This was the time of the so called “Robber Barons”. Among Hearst’s eccentricities was his dinner parties at the Castle, the invitations to which were highly coveted. Hearst would invite notable guests of the time with different views to sit opposite each other at a huge dinner table overlooking the Pacific Ocean. The highly animated conversations which followed were of intense interest to the newspaper man, and was one way he was able to keep his finger on the pulse of the times.

    According to the tour guide, arising out of one of these debate like dinner parties, Hearst became an advocate of the graduated income tax system. He declared that is was not in the best interests of our country for anyone to ever amass the incredible wealth he, and a hand full of others, had accumulated. He believed that such a concentration of wealth came with a byproduct of power and influence, which he feared would likely be abused. Hearst then applied his own power of the press to advocate for a graduated income tax system, and other wealth tax reforms.

    Hearst believed democracy requires a broad and strong middle class, and an educated and well informed electorate to survive. A case could be made that the lack of one, or both, of those two requirements has led to many failures of would be democracies in Latin American down through the decades. In many Latin American countries the nation’s wealth is owned almost entirely by just a few very powerful families, and too little of the population is educated, and/or well informed. As Helen Fortney, my high school civics and social studies teacher, once said: “In a well-functioning democracy the political pendulum swings back and forth, but the democratic process survives and adjusts with the times”.

    Given the current wealth and political divide in our country, and the emerging and imminent natural takeover of our institutions by a new generation, I am fascinated that the leading candidates for the up coming presidential election are all in their seventies. The country is on the cusp of so many generational, and demographic changes, that an objective analyst may conclude that at least one representative of a younger generation would be leading in some of the polls. Perhaps that brewing storm of generational, and demographic change, will emerge in a later election cycle, but the evidence grows that perhaps the pendulum may be reaching another extreme, just as it did when Hearst was moved to action. Stay tuned!

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

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

    TATY finished the week at a strong 155 level. As long as this big picture indicator continues to paint out bottoms in, or near, the red zone surrounding the 140 level, periodic assaults on new all time highs will remain likely. When TATY is making bottoms in the red zone demand is in the superior position to supply. The law of supply and demand determines the price regardless of market valuation, which in the current case is not cheap, or the news. If one had taken the news into account, then most clients would have been in cash several thousand Dow points ago. The news may very well grow worse, it really is a dangerous world out there, and there is a big election looming on the horizon, which will no doubt be lucrative for the folks delivering all those attack ads to come.

    TATY is an objective measure of the balance of supply and demand generated by the only source, which is really worth anything  —  the stock market itself. If you want to listen to opinion, then listen to the evening news. If you want to know the facts about how all the opinions of the market participants have resolved themselves into aggregate action, then watch our objective strategic and tactical indicators.

    TATY continues to signal demand is in the superior position to supply, so we expect an upward drift, and an occasional assault on new all-time highs along the way. The stock market is entering the holiday season, which in the past has translated into low volume dull market behavior. The political arena may be interesting these days, but I suspect the upcoming holiday period in the stock market may be typically dull?

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

    SAMMY has an enviable history of identifying re-surging demand following a period when sellers have exhausted their propensity to sell. As such SAMMY is of little value during a period of extended rally, as is the current case. SAMMY is shown above alone, and below with the SPXL 3X S&P-500 ETF overlaid. The SPXL leveraged ETF is for reference only.

    THE BOTTOM LINE

    Historically the Holiday Season is a low volume and listless trading period for the stock market. The current conditions in the balance of supply and demand suggests that the price is likely to attempt more assaults on new-all time highs. However, these new assaults on all-time highs may be achieved on low volume, and as a product of a dull and listless drift higher. There have been many new highs over these last many months, but the stock market’s overall gain during this period has been less than satisfying given the anemic relative net gain. For example, take a look at the S&P-500 in September of 2018 as shown on the first chart above versus Friday’s close, which is less than two hundred points higher!

     

    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.

    Nov 18

    ADVANTAGE BULL

    Last week’s update drew investor’s attention to the positive seasonal bias at work roughly from Halloween to Easter most years in the equity market. Studies have shown that this span of weeks has contributed almost all of the accumulated gains in the stock market over the last one hundred years or so. And, the period from Easter to Halloween has contributed almost nothing to the gains over the same period. The recent performance in the market, including this past week’s new all-time high on Friday, has once again contributed to this tradition of seasonal outperformance.

