A Paradigm Switch: From The Ratchet Shifts To A Change Band

The All-Time Record [“ATR”]

The S&P 500 Index (or SPY, the ETF of S&P 500) made its 31st ATR on June 18 [T]. At 5,487.03, and moving in H2 (the second half of the year), it made its 32nd ATR at 5,509.01 on July 2 [T], its 33rd at 5,537.02 on July 3, [W], and it made its 34th at 5,567.19 [F]. The three consecutive ATRs were all above the 5,000 level.

How differently do Bears and Bulls perceive the repeated ATRs in the first part of H2? In my opinion, based upon my very acute market observations over three decades, largely the focusing crucial data points are opposite from one to the other: Bulls are based on the Bottom Point (i.e. March 2009) while Bears seem to stick on a Peak Point (i.e., Jun 18, Jul 2, Jul 3, or Jul 5), and wag on it.

As a consequence, Bulls think any ATR is just a routine, hence don’t talk too much about it, while Bears usually tweak on it on and on, individually or all together in this case, seem to waste most of their valuable time.

The 4th of July

The 4th of July is not only related to the independence of America, but also, to me, thinking about my father who passed away today at age 87. He was so healthy, and when my wife and I visited him from America, he said that he moves up and down on the subway-station step, not only one but two steps.

The step in South Korean subway are much higher than America’s when I was up and down so many times from Manhattan to Queens, to Bronx, or to Brooklyn in 1971, staying for six months alone in Brooklyn in doing my training assignment at the Federal Reserve [Fed] Bank of New York, sent by the Bank of Korea which is the counterpart of the Fed.

Now I live by myself. So, on a holiday I used to read new articles from others, and news, but it’s almost impossible to fill the time all day. As a last resort, I used to read my own articles. Currently, 120 were published. The following quote is from one of them.

A Change Band [CB] vs. the Ratchet Shifts [RS]

“The equity market is expected to move by ratchet shifts, with a tight [change] band of +/- 5%…Bears think the band is a bear-market call, seeing the [bottom band] while bulls view [the top band] a bull-market call, believing the plateau theory.” (“Does The Market Implicitly Forebode A Mild-Bear-Market Resurfacing?”)

The decision of a CB is a pivotal step in the price-targeting process, offering insights into investors’ willingness to invest and the realized value of selected equities. The RS, on the other hand, has developed for about 2 years through the vaulted securities [VS] which are the major components in the S&P 500 Index, reaching their about 52-week highs, sticking together, and anchoring firmly on the stable bull plateau.

What is the difference between CB and RS?

First, CB is infinite while RS is finite: Saying differently, CB can somewhat freely maneuver without any indicators and data to project the future movements. RS, however, requires three indicators to determine the future turning points, and tends to reveal a safe time horizon, such as 2 or 3 years.

Second, CB is infinite in a reliable market range between -20% (a bear surface in the traditional definition of a bear market) and -5%, but in the upper bound, it is unlimited because any straight shooting upward will make a top eventually, and will start falling. In other words, CB will end when the market descends to the bear surface -20% while RS will stop by itself when the market will spike upwards without a limit.

A Paradigm Switch and Luke

A paradigm switch from RS to CB can be a solution, exclusively, to minimize unnecessary noises and conundrum on the market in H2, and beyond until perhaps a decade or so, but the version “No one puts new wine into old wineskins” in Luke 5:36-39 (New King James Version) teaches us that both CB and RS, separately, are well served in the future.

The Outcome of the Pulses Check

The pulse checks of SDI, TDI, and Uptrend were 53, 75, and 70%, respectively Friday (Jul 5), that were worse than the last week’s, 51%, 73%, and 63%, respectively, as of Jun 28 [F]. Uptrend pushed up to 70% from 63%, that was too many pulses.

If you want the source of PPO (Paper and Pencil Only) approach, please click this

Uptrend, TDI, and SDI have a common thread of the PPO Approach which distinguishes any movement with a plus (“P”) and a minus (“m”) without considering the size differences.

Pulse Check #1 by The SDI (The S&P 500 Sector Diffusion Index)

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NOTE

Data Source is Yahoo Finance, Author Made Table.

The SDI was 53% Friday (Jul 5), that was upbeat optimal, by an inch up from 51% on Jun 28 [F].

SDI is a diffusion index, so slightly more than 50%, about 6 sectors out of 11, are positive. The positive sectors can tally from Table 1, as: 1) XLK (Tech) 17Ps, 2) XLY (cons discretionary) 15Ps. 3) XLC (comm services) 15Ps, 4) XLV (health care) 12Ps, 5) XLF (Financial) 12Ps, and 6) XLRE (Real Estate) 12Ps.

