A Stock Market Like Mid-Year 1929 With Tories Galore to Boot

The other day I linked to a Bloomberg story reporting management at J.P Morgan / Chase fessing up to problems the firm is facing. The outlook was not at all sparky. In fact, it was downright gloomy. Indeed, there is every reason to believe Still More Gnashing of Teeth Before Market Melt Up Begins.

However, something occurred to me. When the market reaches an important top the general outlook is blue skies and sunny days for as far as the eye can see. Similarly, the future typically portends nothing but stormy conditions just as the market makes a significant bottom.

Now, far be it to suggest fundamental frailties embedded within our contemporary financial arrangement suddenly will be resolved. In fact, the market's projected melt-up probably will be nothing more than a liquidity-driven short squeeze.

This should come as little wonder given how present circumstance might be likened to the first half of 1929, when stresses brought about by an imbalanced financial environment were beginning to take their toll. Eventually, by hook and by crook, these were temporarily resolved and a melt-up unfolded, leading to a top of historic proportions.




The market might be setting up similarly. However, I am only making a technical observation here supporting the present period's fundamental likeness to the 1929 investment environment. Just as some substantive shift in the underlying financial climate then unavoidably led to a stock market breakdown, the same appears to be occurring now.

Once again in our time every conceivable effort is being made to sustain the unsustainable. For a brief time, too, the fixes might appear to be working. However, massive leverage built upon a shrinking physical economy have long been the recipe for disaster. Enter, then, my outlook for a prospective decline to the vicinity of Dow 3600 sometime over the next several years.

There is plenty of time to think more about developments that might precipitate during the coming financial storm. All I know is history cannot be easily erased. Reasonable, workable solutions to difficult problems have precedent. And there is nothing to fear but fear itself.

So, here and now the evidence suggests the stock market is not far from a bottom from which a melt-up might commence, much as occurred during the summer of 1929. Let's have a closer look...




Since January '08 the S&P 100 has twice moved to a new low for the year and in both instances an RSI divergence was registered. I expect this to occur once again as the S&P 100 embarks on its final decline into bottom.

With anticipation toward the market's subsequent melt-up ... weekly RSI could register a buy-side reading stronger than any over the past ten years ... as the S&P 100 extends beyond its 2007 peak. This would confirm my present Elliott Wave-based view suggesting the market currently is correcting its 1982-2000 advance ... setting up for a steep decline to the area major indexes traded during 1994 and a subsequent 1000% gain following that. Of course, nothing is set in stone.




So, what other technical conditions might develop as the S&P 100 proceeds to form its bottom? Well, RSI and MACD divergences ... coincident with an S&P 100 falling on diminishing volume ... would be good.

Truth is, though, several possible scenarios might develop here...

One thing potentially supportive of a pending melt-up following the S&P 100's yet-to-be-seen bottom would result in both RSI and MACD exceeding respective May '08 peaks sometime during the market's present bounce. This would suggest underlying strength is building ... and provide further basis for anticipating positive technical divergences once the S&P 100 finally reaches its bottom.




You can see why the current bounce probably has not completed. Weakening underlying conditions one should expect at a top have yet to fully form. Although these are not necessarily a precondition for a reversal in trend, the expected turn lower to ultimate bottom will more likely unfold when RSI and MACD divergences are registered as the S&P 100 reaches the top of its present bounce from the July 15, 2008 low.




The next leg up in the S&P 100 appears nearer to forming. Today's decline below last Wednesday's low (8.13.08) was confirmed by 5-minute RSI ... which, itself, has now begun to diverge. However, further price-RSI divergence probably needs to develop before the S&P 100 turns higher and moves closer to completing its bounce off July's low.

So, Is This The Home of the Brave?

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The Risk Averse Stock Index Options Alert advocates a patient, disciplined approach to stock index options trading. The overriding objective is limiting one's financial risk. Minimizing investment capital loss is a priority.