    Given the very positive readings on an array of objective supply and demand indicators, the weight of the evidence continues to favor demand over supply. So, the seasonal bias, and the balance of objective measures of supply and demand, favor the stock market touching new all-time highs in the days, and possibly weeks, ahead. As long as the balance of supply and demand remains favorable toward demand over supply, then we will use periods of weakness as opportunities to put cash coming in from new clients , or excess cash in existing client accounts, to work in equities; regardless of how bad the news may become, or how unreasonable valuations may become. Neither the news, nor valuations, determine the price level of the stock market. The price is determined by the law of supply and demand, the only absolute in economics. Currently the balance of supply and demand, as measured by our proprietary indicators, favors demand over supply.

    TATY   —   A REPRESENATIVE 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 format.

    TATY finished the week at a strong 156, and rising. As long as this big picture strategic indicator is painting out BOTTOMS in the red zone, investors may reasonably expect the stock market to have a positive bias, and enough residual demand to power periodic attempts to assault new all-time highs, in an ebb and flow type behavior. These attempts are likely to continue until TATY paints out a “Big Chill Warning”, which will likely become the first objective evidence that the balance of supply and demand may be shifting in favor of supply over demand.

    Big Chill warnings have been highly effective at alerting investors to rising risks in the equity market, and at issuing warnings timely enough for investors to take action to protect accumulated gains, and/or their wealth. No indicator is perfect in this business of risk management, but of all the major top identifying methods I have studied over the decades, TATY is the indicator with the best record by far. Major tops are a gossamer like euphoria diffusion process, which is extremely difficult to measure objectively, which in turn makes it difficult to determine the price level at which market risks to invested capital may have become critical. TATY has a decades long record of identifying levels at which equities may have become vulnerable to the onset of a substantial correction, or outright bear market. Unfortunately, I’ve discovered no method in decades of searching, which can tell us in advance, if a correction may turn into a bear market, or if a nominal bear market may turn into major bear market.

    Fortunately, our inventory of supply and demand indicators include some like SAMMY, which have a proven record of measuring and identifying resurging demand. These have a record of announcing the end of corrections, and/or phases of bear markets, or the completion of a major bear market in equities. This information then becomes critical to the decision to re-deploy cash as price declines are ending.

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

    SAMMY is shown above.

    SAMMY has earned an outstanding record at identifying resurging demand following substantial declines, corrections, and/or bear markets. Tradable low risk bottoms require evidence of exhausted sellers followed in short order by evidence of resurging demand, as investors rush back in to the stock market to scoop up perceived bargains. Our premium/discount indicator, located in the bottom panel of the TATY indicator, and the price charts, has an enviable record of identifying levels at which sellers have exhausted their propensity to sell. Once this has occurred the risks to further decline drops precipitously, as those wishing to sell have already done so leaving few, if any, sellers to drive the price any lower. This is the level at which SAMMY earns its stripes by objectively providing evidence that buyers are re-entering the market in size, which registers with SAMMY as resurging demand.

    Once the resurging demand process is underway, the price has very likely reached a turning point. And, while the newly formed price bottom may be “tested” at some point, the objective evidence of exhausted sellers followed by evidence of resurging demand sharply increases the odds that the decline, correction and/or bear market has ended, and a tradable low risk bottom has arrived. Obviously these low risk tradable bottoms are relatively rare wealth building events (a few times a year perhaps), and are ideal price levels for cash to be put to work in equities with relatively low risks.

    SAMMY is a supply and demand tool for confirming low risk bottoms, but otherwise is of little value. SAMMY is currently in rally mode with the price, so it is shown in this update for information only. However, upon the arrival of evidence of exhausted sellers during the next substantial decline, SAMMY will become an essential tool for identifying the next low risk tradable bottom. Given the positive seasonal, and the current favorable balance of demand over supply, SAMMY may not be needed for a while?

    THE BOTTOM LINE

    Most clients are adequately invested in equities for a stock market crawling higher, and touching new all-time highs along the way, even after taking some profits recently. However, if the stock market serves up a low risk entry to put new, or excess, cash to work, then we will act on the signal, as long as the strategic big picture continues to favor demand over supply. We shall lean toward being invested until the arrival of the next “Big Chill Warning” at which time Alexander and I will be compelled to act to protect accumulated profits, and/or client wealth, should the weight of the evidence begin to shift in favor of supply over demand. Until evidence that supply is overtaking demand arrives, then we will stay invested in equities, and collect dividends for clients along the way.

     

    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.

