Little Red Riding "Hood" Goes to Wall Street to Visit Bear Stearns ~ The Risk Averse Alert

Friday, May 02, 2008

Little Red Riding "Hood" Goes to Wall Street to Visit Bear Stearns

One investment mantra I find enlightened is "the trend is your friend." It offers far more valuable perspective than "invest for the long haul."

As you know, I believe the Dow Jones Industrials Average could fall to 3600 tomorrow and still remain in a long-term rising trend. And as you can imagine, were this to happen it would have a devastating impact on most investors. So, were you to believe as I do that, sometime over the next few years a decline of this magnitude were in all probability likely to occur, what comfort would you have knowing stocks are superior long-term investments? Wouldn't you prefer missing the carnage? Of course you would, because you are equally subject to the sway of greed and fear as is the rest of humanity.

So, in one respect the trend is your friend simply on account of human nature. When it comes to investing the fact of the matter is the all too natural emotional dynamic balancing greed and fear sometimes tilts action heavily to the latter. And that is why broad stock market declines lasting months (and sometimes years) are quite natural.

Now, you might be of the persuasion to believe such things are entirely unpredictable. Let me tell you a little something about Dow 3600... It's just a ballpark number only an Elliott Wave Guy could come up with.

Now think... How many thousands of people these days understand the gravity of a precarious financial system whose "Inflate of Die" mantra is being tested like never before? What do all these people rightly perceive? Well, quite simply, they fathom how an extraordinary financial risk is gaining steam. They fear financial opportunity is waning.

And that, really, is what this game is all about: knowing the difference between risk and opportunity, so you might act accordingly and come out a winner.

For the moment the question is not so much whether things could turn bad, but rather what if things do not get better. Seems to me the psychology of fear born of unprecedented circumstance is creating an environment of increasing doubt. (And it stands to reason this kind of thing could stimulate fast trading.)

Am I just making all this up? Look at LIBOR, the interest rate regulating the multi-quadrillion dollar derivatives market. Its message is a loud and clear all is not well.

My point here is this: there are many things right in front of our faces giving us a glimpse at the state of greed and fear. This is why I take to a technical view of things...

OEX weekly

Do you see why the March 17, 2008 low probably does not mark the bottom to the stock market's multi-month decline?

Just as RSI was breaking down going into the Y2K top, it was doing much the same going into the October '07 peak. Now, look back to the 2001-2002 period. Following each onset of sell-side strength, the stock market would find legs for a time ... then subsequently proceed to fall apart and set another new low.

So, looking back just a few short years ago you see a demonstration of how the trend is your friend, and how certain simple technical measures can help you assess the underlying state of greed and fear.


I am beginning to suspect this rising wedge I've recently been drawing on the chart of the S&P 100 might turn out to be something more than "meaningless." Any Elliott Wave Guy worth his salt will tell you it's a pattern suggesting a great deal of underlying weakness. Isn't that a strange coincidence.

There's more that will still need to unfold before I would venture to make anything of it just yet. Were things to proceed as I put forward yesterday ("[a] pause ... preceding a last-gasp advance ... to the precipice") resulting in a [most bearish] rising wedge taking full form, then I might be licking my chops like the big, bad wolf (Jamie Dimon) when Little Red Riding "Hood" came knocking at Bear Stearns' door...

* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities 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.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!