The second quarter has ended with the Dow and S&P-500 holding on to most of their gains for the year, and threatening once again to touch new all-time highs. However, investors on Wall Street tend to become more interested in weekends in the Hamptons, or long vacations to other destinations as the Dog Days of summer approach. This time of year volume tends to decline and trading is often dull and listless, as the players take a break and go on vacation. This past week the trading did turn dull, and the S&P-500 futures contract traded in a tight ranges intraday, which was blamed on waiting for news coming out of the G-20 meeting in Japan. Given the current condition of the balance of supply and demand, any positive catalyst in the near term has the potential to push the popular stock indexes to new all time highs. However, the developing negative divergence in the TATY strategic indicator mentioned last week is still in place, and is beginning to cast a shadow on the continuing strength of the rally.
TATY — A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY, shown above in the first attachment in yellow with the S&P-500 overlaid in red and blue candle chart format, continues to paint out numbers above the red zone, albeit with a negative divergence shown by the down sloping red line. When TATY is making bottoms in, or near, the red zone surrounding the 140 level, bull trends tend to continue in the price. This condition can linger for weeks, or months, as TATY bottoms near the red zone are objective measurements of the favorable balance of demand over supply. While no indicator is perfect in this exercise of navigating uncertainty in the markets, it would likely take an excursion in the TATY indicator into the caution zone surrounding the 115-125 level to signal a change in the balance significant enough to threaten the continuation of the bull trend. So, the strategic picture bottom line is conditions remain favorable for new all-time highs, but the growing negative divergence in the indicator suggests any new all-time highs may only be marginal, as the rally is likely to attempt to struggle higher in the face of the growing negative divergence.
SAMMY — A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY did not issue any new buy signals this past week, as the rally in the price suggested by SAMMY’S most recent two buy signals (vertical blue lines) issued in May has crept higher. SAMMY is shown above in the second chart by itself, and below with the SPXL 3X leveraged ETF overlaid. As stated previously, SPXL is traded only in selected family accounts, and never in client accounts. Taken together the current objective measures of supply and demand depicted by TATY and SAMMY suggests that the odds remain favorable for new all-time highs in the stock indexes.
THE BOTTOM LINE
Objective measurements of the balance of supply and demand suggests the odds of the popular stock indexes touching new all-time highs remain favorable. However, the growing negative divergence in the TATY strategic indicator is a concern, and this divergence is suggesting that any new all-time highs may only be marginal in nature, and perhaps fragile should the divergence grow even more negative. A decline of the TATY indicator into the caution zone surrounding the 115-125 level would be an initial warning that the underlying strength in the balance of supply and demand for stocks had weakened to a significant enough extent to perhaps compel us to take defensive action in equity portfolios. The negative divergence with TATY above the red zone is a concern, but a TATY excursion into the caution zone surrounding the 115-125 level would potentially be a call for defensive action on any subsequent rally.
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