Recommendations target the stock market's path of least resistance. Call and Put options alike are used when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Building the Case for Death by a Thousand Cuts

The probability of an expected move taking various stock indexes to new lows for the year coming by way of a sharp sell-off might be lessening. The McClellan Oscillator for both the NYSE and NASDAQ Composite indexes suggests so much. Death by a thousand cuts instead appears the more likely manner in which July '08 lows will be taken out.

I originally thought the McClellan Oscillator's burst higher in July might be likened to what happened last December '07 (see Cramer's "Bull Run" Takes a Trip Down Memory Lane). That it is holding up positive longer than I supposed, though, probably means something different. Of course, I am only speculating.

A drawn out decline completing the stock market's multi-month correction certainly would be harmonious with the entire move lower over the past year.

Likewise, this final move lower, once it gets under way, might result in the McClellan Oscillator remaining negative for an even longer duration than was the case May '08 - July '08. You will recall the Oscillator's prolonged stint in the negative was considered a condition indicative of capitulation (see Unmasking the Stock Market's Capitulation). An extended stay below zero would be harmonious with Elliott Wave expectations for a correction-ending decline, too.

I might also anticipate the McClellan Oscillator registering notably shallow negative readings, though, over the duration. This would further the case for capitulation, indicating selling finally has been washed out.




The market climbs a wall of worry. So, when you are worried would you hold shares? Would you buy shares? No! You would sell shares and this would result in the volume of shares traded increasing.

However, precisely the opposite is happening. Therefore, a case for anticipating the present rally's failure is made.

Look for RSI divergence to form (much as occurred at the May '08 peak) before the S&P 100 turns over.

MACD appears near to reversing and returning to the negative. Of course, nothing is set in stone and things could evolve in a manner similar to early April '08. One notable difference now versus then, though, is no price-MACD divergence developed prior to the present launch higher. So, I am more inclined to think MACD's current position suggests a reversal lower is near.

Moving forward, though, we might expect positive MACD divergences to form as the S&P 100 sinks below its July 15, 2008 low. Already a positive divergence has developed ... comparing July's S&P 100 bottom to January's (not shown). Further MACD divergences forming as the S&P 100 bottoms over the weeks ahead would be favorable confirmation suggesting a melt-up likely will follow...

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The Risk Averse Stock Index Options Alert advocates a patient, disciplined approach to stock index options trading. The overriding objective is limiting one's financial risk. Minimizing investment capital loss is a priority.

Recommendations target the stock market's path of least resistance. Call and Put options alike are used when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Still More Gnashing of Teeth Before Market Melt Up Begins

It is painfully evident the stock market's present buoyancy has less to do with renewed interest in owning equities than it does a seeming lack of will to collectively sell at the current moment.

Whether one might think this is madness, given the fact credit market stress continues, is irrelevant. The lack of any concerted, fear-filled sense of urgency to sell and possibly precipitate a panic probably is a telling sign ... at least by some relevant measure anyway.

Needless to say ... of all people who are keenly aware of lurking, grave danger at the credit juice bar, we should be the least bit surprised once the market melts up as I suspect it will ... in the not too distant future.

However, I am not about to read too much into the market's present resistance to playing its traditional role as a forward-looking indicator. It might still be "business as usual" at CNBC, but the ruse the Bank of England's largest OTC derivatives junkie just pulled is bound to bring new meaning to "Mad Money."

Vain attempts to buttress a sense there is no longer much to worry about — which fantasy its purveyor's fear can only be exposed when eyes are turned away ... revealing just how so-called pillars of finance cowardly fess up — is not the kind of behavior breeding confidence, and stand as a clarion call to Dow 3600 sometime over the next 3-5 years.

Fine, you say, but what about right now?

Well, maybe the combination of $3.5 trillion sitting in money market accounts and a decidedly bearish sentiment among investment newsletter writers is enough to engender a mad dash from one sector to the next ... in spite of terribly persistent credit market risks.




Still, I cannot give too much credence to the growing hoard of sideline cash. It has been building for some time, and as I have said before, Maria, it is there for good reason.

One might also say the same for present bearish sentiment. This, too, relatively speaking, has been persisting for quite some time. In fact, more or less all year..

