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.
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