Pulse Check #2 by The TDI (Trifecta Distribution Index)

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The Second Checker, on Jun. 7 TDI was 75% which was a maximum pulse to be acceptable. On Jun 14 TDI was an-inch up to 76%. As a result, the pulse of the plateau was above the upper bound of 75%, resulting the pulse was too many to harm the health of the plateau.

Fortunately, Friday (Jun 21), a weakened S&P 500 helped TDI came back to 75%. Friday (Jun 28), I did not know TDI’s outcome until last hour. The market was solid in the premarket and until 3:00 ET the market indices were positive, so I didn’t expect for SPY to slide. Alas, three major indexes were down, except Russell 2000 IWM. SPY, DIA, and QQQ fell down sufficiently, so TDI made it again, logging 73% on Jun. 28 [F].

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In the first week, we had 3Tp and 1”D” (2 pluses, bullish) in the short week as reading Table 2. As a result, the pulse was up 75% again, but it is still good at the surface.

TDI: 75% (= 100*9/(9+3)) is acceptable. Bulls vs. Bears was 9 (=6 (Jun) + 3 (Jul) vs.3 (= 3 (Jun) + 0 (Ju)), according to Table 3.

If you are a trifecta trader, you must be interested in summary Table of Table 3, and “TP/Tm” column in Table 2.

Pulse Check #3 by The Uptrend and Other Indicators

The Third Checker, the Uptrend was 70% (= 100 * 16 / (16 + 7)), registering that Bulls vs. Bears was 16 (= 12 (Jun) + 4 (Jul) vs. 7 (= 7 (Jun) + 0 (Jul) in Table 5.

The pulse in the uptrend, 70%, was acceptable, but too many, so was needed to come down.

The secondary criterion, the Friday votes was bullish, registering bulls vs. bear was 6 vs. 4.

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Market Perspective

In the first half of the year [H1], S&P 500 Index has performed very well, it rose 14%, and ascended 4% quarterly since March 29. In June and the first week (1 – 5), it spiked +10.6% (%CH.2), and +2% weekly (%CH.3), and closed -0.4% at $5,567, as reported in Table 5.

Friday (Jul 5) the S&P 500 started very strongly in the second half of the year [H2]. Although H1 started at a bit lower price in the first week from 4,770 (Dec 29, 23) to 4,697 (Jan 5, 24), falling -73 (-1.5%). Therefore, H2 is expected to have a higher than 14%, no matter who will win the election.

Major U.S. indexes hit record highs in a broad-based surge Friday (Jul 5) after relatively soft jobs data dragged down Treasury yields and raised hopes for a September rate cut. Though the usual suspects—mega caps and other major tech and communications services sector stocks—topped the leaderboard, the rally included all but three of 11 S&P sectors.

The U.S. economy added a solid 206,000 jobs in June, the government said in its nonfarm payrolls report earlier Friday (Jul 5). That was more than analysts expected, but below May’s downwardly revised tally of 218,000. That lowered the three-month average growth below 200,000 and back to near pre-pandemic levels.

In addition, the unemployment rate edged up to 4.1%, well above 3.6% a year ago and likely adding to expectations the Federal Reserve could trim rates soon. The market now prices in more than 75% chances that the Fed will cut its benchmark lending rate by a quarter point at its September meeting.

The current market has been so strong that my primary concern is a smooth consolidation process in a long-term (3 years or longer) dimension. I am really worried about finishing the bull market as bears wish.

The only hope at this time is a paradigm switch that works nicely to make the hot market cool. All in all, I am cautiously bullish until 2028, and beyond. A soft landing is expected in 2024 and 2025.

Conclusion

The main guidance is a Change Band [CB], which is flexible enough to iron out all disturbances in the markets, equity and bond.

But we are not sure of how long a CB will work out, and what trajectory a CB will draw, or more importantly, whether bears and bulls will be satisfactory with a CB when they will invest and trade in the same market. All market participants will be on a stiff learning curve, so are contributors, financial media, and the author.

My intraday trading has been in a barren environment, due mainly to often holidays and seasonal summer doldrums. My recent trading records (which were in my published articles as regular comments for every session) have shown some gains from speculative cash cows. It’s very risky, but I have a lot of controls to minimize the risks. Readers must be very careful to mimic my trading in any chance.