Note how at the May peak there were fewer than three bullish investment newsletter writers for every two who were bearish. Still the market sank, resulting in most major indexes taking out respective lows set on March 17, 2008. Who is to say an even lower ratio might not become a self-fulfilling prophesy, then?

All I know is further wave of selling taking out July's lows remains a high probability. In fact, I am sure of it, Cramer. Once it is over, then you can have your "Bull Run."

The only thing presently defying certain discernment is just how Monsieur Market might fall. Will it be a slow, maddening drop, further manifesting the gnashing of teeth sentiment I thought possible a couple months ago (after assuming a 1987-like crash event probably was off the table) ... or will the next leg lower unfold rather quickly?

At this point I prefer assuming the former possibility rather than the latter.




I am assuming the NYSE Composite's ultimate bottom lies not much further below its July low. The vicinity of 7600 has been its target for months now. This is where it remains.

The present period is beginning to look just as similar to what followed the January '08 bottom as it does December '07. Up until now I have been considering this latter similarity as being more indicative of what probably is to come ... thinking bottom might arrive sooner rather than later, and with all haste given cyclical considerations discussed yesterday.

However, a sharp break lower simply has not been forthcoming. So, maybe death by a thousand cuts lasting into October and resulting in all manner of technical divergences further heightening the likelihood of the subsequent melt-up I am expecting will be the way things proceed.

Bottom line the NYSE Composite has not yet bottomed. Soon enough it is likely to fall and take out its July 15, 2008 low. Again, just how the move lower might unfold I cannot say.

Right now, a move up to the 50-day moving average might be in order before the NYSE Composite turns lower and finally completes its multi-month consolidation. Furthermore, the trip to bottom might once again bring rotation back into NYSE-listed stocks and hit NASDAQ relatively harder...




I wish I had sooner seen developments unfolding in the NASDAQ Composite as shown here.

First, consider the move down in November '07 ... up to the bounce in December '07. Note how this decline is much like the larger drop from the same starting point to the March '08 low.

Now, consider the bounce subsequent to each decline. The "like from like" similarity is uncanny. Here, too, we see the NASDAQ Composite presently appearing much like it did in December '07.

Does this imply NASDAQ is near to being throttled? Again, I don't know. I rather think not ... despite being quite sure the March '08 low will be taken out sometime over the weeks ahead.

If only I had seen this coming. I probably would not have so soon positioned myself strongly on the Put side. I am not happy about this misfortune. Still, I have little doubt this gaff soon enough will be atoned...

The Secret Bailout of J.P. Morgan

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The Risk Averse Stock Index Options Alert advocates a patient, disciplined approach to stock index options trading. The overriding objective is limiting one's financial risk. Minimizing investment capital loss is a priority.

Recommendations target the stock market's path of least resistance. Call and Put options alike are used when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Going for the Gold in Stock Market Cycling Event

Back in May I raised the possibility suggesting a 1987-like crash might unfold. This was in keeping with analysis indicating a capitulation had yet to develop since last year's Q3 peak. More critically, though, an easily arrived-at Elliott Wave view heightened the probability lows set on March 17, 2008 were only a temporary resting point ... rather than termination of the stock market's multi-month correction of gains made from 2002-2007.

But within a matter of only a couple weeks I backed away from supposing a 1987-like crash might usher in the market's capitulation, instead believing this less likely given developments over the interim.

One reason why I changed my mind so quickly had to do with certain cyclical guideposts within my analytical repertoire. One is the decennial cycle and the other is the presidential-term cycle.

(Bear in mind I generally give cyclical considerations a back seat to other, less arbitrary technical measures I would argue are more complementary to Elliott Wave analysis.)

Combined, these two cycles suggest an upward bias in the stock market during the second half of '08. Thus, it seemed reasonable to assume the further past mid-year we moved, a decidedly negative outlook anticipating a crash event might not be well-advised. So, my sense back in May-June '08 was a crash would either unfold immediately, while these two particular cycles were only beginning to rise in unison, or it would not develop at all.

