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    30 Mar    Uncategorized

    “Two roads diverged in a wood, and I –

    I took the one less traveled by,

    And that has made all the difference.”

    The emerging situation in the stock market reminded me of the famous poem penned by Robert Frost. While bear markets can play out in more than a dozen different ways, I am going to discuss in this update the two most likely forms this new bear market may paint out over the days and weeks to come. And, fortunately there are a couple of former examples, which may loosely become a template for how this bear traces out its path to completion. However, while one of these formats will likely become an approximate road map, the “degree”, or magnitude, involved will likely be on a much larger scale, given the record setting kick off to this newly minted bear. Here is a way to grasp the notion of “degree”, which is somewhat similar to the difference in the levels of the game of football, high school, college and finally pro. The game is essentially the same, but the skill levels involved are different in orders of magnitude.

    Snapshot 341

    Keeping in mind that the forms available for the progression of a bear market is a multiple choice exercise, let us now take a look at what may be the most likely two choices based on the best evidence available. The first option is similar to the form of the 1990 bear market shown in snapshot 341 above. The sideways movements in 1989 finally touched new all-time highs, then spiked sharply lower into a final leg down in 1990. A case can be made, that in like manner, a bear market began in the S&P-500 in 2018, peaked in February 2020, and is now in its terminal leg down in record setting fashion. Now the 1989 — 1990 format is not a perfect template for the potential 2018-2020 bear in progress (snapshot-346 below), but the forms are close enough to make an analyst raise the question is the current record setting plunge a violent terminal leg in a bear, which has been in progress for months? It is an extremely important question.

    Snapshot 346

    Snapshot 345

    Snapshot 344

    Now please take a look at snapshot-345, and snapshot-344. Snapshot-345, which shows the peak of the NASDAQ in 2000, and the sharp decline in the price as that bear market kicked off. Please notice that the decline was persistent and violent just as is the current decline in all the popular stock indexes. And, the current decline has been record setting, which implies this bear may likely be of larger degree than the 2000-2003, and 2007-2009 bear markets, as difficult as that may be to wrap one’s mind around intellectually. If the loose template of what happened in the 1989-1990 model bear is what is going on, then this volatile, violent, and record setting down leg is likely a terminal leg in a mature bear market dating to 2018. If the 2000-2002 NASDAQ template is the active option, then the bear is just beginning, and the record setting nature of the current decline implies this new bear may be of a larger degree than either 2000-2003, and 2007-2009. Hence in terms of the new bear market “the road not taken” will likely become extraordinarily important! There is a prodigious potential amount of wealth hanging in the balance between the two bear model options.

    Please notice in snapshot-345 that after the first nasty leg down, the NASDAQ rebounded nearly 62% in a bear rally. However, also please notice in snapshot-344 that when the bear rally ended the NASDAQ turned lower and completed its decline in 2002 after falling from 5132.52 to 1108.49. That is a decline of 78.40%!


    TATY is shown above in snapshot-343 in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week at a very oversold 43.

    Over the decades significant and tradable lows during bear markets, and/or final lows in bear markets have occurred as TATY was positively diverging with the price, and often accelerating higher. In the current situation, the opposite is true with the price experiencing a record setting sprint higher this past week with TATY negatively diverging. In addition, the Premium/Discount to Value indicator in the lower panel of the TATY chart is still in deep discount territory, which means it too is negatively diverging with the sharp rally in the price. This is cause for concern that either the 1990 model terminal decline in the price is not yet complete, or the 2000 model decline is just beginning. In either case another leg down to test the low is implied to have a significant probability. Since this extraordinary decline has already declared itself to be operating as a statistical outlier, I am suspicious that until families of both strategic and tactical indicators return closer to their normal ranges this decline may continue to exhibit record setting activity, both up and down.


    There is not yet any evidence of exhausted sellers, so showing SAMMY would be superfluous. SAMMY excels at depicting re-surging demand after sellers have spent their fury. SAMMY will be a crucially important indicator again, but that time is not now.


    The current decline from the February all-time high has already declared itself to be a statistical outlier, which implies something may be afoot at a very large degree, and possibly even of larger degree than the 2000-2003, and 2007-2009 bear markets. This new bear market will likely develop along the lines of one of more than a dozen possible formats, or forms. Given the characteristics exhibited to date, the two most likely formats, or forms, are represented by the 1990 model bear in the S&P-500 (snapshot-341 above) and the 2000 model bear in the NASDAQ (snapshot-344 and 345 both above). The ferocity and record setting nature of the current decline suggest it is part of a bear market, which may likely be of larger degree, or magnitude, than the 2000-2003 and 2007-2009 bear markets.

    So Gregory what if neither of the model bear markets you have discussed turns out to be of the format the market selects for this current bear market? Fortunately, in our approach we are monitoring the changes in the strength, or weakness, in the balance of supply and demand, and then comparing those metrics to the historical record. Diagnosing the form the bear may choose would be very useful additional information, but not as critically important as identifying price levels at which sellers have exhausted their propensity to sell, and then follow on evidence of resurging demand.

    Our goal during bear markets is to exploit intermediate term rallies for their exceptionally fast markups in the price, and avoid participating significantly in the devastating bear declines. And, obviously one of those intermediate term rallies will eventually develop into a new bull market, once a final bottom is reached. Please see the last chart above from a 2014 presentation I did for a group of wealthy investors at St. Simons Island for an example of how both intermediate, and final bottoms, have acted vis-à-vis the TATY indicator. While no indicator is perfect in this business, the odds are significantly favorable that intermediate term, and a final bottom, during the current bear will continue to impact the indicators in like manner as the past. Sharp eyed investors will also notice how TATY stalled in the red zone as tops formed during the bear rallies, which is crucial information when trading intermediate rallies term lasting from on average from 8 to 12 weeks during bear markets of the degree of 2000-2003, and 2007-2009.


    In the days and weeks ahead the conundrum of what kind of statistical outlier bear we are dealing with will likely be solved with objective information generated by the stock market itself. And, we will adjust our strategies and tactics according to that additional information. If the 1990 S&P-500 model bear is now in force at a larger degree, then the bear market is closer to an end than a beginning. On the contrary, if the 2000 NASDAQ model bear is now in force, then a bear market of very large degree is likely just beginning. There is a copious amount of wealth potential difference in which of those two roads will be taken by the stock market!

    “Two roads diverged in a wood, and I –

      I took the one less traveled by,

      And, that has made all the difference.”

    Please be safe!


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


    ByOptimist Capital

    Optimist Capital Institutional Wealth Management for All

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