The Cultural Spin on Diehard Fantasies ~ The Risk Averse Alert

Tuesday, April 01, 2008

The Cultural Spin on Diehard Fantasies

FACT: The mountain of crap many a financial institution classifies as "assets" are fictions — fantasies. It would not matter if J.P. Morgan himself came back from the grave and backed their viability; they will remain the same: ultimately unpayable (at least in 2008 dollars anyway). Truth is many a financial institution which led today's explosive stock market rally is in all probability living on borrowed time.

King among them is UBS, which today announced a Q1 '08 loss of $19 billion. Some have reported UBS, Europe's largest bank, is in serious trouble. Over the past six months it has lost $37 billion dollars. You and us? I think not.

Of course, nothing so final is made public by insiders. Chief Executive Marcel Rohner says, "We will return our company to profitability."

And, according to the Wall Street Journal, "The news from UBS ... prompted some optimism among investors that European banks could be reaching a point where they can claim losses have peaked."

We should all be grateful Rupert Murdock is at the Journal's helm. American history abounds with diehard British fantasies, and so we are quite capable of assuming truth need only require we appropriately insert the word "not" in statements coming from the many friends of the Kingdom.

Need an example?

Try this: Americans were the terrorists of 1776-1783...

Think, Man!

There are two things today's trade require me to address. First, I was supposing the "death by a thousand cuts" action last week might continue a bit. That is why, yesterday, I suggested today's action "might be ... dull."

I really regret stating something so specific — however diffident — when it adds nothing to even the shortest-term forecast. Fact is Friday's commentary suggesting "next week could see the S&P 100 rise at least to the vicinity of 620 +/- and possibly even approach 630" is all that really mattered in the context of analysis put forward yesterday. Likewise, with all the liquidity awash on Wall Street, I should have assumed animal spirits emboldened by the start of a new calendar quarter might have come to life today.

The second thing I need to address regarding my heretofore short-term outlook surrounds this latter refinement that, the S&P 100 might "possibly even approach 630" (much as it did today).


Although not stated in last Friday's commentary, I had been anticipating the S&P 100 would stay below Monday's (3/24) intra-day high of 632.94. You might have understood this simply looking at the mark-up added to the S&P 100's 6-month chart (reproduced above). Likewise, you would have similarly gathered why I was expecting the index to fall back to the 590-600 range.

However, now that last Monday's intra-day high has been exceeded, my outlook must necessarily change.

OEX 5-min

Nothing but buy-side strength was demonstrated by today's RSI performance. The picture is very impressive, particularly contrasted to last week, when RSI largely held below 50 (confirming selling strength) while the S&P 100 declined ever so slowly (i.e. Tuesday through Friday). Today's buy-side RSI strength coinciding with the S&P 100 shooting through the roof offers both support for my "long-term" outlook anticipating a stock market melt-up, as well as more evidence suggesting the stock market bottomed on Monday, March 17th.

So, then, what about my remark last Friday stating, "the stock market probably will not trade outside the range it has been stuck in for the past two and a half months over much of the month of April" ... does this still stand?

And what about those "strong hands [who] might wish to create conditions that rattle weaker hands to give up ... their shares," as I suggested last Thursday (3/27)?

Well, per this latter point, there is little question today's monster advance was largely a short squeeze in financials. A huge bank (UBS) losing $19 bn (man, that's a lot of bread!) whose shares ramp up by nearly 15% probably is more a short-term play being made by strong hands, rather than a case where investors have come to their senses about some fundamental, long-term value in the shares of UBS and a host of other financials whose advance was the driving force behind today's rally.

Whether my projection regarding the trading range of the past two and a half months will pass muster I really cannot say. I remain inclined to believe it will. This despite believing the stock market's present launch higher is not yet over.

OEX 5-min

As you can see, RSI, though maintaining a position strongly on the buy-side today, diverged from the S&P 100 as the day progressed. Thus, chances are the S&P 100 will pull back to 630 before advancing beyond today's close. We might see it reach somewhere near 650 before this rally is over.

After that who knows. It's too early to say. However, I would not discount the possibility the S&P 100 could pull back all the way to 600.

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