Will the Real Amazing Capitulation Please Stand Up! ~ The Risk Averse Alert

Wednesday, May 28, 2008

Will the Real Amazing Capitulation Please Stand Up!

I will never forget it... It was October 2002 and the stock market was falling to its lowest levels of a three year bear market (whose duration and extent I had forecast in January 2000, by the way). It was then I discovered "The Maria Bartiromo Sentiment Index."

Poor girl was just moribund. You would have thought she had just been told Ted Kennedy was her real father. She was depressed and finding it impossible to squeak a single Pollyannish word. You couldn't help but suppose a bottom was at hand.

Of course, being an Elliott Wave Guy I had a strong suspicion. However, I wanted to share this with you because, who knows, I might learn tomorrow Dick Cheney is my real father and have a fatal heart attack.

So, now that you're aware of "The Maria Bartiromo Sentiment Index" you should have a pretty good idea when the stock market is soon to melt up. Just listen for a fatal tone of anguish fearing ratings are about to plummet. (Goodbye big raise ... hello $5 a gallon!)

Continuing this trip down memory lane, allow me to take you back a couple years earlier...


I marked a memorable week in April 2000. Over those five short days I multiplied a $5000 OEX Put position into a $40,000 take. You bet it was sweet.

And there's a reason I wanted to show you this.

Take a close look at trading during early April 2000, just prior to that big, 12% down week. Focus in on Tuesday, April 4, 2000 — an incredibly volatile day. First up, then down, then back up. Having traded in a nearly 60 point range, the S&P 100 finished the day just 7.33 points lower. That same day the NASDAQ Composite was down as much as 13% (HUGE!), only to close 3% lower.

It simply was one of those days that "cleared the air." It raised the red flag signaling, "Beware!" A lot of technical damage was done.

What followed, though, was what I wanted to show you. You see how the S&P 100 advanced over the next three days right back to the high it reached on April 4, 2000? It was one of the most pathetically weak advances I have ever seen. It was screaming, "Trouble!"

And this was precisely what I had anticipated following the stock market's April 4, 2000 whip-saw. That's why I took on a big OEX Put position on Monday, April 10, 2000.

Now, here's the thing you should know... There's a lot of similarity between trading following April 4, 2000 and trading since the March 17, 2008 bottom.

We have the red flag whose waving I most recently covered in "To Sir Elliott, With Love." And we have the crisis of confidence whose character effectively reveals underlying weakness by way of a persistently diminishing volume of shares traded on the NYSE.

My concern is only all the more compounded by an evident lack of willingness among the stock market's vested interests to offer up shares for sale since the March 17, 2008 bottom ... despite growing pressure on the physical economy and well-hidden risks in the financial system. This simply demonstrates a degree of complacency scarcely ever rewarded throughout the stock market's long history.

And finally ... last week ... the long anticipating meltdown began ... with a slaughter of the stock market's generals.

Oh, and by the way...

Jeff Mortimer, Senior Vice President and Chief Investment Officer—Equities at Charles Schwab Investment Management, announced today on CNBC, "The March lows were an amazing capitulation."

Well, that's what makes a stock market! And you know what Mr. Mortimer? Even if I were Ralph Kramden, I would have no compunction whatsoever to panic and say, "Hummana, hummana, hummana."

That's the nice thing about having a healthy measure of skepticism I guess.

I get that from my mother. She once told me not to believe everything you hear ... and only half of what you read. See mom, I listened!

Of course, there's that little thing called "evidence" suggesting the "amazing capitulation" is but days from exploding onto the scene. And yes, I remain quite sure of it ... so, the half of what you read my mom says you can believe hinges on her well-known reputation for calling out Jeff Mortimer whenever he is wrong.

OEX 5-min

A Risk Averse Alert first! Elliott Wave counts. Oh joy. Can you imagine if I bored you to tears explaining all of this?

But you get the idea. I think the market's bounce has just a bit more to go.

You've heard the expression "dead cat bounce," right? Well, baby, this is it ... an options time value killing extravaganza ... just purring like a little kitten.

It shouldn't last much longer, though. When to say when probably will be here (finally!) before week's end.

NYSE 5-min
NASDAQ 5-min

As you can see, all the above indexes are within striking distance of the respective bounce targets I indicated yesterday.

You should also duly note the rotation from the market-leading NASDAQ to the NYSE Major League took center stage over the course of today's trading. This is just as one might expect in the waning moments before Mr. Market rolls over and plays dead...

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© 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.

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adan said...

interesting article - thanks!

look fwd to the one covering today's action (thursday)