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Flirting with W’s

Last week volatility returned as markets took a turn south.

It’s difficult to discern just what caused the move. From a purely standard deviation basis the markets looked over-bought. But this is rarely a reason in and of itself to get markets to pull back.

Civil unrest? Maybe. Spike in Covid-19 cases raising concerns of shutdown 2.0? Maybe. Jerome Powell’s talk on future Fed policy? Maybe. Permanent job losses and higher long-term unemploymenet? Maybe. Over-ambitious estimates of 2021 economic growth? Maybe.

Pick what you’d like, whatever it was, the markets peaked Monday then went on an aggressive 4-day slide ending the 3-week positive streak.

The spike in volatility may bring technical analysis back into vogue temporarily as markets seek to find support.

Based on the last several weeks, support looks to be showing up in a few key areas: 2944.99 / 2903.24 / 2860.95

The 100 dma is at 2944.99, the 50 dma is at 2903.24, and the slightly more controversial low in the 4-week pattern for the 21-malg is at 2860.95. The malg (moving average linear regression) actually printed back in April. So we’re talking about a pretty aggressive slide to give up all of May and June’s gains to roll back that far.

Resistance isn’t really worth discussing right now. The discussion is about whether or not the markets will find a footing. And there are a lot of variables the markets are trying to price in right now. Pricing in structural changes to the economy can be tricky.

Last week definitely put a damper on momentum too. The BigFoot database seems to have stabilized as the trend of weekly additional buy signals flattened last week, showing no significant change from the prior week. This is an indication that momentum has flattened or turned negative.

The other macro economic indicators in the BigFoot system remain unchanged at this time.

For the week, look for volatility to remain high with pressure to the downside. This may be part of the “w” that many have called for during this recovery. Pricing has arguably been pretty high based on valuations and future earnings projections for a lot of large-cap stocks. A pull-back from these would not be out of character. The larger question is how long does the pull-back last, and how deep does it go? If this trend plays out anything like it has for the past few months, it could be a fairly quick and violent move with a similarly paced resolution.

If futures are any indications, we will see a quick drop at the open on Monday. How the rest of the week follows through will the interesting. Technical indications suggest we’ll see downward pressure most of the week, or until the SPX hits at least 2950 or so.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

To Infinity, and Beyond!

The economy no longer matters. As long as we have money from helicopters, the stock market can go higher… and higher… and higher… And if you’re one of the chosen ‘essential’ businesses, your stock can go to ALL TIME HIGHS!

The reality is, things don’t make a ton of sense right now. Economically, we’re fractured. Unemployment is setting records, yet the indexes climb. Companies withdraw guidance, yet the indexes climb. Governments talk about extending or re-instituting shut-downs, yet the indexes climb.

You get the theme here? The indexes want to climb. This is momentum playing out in front of us.

In truth, Indexes are a bit of a conundrum for the markets right now. The entire market is not so healthy, but indexes would lead you to believe this is not the case. Underneath the eclipse of just a few mega-stocks, a market actually exists; a market with winners AND losers.

The larger question is, will the indexes ever re-sync with the economy? In short, maybe not. Since the indexes – particularly the S&P 500 – have become so top-heavy, there may be a decrease in correlation to economic activity… at least for a season.

Here’s the issue though – if a handful of stocks drive the indexes up, that same handful can drive them back down. And, at some point, valuation will matter again. Perhaps it is not until we get some semblance of economic stability again – perhaps, for now, money flows into the mega-caps because it feels safe. But, when things begin to function again, will the stratospheric valuations be justifiable?

We’ll see. But for now, the them is simple: earnings don’t matter (yet), and the Fed is printing money. So don’t fight it…

For the week, the trend is actually sideways. Futures point to a sharply higher open this Thursday. However, it’s a shortened trading week, so volatility tends to be higher.

We’re over-bought by all the measures we typically use in this blog. This market is trading on hope and momentum. We’ll see how far it carries us.

For the week, here are the key numbers:

S&P 500 support levels: 2943 / 2907 / 2887

S&P 500 resistance levels: 2999 / / 3027 / 3060

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

That Escalated Quickly

It’s 4am on the West Coast. Markets looked shakey as I went to sleep. And for whatever reason, sleep just wasn’t happening. So at 3am I checked the futures markets. They’re suspended…

Well, since I’m not sleeping anyway, let’s take the time to dig into this thing a little more than a typical Monday (and yes, this is longer than typical – and probably more typos than typical – no apologies even).

So Sunday night into Monday in the wee hours of the morning, the futures markets were halted as European stocks tumbled and traders pushed the futures lower. And by lower, I mean… much lower. Like over 8% lower.