Now, although I concluded a crash event was unlikely soon after I had raised the possibility, I did not back away one bit from the 70% probability I had given to the likelihood March '08 lows would be taken out. In other words, a sell-off reflecting capitulation still was in the cards.

Elliott Wave possibilities supportive of further selling ... plus underlying technical conditions indicative of a climate conducive to weakness ... alone formed my expectation for a declining stock market in which some substantive demonstration of capitulation might be expected. This view I held despite contrary cyclical considerations.

However, whether what subsequently developed from May 19, 2008 - July 15, 2008 qualifies as the full manifestation of what I had anticipated is rather doubtful. Yes, there are some things one could cite as indicative of capitulation. But the evidence does not at all seem conclusive. That is why I rather expect still further selling before a bottom finally is in place.

So, it turns out cyclical considerations have proven pernicious to the low-risk, stock index options play I thought possible. This is all the more apparent now that the S&P 100 has taken out its March 17, 2008 low. The effect on underlying volatility has been a real bear (no pun intended), particularly given my determination to risk just $500.

In comparison the year 2002 (the last time I forecast a low-risk options trading opportunity) was a breeze. I just did not miss a single twist or turn. However, volatility I expected then actually materialized, which is more than I can say presently.




The unfolding form the S&P 100 has traced since its July 15, 2008 low is, without a doubt, consolidating losses incurred since its May 19, 2008 peak. However, just how much longer this consolidation might persist is a rather frustrating mystery. Indeed, it could be over already. Then again, though, some undetermined number of days might pass before the final turn lower unfolds.

Given the cyclical considerations I mentioned above, there is reason to suspect any imminent sell-off (should this in fact be in store) might develop rather quickly ... and then rapidly reverse as the market embarks on its anticipated melt-up.

But then again, what possibility is there of something slightly different developing? Could the S&P 100's July 15th low be taken out by way of a decline best described as death by a thousand cuts ... unfolding over several weeks time ... resulting in a new low ... bottoming in the 520ish area? Might the rather unexpected, reduced-volatility decline from May 19, 2008 - July 15, 2008 indeed be forecasting this development? Would this not be fitting present cyclical considerations? Do you think just because cycles are rising, this necessarily implies the market cannot be slowly bled?

Remember, the trend is your friend ... and we might conclude a "slow bleed" has been the market's trend for quite some time now ... even prior to last year's peak when NASDAQ enters the picture.

Bottom line, I already have a post-it with a big, red L ready for Cramer once July 15th's low is taken out. As much as certainty is possible in this game, I am certain this post-it will be mailed out. Despite having been at this only a few years less than he has, I simply am astonished by how he persists in calling July 15th "bottom."


[5:00 p.m.]
Just another trading day defying gravity ... treading in mid-air ... going nowhere. The buoyancy we are witnessing seems to suggest the market might not soon embark on the sharp move lower I have been supposing would end its consolidation of gains made from 2002-2007. However, I am not willing to bet the house on this.

I submit the relatively directionless (and seemingly endless!) sector rotation we are seeing supports the broader view I hold. To whit...

Given the form this rotation is taking — more positively affecting the most beaten up sectors — we have evidence that, once this runs its course, a general recognition of there being no compelling fundamental basis for holding stocks in these sectors probably will evolve, and a resumption of the market's negative trend likely will develop. This, then, supports my outlook toward the market's July 15th low, with Elliott Wave considerations making the case bottom is not yet in place.

Furthermore, given the fact this rotation is occurring such as it is — applying drops of cash from the sea of liquidity sitting in money market funds to the task of buying stocks technically poised for a trading bounce — we have evidence of "animal spirits" necessary for launching the stock market into a spectacular melt-up. Elliott Wave considerations similarly support this distinct possibility, once bottom finally has been established.




Today's bounce in the NYSE Composite was a lot like last Friday's. There really was no substantive RSI divergence raising the probability of a sizable rally off today's low. Rather, the turn higher might be better rationalized with a view toward NASDAQ...




