Fed Feeding the Wrong Kind of Animal Spirits on Wall Street ~ The Risk Averse Alert

Wednesday, March 26, 2008

Fed Feeding the Wrong Kind of Animal Spirits on Wall Street

OEX 5-min
I am not so sure the S&P 100 "needs" to retest its Monday, 3/17 intra-day low. This is contrary to what I thus far have been suggesting with reference to intermediate-term RSI (more on this below).

The "form" the S&P 100 has taken since last Wednesday's (3/19) high suggests the stock market may be about to explode higher. Other stock indexes support this view as well.

Although I have been suggesting intermediate-term RSI would rise above its December high before the S&P 100 turned lower and challenged last week's low (set on Monday, 3/17), there is no denying the kind of RSI divergence one might expect at a bottom has already formed.

Now, the possibility I mentioned above, suggesting the stock market might explode higher (say, tomorrow and Friday), could turn out to be something like a "false positive" medical test. We'll probably know for sure sometime tomorrow. If the S&P 100 does not launch higher, then it probably will break down to the 590-600 range. Yet, even were this to happen I suspect the stock market might sooner rocket higher than I have been suggesting prior to today.

The more I look at the big picture — the nearness to which all major indexes are to points at which, were they to fall below, the stock market might likely thereafter collapse spectacularly — the more I am persuaded last week's low represents something of a strong floor.

Bottom line, the stock market's multi-month decline since last October might have ended with the Bear Stearns take-down. However, this decline has been but part of a larger corrective pattern that began last June. So, even if the stock market rises over the weeks ahead — to the point of challenging last October's high or possibly even exceeding it — the anticipated stock market melt-up part and parcel with the Risk Averse Alert's "long-term" forecast might still face a late spring or early summer speed bump. In fact, following any significant advance over the weeks ahead there could be another steep decline taking major stock indexes (the S&P 100 included) right back down to present levels, or even a bit lower.

That's a bit of forward thinking stated for the record.

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