Apparently oil is collapsing. The details are coming in. But I don’t yet have all the pieces sorted out. It sounds like Saudi Arabia is engaging in some form of “price war” if headlines are to be believed (which I generally take with a grain of salt these days).

This puts the markets in a tough place. Essentially, whether it should be or not, the Covid-19 coronavirus has become a Black Swan Event. The fear of economic impact has changed behavior, thus creating the economic impact everyone fears.

History will discuss whether or not a reckless media drove the world toward panic, or whether this was, in fact, a justified reaction. But today, it’s neither useful nor practical to discuss these points. Instead, we must discuss what — if anything — there is to do as investors.

The challenge of this event is the speed at which it has gripped the markets. In essence, just 12 trading days ago, the S&P 500 was at all-time highs and markets were climbing higher. Then the coronavirus scare took hold. Since then we’ve seen a market route.

The S&P 500 (SPX) is down over 12 percent in 12 days. Based on overnight futures, it’s likely to drop another 4+ percent today. And it’s hard to know where the end is.

Don’t mistake this analysis as panic. It is not. This is merely observation of the behaviors of both the public and government reactions.

If the standard protocol for virus management is quarantine, this WILL have an economic impact on our global economy. Already we’re seeing cruise ships held out of port – travel restrictions – and runs on toilet paper and hand sanitizer. Now we’re seeing local governments declare states of emergency (Oregon joined the list yesterday). This is no longer an academic exercise. The impact is real.

Whether it is rational or not is not the point. It is happening.

The speed and timing of this event creates a challenge for the BigFoot algorithms. They are built on week-over-week moving indicators to avoid whip-saw trading. And all this activity has been compressed into essentially two weeks.

Currently, for the SPX and NASDAQ, the BigFoot trading algorithms have sell signals. For the DJIA, the algo’s still have a hold signal. But after this week, assuming the market route continues, we’ll likely see that signal flip to sell as well. We’ve also seen the overall disposition of the trading database fall to about 51% long. This is another 4% lower than last week’s 55%-ish reading. And we’re well off the low 80% long levels of just a month ago.

Why hasn’t it sold sooner? Because the markets have been on such an aggressive upward move for so long, it’s skewed all the comparative data the system uses to make trades.

The weird thing is, compared to two weeks ago, the markets look terrible. But compared to six months ago, we’re still about flat. That’s not that bad relatively speaking. The trading tools understand this. And they aren’t swayed by our emotions. They remain consistent and statistically driven. It is our own emotions we must beware of.

If one is to override the decisions of the system (not suggesting you do this), one must believe the conditions will deteriorate further. In essence, you must front-run the signals. And to do so is to break from the process, the statistics, and all the data to this point the system is relying on. Again, beware of allowing emotions to drive this process (as historically, investor emotions tend to create mistakes that cost).

Of course, no two markets are alike. Historically, corrections and bear markets each have their own unique circumstances that drive their outcomes. So historical statistics are but a guide here. Nevertheless, to override the signals is to introduce new and unpredictable variables into your investment process.

Of course, the big questions I suspect most are wondering is, when will the macro signals change (since they are all still long at this time)? And what do we think the markets may do?

First, the macros.

There are presently three marco indicators in the BigFoot system. Each looks at data from a different angle.

The market macro, not surprisingly, looks at market prices. It is a slow-moving indicator that can only change on a monthly basis. Currently, the signal is long, but will flip to sell if the SPX fails to close above 3160 at the end of March. As of right now, there appears to be a high probability this will occur.

The economic macro is a different animal. It follows a weekly signal, so can be more active than the market macro. It is built on a neural network that is constantly analyzing data to adapt. It will require more significant shifts in economic data before it flips to sell. This does not appear to be on the near-term horizon. Then again, data is moving quickly all the sudden.

The credit macro, like the economic macro, is a weekly signal. It uses a different artificial intelligence system to track key data points. In essence, it tracks risk in the credit system. If we see default rates on the rise, this indicator will likely flip as well. But for now, it appears stable.

So, in the near-term, it looks like the algo system is triggering a bunch of sells and holds — including the major indexes. But the macros remain long (at least for now). But we’re watching the market algo in anticipation it will fip at the end of the month.

Understanding how the algo’s and macro’s are viewing the data, this brings us to the discussion portion of our blog today: what are the market technicals telling us?

In short, this thing is ugly. The fall has been so rapid there is very little in the form of support. So now we look to big fat round numbers and emotional lines in the sand.

What does that mean? Well, the big fat round numbers are the ones that are easy to see on a chart… numbers that end in 0… like 3000, or 2900, or 2800… or 2650, as you’ll see in a minute.

And the emotional lines in the sand? Those are things like the 50, 100, or 200-day moving averages, or a 10% pull-back of 20% pull-back from a high value.

