After recently completing a new TATY low in the red zone, the price rallied back to touch new all-time highs as measured by the S&P-500. As long as the TATY strategic supply and demand indicator continues to form bottoms in, or near, the red zone surrounding the 140 level, the price will likely continue to attempt to assault new all-time highs. This is not an opinion, but a reference to the historical behavior of the TATY indicator over three plus decades. That is the good news.
The bad news is although the price has touched new all-time highs as expected, it has done so in the face of a persistent, and growing, negative divergence between the declining indicator and the rising price. These kinds of negative divergences can linger for weeks, but are almost always resolved by the price eventually following the indicator lower. The positive seasonal bias from roughly Halloween to Easter is also getting long in the tooth, so given these factors, plus a market which is certainly moving toward the rich end of the valuation spectrum, clients will likely witness a growing propensity toward increasing volatility as election looms closer on the horizon.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY finished the week at 151, and well below the negative diverging orange line on the first chart shown above. Investors will also notice that the premium/discount indicator in the lower panel of the TATY chart is also displaying a negative divergence, which is depicted by the down sloping orange line in the lower panel. This means the price has managed to touch new all-time highs on weakening demand for equities. This situation implies that any increase in supply may have the potential to quickly overcome already weakening demand. Obviously this is a situation, which will require constant monitoring in the days ahead. However, history suggests that the rally should be given the benefit of the doubt until our family of supply and demand indicators issue a “Big Chill” warning, which would begin with TATY descending into, or close to, the caution zone surrounding the 125 level.
The chart gymnastics required for TATY to complete a “Big Chill” warning would likely take days, or perhaps weeks, to complete, but the accompanying volatility would likely begin immediately. Its been many months since volatility ruled the stock market, so when it returns, possibly suddenly, investors will likely be shocked, and perhaps instantly uncomfortable with their exposure to the equity market. However, Alexander and I expect to turn the increasing volatility into opportunities to enhance the wealth of our clients, as the speed of price movements will likely move from something resembling a turtle to that of a road runner at full sprint.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above alone, and below with the SPXL 3X S&P-500 ETF overlaid. The SPXL is for reference only.
SAMMY is a wonderful tool for detecting resurging demand after sellers have exhausted their desire to sell. However, it is of very little value once a sustained rally gets underway, so it is shown above for information only. However, investors will notice that SAMMY is also showing a pronounced negative divergence, as depicted by the down sloping orange line on the second chart. With three key indicators displaying negative divergences with the price touching new highs, prudent investors would likely do well to postpone any additional purchases, and cash out any long leveraged holdings. Family members received quick and substantial profits on the SPXL ETF positions I purchase near the recent low, and I have now cashed out all those leveraged positions. I’m going to hold all non-leveraged long positions for clients, and family members for now, but fully invested accounts will be subject to some marginal profit taking, if it becomes more apparent that this leg of the rally may be nearing an end.
THE BOTTOM LINE
The previously discussed negative divergences between the price touching new all-time highs, and a series of fading indicators suggesting a continuing trend toward weakening demand for equities, has compelled me to take profits on our SPXL 3X leveraged positions in family accounts. The arrival of more evidence that the current leg up in the bull trend maybe ending may result in some marginal profit taking in long non-leveraged positions in both family, and client accounts. The eventual issuance of a “Big Chill” warning would compel Alexander and I to consider protecting accumulated profits, and client wealth, by lowering our asset allocation to equities firm wide in the face of objective measurements of rising risks to portfolios. We expect to see a substantial rise in volatility as the calendar marches toward the election, but we expect to turn potentially rising volatility into opportunities to increase client wealth
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