    Nov 11

    TIS THE SEASON

    In the agricultural markets there are often strong seasonal tendencies related to the planting, growing and harvesting of crops in the Northern Hemisphere. Obviously this annual cycle impacts the available supply of ag products like corn, soybeans, and so on, which in turn affects price expectations come the harvest. Some commodity traders design strategies to take advantage of these seasonal trends, and books have been written about how a would be ag investor may be able to bend the seasonal cycle to his, or her, advantage.

    Seasonal trends in the financial markets are much less obvious, because there is no easily identifiable planting, growing and harvesting cycle at work. However, there is one seasonal worth mentioning, which is often at work in the equity market. Numerous studies have shown that over the last one hundred years, or so, almost all the gains in the stock market have occurred roughly from Halloween to Easter each year. And, the period from Easter to October has made almost no positive contribution to the overall performance of the S&P-500.

    The positive seasonal tail wind for stocks from Halloween to Easter is obviously a blunt financial tool, and a significant challenge to apply successfully, but not without a valid basis. Income taxes for the current year ending December 31st are due to be paid in full by April 15th of next year. This annual not so pleasant deadline gives rise to a flood of new money contributions coming into retirement accounts, as the deadline for the current tax year’s retirement contributions loom. Most financial institutions immediately put this flood of new money into the stock market, which in turn creates an artificial seasonal demand for stocks. This process is also boosted by other factors like spending for back to school, or college. Regardless of the contributing factors, this financial seasonal has been proven to exist, but alas the seasonal tendency is not a surgical tool in an investor’s tool box, but more like a tail wind is to a jet airliner, which may be at work sometimes at varying levels of strength.

    The bottom line on the positive seasonal influence on the stock market from roughly Halloween to Easter is investors may want to be a bit more aggressive with their asset allocation to equities during this period, if their analytical tools are confirming that demand is strong relative to supply, and/or the strength in demand is growing relative to supply.

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

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

    TATY painted out a bottom marginally below the red zone in August, and another bottom in the red zone in September. When this indicator is making bottoms in, or near, the red zone demand is in the superior position to supply. There is no documented case of a major stock market top having formed when TATY is painting out bottoms in, or near, the red zone. Every major top, and the expiration of every major rebound rally during bear markets, over the last almost four decades have occurred after TATY declined into the caution zone surrounding the yellow 115-125 level followed by the indicator stalling out in, or near, the red zone surrounding the 140 level, and then beginning a persistent decline. Price bottoms tend to form in the stock market after TATY bottoms, and then begins to paint out an accelerating positive divergence higher, even as the price continues to probe for its final low.

    Diagnosing the formation of a major stock market top is an extremely difficult exercise, and virtually impossible to accomplish successfully without sophisticated, and time tested, analytical tools like TATY. No indicator is perfect in this business, and they all have their individual quirks, but TATY does have an enviable record, and is the best analytical tool I’ve discovered for identifying the formation of major tops after my ongoing multi-decade search.

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

    SAMMY excels at identifying resurgent demand after sellers have exhausted their propensity to sell. It is shown above in the second chart with the SPXL 3X leveraged S&P-500 ETF overlaid. SPXL is for reference only.

    SAMMY is of little value during rallies, and the formation of tops, so it is shown above for information only. SAMMY will become extremely valuable again, when the stock market serves up the next tradable bottom. As a tactical indicator, if the big picture strategic indicators are flashing a favorable investment environment, then an investor armed with SAMMY would likely take every signal of exhausted sellers giving way to resurging demand, as an opportunity to put money to work in equities   —   regardless of the price level, or market valuation.

    In Capitalism supply and demand determines the price, not the evening news, nor market valuations, rich though they may be currently. For example, the NASDAQ was soaring in the late 1990s, even as valuations became exponentially expensive, but supply and demand continued to drive the price higher powered by expectations the emerging internet would have a huge impact on commerce, and eventually it did. Some internet concept companies came public in those days without any SALES, not to mention no profits! Markets rise and fall on future expectations driving the balance of supply and demand, and not by what is already known and priced into the stock market.

    THE BOTTOM LINE

    The equity market is not cheap, and the news is really awful for a period of relative peacetime, and all this bad news is coming at investors as if we were drinking from a fire hose. However, while volatility may very well increase due to the uncertainty implied by the looming election, the classic signs of a major top having formed in the stock market are simply not yet in evidence vis -a-vis our proprietary supply and demand indicators. Given the stock market is entering a positive seasonal period, and the lack of objective evidence of a major top forming, investors may reasonably expect the current stock market rally to attempt renewed assaults on new all-time highs, until evidence arrives that supply is moving toward the superior position relative to demand.

     

    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.