So far, the SPX is breaking down in all of these categories save one: the 20% pull-back. To investment professionals, this is the official bear market line in the sand. (And yes, this blog is being written with the idea that most who read it are pro’s, but some of you may not be – or some of your pro’s actually sent you here to read this so you can understand how we are analyzing things are attempting to keep logic and reason in the investment equation).

So what would be a legalistic bear market? A close below 2714.816 by my math.

So let’s talk numbers. The SPX closed at 2972.37 on Friday, March 6, 2020. Futures are down big. And we’re looking for the floor. Where might we find it?

Well, here are the key numbers as best I can tell:

2943 / 2911 / 2857 / 2772 / 2725 / 2681 / 2609 / 2407 / 2351

Based on the futures, we’re likely to blow past 2911 at the open today. So 2857/2850 will be the next line in the sand. But futures were halted at what looks more like 2819 or so. If that’s true, the markets may be testing the 2772 level shortly.

Bottom line, sellers outweigh buyers right now. Governments have stepped in to attempt to manage the spread of Covid-19, and economic activity is being affected. The follow-on effects are still yet unknown. But we know this: the up-trend has failed, and there is massive momentum to the downside right now. If the futures are right, there’s more pain to come.

This is just a guess, but based on the escalating fear, the bear market scenario looks pretty high. If we hit the extremes of the current downside targets, it would be a 30% correction from the peak. That’s rough… but it’s not 2008 rough. (Because when you lose 50% in an investment, you need 100% gain just to break even. When you lose 30%, you “only” need about a 43% recovery to break even. )

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.


Hard to Fight a Trend

This market has a lot of momentum.

Yes, it’s an underwhelming statement; but it’s nonetheless true. The stock market has the wind at its back these days. Even in the face of scary headlines about Coronavirus epidemics.

The reality is that Coronavirus is having an effect on systemic profitability. It has altered behaviors and shuttered factories for many multinational players. The result is, not surprisingly, profit headwinds.

And yet this market goes higher.

Did we mention this market has a lot of momentum?

This is becoming a more concerning sign as retail investors shrug off concerns, rally behind the cry of a ‘good economy,’ and continue to push stocks to new all-time highs.

Currently, it’s tough to peg just how high this market can go. But the down-side has given us a few technical hints.

The January pull-back for the SPX set up a consolidation wave with support around 3285. This is a little less than three percent below current market levels – not exactly a massive pull-back if those numbers get tested – but enough to give traders a new entry point. And frankly, that seems to be the pattern of this market: buy the dips.

We’ve seen this before, and markets went significantly higher during 2019 when this happened. Will history repeat itself? Who knows? But did we mention this market has a lot of momentum?

Until evidence suggests otherwise, it may be wise not to fight the tape too much on this one. This bull will end, but the eminent demise is not evident at this time.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

The Trade Wars Begin

While it sounds like an episode from Star Wars, this may not be fantasy. The trade talks between the US and China appear to be breaking down. At this point, both sides are talking new tariffs. And the speculation about just how quickly the world will come to an end has begun.

Putting political commentary aside, what does this mean for investors?

In a word: it’s bad.

Futures are getting hammered as markets appear poised to drop about 2% across the board. The 10-year treasury yield has also dropped as people seek safe-haven assets. Even the BigFoot database has dropped from over 82% long to around 75% long. So this is becoming more than just a squawking media cycle.

Support may be tough to find in this market. There’s been such a steady climb the last month that there are very few ‘stops’ on the way back down. The first noteworthy area the markets reversed is the intra-day low set back on March 27th at 2787.

Here are key support levels from there: 200-day moving average is at 2776. 100-day moving average is at 2749. And then there’s the March 8th low of 2722.

All of these levels imply a drop of over 3% for the week.

The only silver lining to this situation is that it could end. Should a deal be reached, markets would now view this as a VERY positive event that could push things to all-time highs in short order. Otherwise, the upward momentum is shot. We’re now looking at a sideways pattern where the markets have to find their footing, re-test a few times, and see if they can grind higher.

So yes, this news is damaging. Unless something happens today that gives the market a hard reversal — something that has this market finishing in the green today (which, frankly, is hard to rationalize given the current data) — there’s likely more damage to come.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Thin Air

The SPX is in a difficult spot. On the one hand, momentum in the smaller-cap stocks looks questionable; prices are above monthly trend; and earnings season has many concerned growth may be waning.

On the other hand, the prior intra-day high of just over 2940 is within striking distance.

So which way does the market go?

This is a tough call given that things seem pretty fairly valued at these levels. If you’re looking for a clear catalyst that drives equities higher, we may not know it until after the market has already placed its bets.

Markets aren’t in the business of sitting around and waiting for all the data to materialize. Often times they place their bets. Last week may have been an indicator as prices climbed while volumes dwindled.

