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    THIS AIN’T NO PLACE FOR AMATEURS

    In the words of the late Rev. Dr. Wilson L. Nearing, “THIS AIN’T NO PLACE FOR AMATEURS”, a dear friend, and mentor, from my post Georgia Tech years. At 6’ 5” and 275 pounds, and with a personal portfolio including a stint as a life guard in Daytona growing up, a college fullback, a business executive, a professional operatic baritone, Columbia Theological Seminary in Atlanta, and liaison to the Atlanta power structure for North Avenue Presbyterian Church during the late 1960s Civil Rights movement. Bill Nearing was a talented and larger than person, whose life experiences made it possible for him to relate to people from all walks of life. His one line observations on life continue to guide me to this day, and as the stock market put on a volatility show this past week some of his wisdom came to mind. There are some we meet in life, which have the ability to enrich our lives through their acquaintance, and Bill was one of those rare individuals.

    CLIENT AND RESEARCH CUSTOMER STOCK MARKET UPDATE FOR THE WEEK ENDING MARCH 6, 2020

    This past week reminded me of the fall of 2008, when the stock market was gyrating in large swings at a velocity of hundreds of Dow points per hour, or in some of the most intense selling scores of points per minute. At one point the S&P-500 eMini futures contract moved over 80 handles (points), or $4000.00 in one minute, when the Fed announced a cut in interest rates. Would be futures day traders no doubt got a lesson in the power of the market, even if they were trading only one contract! So the question naturally arises, has the stock market entered a bear market, which will wipe away billions, possibly trillions of dollars from stock accounts globally, or is this just another periodic correction before the longest bull stock market in history resumes? In the comments below I’ll discuss how both possibilities will likely look in the context of our proprietary supply and demand indicators. And, how we will apply those indicators to first preserve your wealth, and then enhance it with the least risks possible.

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

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

    TATY has been around a long time. It was among the first concepts I programmed back in the 1980s, when I acquired an Equatorial Satellite Dish with an IBM PC-XT strapped to it in order to get real time data for the stock market. I remember the Satellite dish vendor saying: “You must really need this dish, because you are our first customer in the Southeast”. Ditto for the software vendor for the IBM PC-XT in NYC. Of course from that beginning TATY has been through countless evolutions, and control parameter changes, and finally that original notion of how to objectively measure the ever changing balance in the supply and demand for stocks has generated families of both strategic and tactical supply and demand indicators. All in efforts to get at how global opinions about the equity market resolve themselves into the forces of supply and demand. In my approach we are not trying to guess the impact of the individual inputs, but rather the implication of the changing balance the inputs produce, which is much more important to the won/loss ratio of our investments/trades.

    There are millions of investors making countless transactions globally per day, so to assign a “cause” to one news event for the movement of prices in the stock market is an exercise in statistical futility from my perspective. Then there is the issue of the “magic” newspaper, you know the one that tells you next week’s news today. If you had the only copy, could you predict the stock market’s reaction to the news you have the advantage of getting a week in advance? The answer is no. You need an example? On the night the current occupant of the White House was elected the futures market sold off hard, but when the NYSE opened the next morning a prodigious rally began. So, we leave predicting the stock market to those, which believe they have the talent and expertise to be successful at that most difficult of arts. However, we will continue to rely on attempting to objectively measure the most fundamental of fundamentals in Capitalism, the Law of Supply and Demand, which is the true driver of prices in any market in order to navigate the rise, and fall, of risks to client wealth in the stock market.

    TATY, for the second week in a row, finished the week in the green zone surrounding the 90-100 level at 90. Excursions into the green zone are infrequent, and always mark periods when sellers are highly motivated. Motivated selling produces opportunities for the price of equities to trade at a discount to their “value”, and we like to be buyers at substantial discounts to value. Alexander has been picking up some individual stocks trading below their recent lows, with P/Es in the lowest part of their range for weeks, and with generous dividend yields, while at the same time interest rates were  touching new all-time lows. I’ve begun dollar cost averaging into some ETFs, as the market offered us discounts to value, even though this decline is not yet showing any classic signs of ending. However, the discount to value indicator in the lower panel of the TATY chart is showing a gross discount to value being available at minus 31 and change, so it makes sense to do some buying at this level of market distress.