Gains made from Monday to Monday, 8.4.08 - 8.11.08, are holding on NASDAQ ... unlike the Big Board. Despite negative RSI since Monday's top, and despite there again being no evident RSI divergence leading into today's turn higher, the fact no selling urgency has yet to develop in secondaries might be all the reason the bid came into NYSE listed stocks once the NYSE Composite touched its floor of the past week or so.




It's a long way to Tipperary (OEX 560), but the S&P 100's late-day turn lower with RSI positioned in a way that's conducive to further selling lends hope for the blessed moment I thought would be here long before now. Truly, the wait has been sheer torture...

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The Risk Averse Stock Index Options Alert advocates a patient, disciplined approach to stock index options trading. The overriding objective is limiting one's financial risk. Minimizing investment capital loss is a priority.

Recommendations target the stock market's path of least resistance. Call and Put options alike are used when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

And Now That The Set Up Is Blown?

I am by no means the sharpest tool in the shed. Nor am I a well-spoken skeptic.

Yesterday I linked to a brief summary article about the conflict between Russia and Georgia, calling it a "staged event." Well, I learned a little more about just how much this situation is relevant to the point I made. Apparently, the war is of great interest to investment bankers in New York.

Mark Ames, American editor of "The eXile" (formerly a Moscow-based English language newspaper, shut down in June '08, but still publishing online), wrote the following on Saturday, August 9, 2008:

The invasion was backed up by a PR offensive so layered and sophisticated that I even got an hysterical call today from a hedge fund manager in New York, screaming about an “investor call” that Georgian Prime Minister Lado Gurgenidze made this morning with some fifty leading Western investment bank managers and analysts. I’ve since seen a J.P. Morgan summary of the conference call, which pretty much reflects the talking points later picked up by the US media.

These kinds of conference calls are generally conducted by the heads of companies in order to give banking analysts guidance. But as the hedge fund manager told me today, “The reason Lado did this is because he knew the enormous PR value that Georgia would gain by going to the money people and analysts, particularly since Georgia is clearly the aggressor this time.” As a former investment banker who worked in London and who used to head the Bank of Georgia, Gurgenidze knew what he was doing. “Lado is a former banker himself, so he knew that by framing the conflict for the most influential bankers and analysts in New York, that these power bankers would then write up reports and go on CNBC and argue Lado Gurgenidze’s talking points. It was brilliant, and now you’re starting to see the American media shift its coverage from calling it Georgia invading Ossetian territory, to the new spin, that it’s Russian imperial aggression against tiny little Georgia.”

The really scary thing about this investor conference call is that it suggests real planning. As the hedge fund manager told me, “These things aren’t set up on an hour’s notice.”

(Here's more on Georgian PM, Lado Gurgenidze.)

Mr. Ames' concluding remark really caught my attention, so I thought I would pass it along. As is so typical here in the United States when it comes to "news," all things generally are not what they seem.

So, having kept an eye on this developing story throughout the day today, it was rather clear things were not at all going as planned. The public fronts (press and political), when they were not being deathly silent, were a bumbling, stumbling embarrassment.

And this might just make the next act from a bankrupt aristocracy's bag of tricks all the more dangerous and reckless...

I do sometimes wonder whether my melt-up thesis is ill-conceived. However, this is little wonder given fundamental factors we have to consider.

Yet I entirely agree with Doug Noland. Markets live on fear and greed, and it is not the nature of the game to let fundamentals get in the way of price movement. We have but the market's recent performance confirming this.

So, what's next?

Well, things on the Big Board still are not looking up at all...





And the Pump and Dump is looking a bit February 2002ish...





Nevertheless, if there is more money to be made squeezing lemonade from lemons, then what can I do? I am crossing my fingers a couple August OEX 560 Puts will present an opportunity to save face...

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The Risk Averse Stock Index Options Alert advocates a patient, disciplined approach to stock index options trading. The overriding objective is limiting one's financial risk. Minimizing investment capital loss is a priority.

Recommendations target the stock market's path of least resistance. Call and Put options alike are used when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.