Futures have indicated a fairly mixed open.

The trick looking forward is that the technical signals are mixed. At this point, the SPX is sitting atop a trend looking for a direction. Do we break out higher or retrace?

A healthy move for this market (SPX) would be to pull back to the 2860/2800 level the reverse to push on to new highs. What appears more likely is a move to take out the 2940 highs, followed by an even tougher decision about whether or not things should move higher from there.

The air is getting pretty thin at these levels. Markets seem to have moved higher not because of the news but because of a lack of reason for the trend to break. This makes things more fragile. A negative announcement could trigger the next 10% pull-back. But that doesn’t seem to be the prerogative of the markets lately. Given the now tired adage of TINA (there is no alternative), it appears the probability the SPX crosses the 3000 level this calendar year is still pretty likely.

SPX for the week

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Don’t expect much from a three and a half day trading week. Holiday weeks like this traditionally mean lower trading volume – and often higher volatility. Given the most recent few weeks in the market though, sentiment seems to be shifting. The Q4-Santa Claus Rally is in danger of passing us by. Post-Thanksgiving we’re really only talking about four more weeks of trading for the year when you consider window dressing, capital gains reporting, and the other holidays that will keep people home and away from the trading floor. Given the lack of trading momentum headed into this week, this market may not have much left in the tank.

This week should be a decent tell for the remainder of the year. Watch to see if the markets can find support above 2715. Otherwise, this market may find itself on Santa’s naughty list for the rest of the year.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different
types of investments involve varying degrees of risk, and there can be no assurance
that the future performance of any specific investment, investment strategy, or product
(including the investments and/or investment strategies recommended or undertaken by
BigFoot), or any non-investment related content, made reference to directly or indirectly
in this blog will be profitable, equal any corresponding indicated historical performance
level(s), be suitable for your portfolio or individual situation, or prove successful. Due
to various factors, including changing market conditions and/or applicable laws, the
content may no longer be reflective of current opinions or positions. Moreover, you
should not assume that any discussion or information contained in this blog serves as the
receipt of, or as a substitute for, personalized investment advice from BigFoot. To the
extent that a reader has any questions regarding the applicability of any specific issue
discussed above to his/her individual situation, he/she is encouraged to consult with the
professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified
public accounting firm and no portion of the blog content should be construed as legal
or accounting advice. A copy of the BigFoot’s current written disclosure statement
discussing our advisory services and fees is available for review upon request.

Get Back to Work

Vacation season is officially in the rear-view mirror.  Almost every school in the country is done with summer and back to the grind.  And the next break in the action won’t really occur until the Thanksgiving Holiday.  Look for volume to start climbing.

Let’s skip the fluff and get right to the chase:  the technicals are still showing bull signals at this time.  The media cycle is all aflutter about trade deals and the woes of the presidency.  Meanwhile, earnings are up, and interest rates are still tame.  This seems to be the only thing market participants care about right now.  Speculating on what out-there news story will take down Trump just hasn’t been profitable.

So what do the technicals tell us?  So far, the 2900 level is the next battle.  While markets closed at new highs, there may be some consolidation between 2870 and 2910 or so while participants settle into this new range.  Otherwise, the markets could shoot up toward the 2940 levels this week.

Over the weekend futures got as high as 2912.50 before pulling back to start this week.  The early indication is that the pull-back is likely to lead to an opening level similar to last Friday’s close.  It looks like the underlying momentum could turn positive though, pushing things higher.  If this market gets a little push, it could climb very quickly.

For the week, look for a positive bias.  It appears one of two likely options are in the set-up:  1) the market does some back-and-forth between 2870 and 2910,  or 2) the market finds its footing early and climbs passed 2925 while hunting for 2940 or so.  If option 2 happens, 2910 should become a new line of support for the week.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different
types of investments involve varying degrees of risk, and there can be no assurance
that the future performance of any specific investment, investment strategy, or product
(including the investments and/or investment strategies recommended or undertaken by
BigFoot), or any non-investment related content, made reference to directly or indirectly
in this blog will be profitable, equal any corresponding indicated historical performance
level(s), be suitable for your portfolio or individual situation, or prove successful. Due
to various factors, including changing market conditions and/or applicable laws, the
content may no longer be reflective of current opinions or positions. Moreover, you
should not assume that any discussion or information contained in this blog serves as the
receipt of, or as a substitute for, personalized investment advice from BigFoot. To the
extent that a reader has any questions regarding the applicability of any specific issue
discussed above to his/her individual situation, he/she is encouraged to consult with the
professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified
public accounting firm and no portion of the blog content should be construed as legal
or accounting advice. A copy of the BigFoot’s current written disclosure statement
discussing our advisory services and fees is available for review upon request.