    As previously stated, Alexander and I are not in the business of making predictions, but we most definitely are in the risk management business. So here is how we expect to manage the market risks implied by the current situation. At some point history suggests TATY will begin to diverge with the downtrend in the price and rally. The price is likely to remain “heavy” until TATY can sustain numbers into the caution zone surrounding the 115-125 level, when the price may begin to stabilize, or even move higher. In the interim the price will likely move both up and down with substantial velocity.

    Once TATY recovers above the caution zone, and the premium/discount indicator in the lower panel of the TATY chart has rallied first back to the red line at minus eight, and then on toward the green line at minus three, the price will likely begin to rally, and follow the supply and demand indicators higher. Or in other words, the supply and demand balance will begin to shift in favor of demand before the price responds with beginning a sustainable rally. This historical sequence has occurred over and over, and is really wonderful news for those of us wanting to buy clients into the market. The good news is we almost always can see the ongoing shift in favor of demand before the price responds, which usually gives us a window of time to scoop up bargains before the price begins to follow our indicators higher. Buying when our supply and demand indicators have already painted out yawning positive divergences to the price has been shown to be a highly effective approach to managing the risks associated with putting cash to work with new equity purchases. This begs the question, why be a buyer, if the stock market is entering a substantial correction, or even a bear market?

    Until hard evidence of a budding bear market arrives, then we must give the benefit of the doubt to the notion that the bull trend has just entered a correction and not a bear market. At this point all we know for sure is that sellers are highly motivated. However, more information will be needed before a determination can be made, if this is the initial leg down in a new bear market, or just a periodic correction before the resumption of the bull trend. If the conditions are met for a “Big Chill Warning”, then we will begin to shift our asset allocation away from our current equity exposure. Until that evidence arrives, we will treat the current market distress as an opportunity to put excess cash to work, which we are doing. If we are beginning a new bear market, then clients need to know that the average rebound rally in the 2007-2009 bear debacle lasted approximately 12 weeks, plus or minus. Rallies of that magnitude are opportunities given that TATY diagnosed every one of them.

    SAMMY   —   A REPRESENTATIVE 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 is shown for information only, because it has just one purpose in life, and that is to show clearly when investors/traders have begun to scoop up perceived bargains in size after sellers have exhausted their propensity to sell. Exhausted sellers are a necessary condition for a stock market bottom, but not a sufficient condition. For a stock market bottom to be complete evidence of exhausted sellers must be followed in a short period of time by evidence of re-surging demand. SAMMY has a history of successfully identifying evidence of re-surging demand. At this point there is no evidence of exhausted sellers, so evidence of re-surging demand is moot.

    THE BOTTOM LINE

    There is evidence that sellers are highly motivated, but no evidence at this point that the correction is ending. When TATY begins to paint out a positive divergence to the price, and the premium/discount indicator in the lower panel of the TATY chart rallies first to the red line at minus eight, then on to the green line at minus three, the price is likely to respond by staging a sustainable rally. In the absence of a “Big Chill Warning” forming as TATY rallies, then the follow on rally by the price will have the potential of touching new all-time highs. Should the conditions for a “Big Chill Warning” be met, then the follow on rally will likely fail short of new-all-time highs, and decisions will need to be made about adjusting equity asset allocations in line with the new evidence of rising risks to equities.

    Obviously this is a process, which is likely to take days, perhaps weeks, before any definitive action must be taken to protect accumulated profits, and/or your wealth. In the interim, clients should continue to expect a much more volatile investment environment. However, please remember volatility can also be the investors/traders friend, if they are armed with talent, training, experience, effective and proven supply and demand indicators, and the courage to act decisively in chaotic situations. The courage to act is the product of preparation!

     

    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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