Kissing Fannie is Never a Sign of Strength ~ The Risk Averse Alert

Tuesday, May 06, 2008

Kissing Fannie is Never a Sign of Strength

Not one thing has changed my forecast for a pending sharp decline developing in the stock market. During this decline we should find opportunity to trade OEX options and rapidly multiply a $500 initial stake into some solid, low 5-figure sum.

The 70% probability I have given to the likelihood the March 17, 2008 low will be taken out has in no way been threatened by the persistence of the stock market's advance off that low. In fact, each passing day seems only to confirm how great is the risk of a mini-collapse.


It's the same old, same old picture of complacency viewing the volume of shares traded on the NYSE. This simply is not reflective of the wall of worry the stock market is said to climb.

I know this is old news. However, rather than growing stale, its meaning continues to be all the more refreshing, particularly taking into account the ongoing performance of other underlying technical measures I have presented over the past week or so. There are red flags all over the place.

As an unrelated (?) aside, today I found circumstances surrounding trading in Fannie Mae worth noting. After reporting abysmal losses before the market opened the stock of this GSE rose nearly 10% by the end of the day. Analysts were quick to suggest there is an extraordinary degree of underlying strength buoying the stock market at present. There was universal agreement the worst of the credit market's problems are behind us. I am not at all so sanguine.

Once the stock market's melt-up begins (following the pending mini-collapse I am forecasting), we should be prepared for a good deal more analytical fantasy — wishful thinking — when underlying facts present a far more ominous story.

Be that is it may, it is during the initial stage of the stock market's still-to-come melt-up we should find occasion to take some part (say, 50%) of our 5-figure score made during the preceding mini-collapse (now on the doorstep) and multiply this into something north of $100K.

The price-RSI picture you see thus far this year in the chart of Fannie Mae (NYSE:FNM) provides a view of what we might expect to unfold in the stock market at large sometime during the weeks ahead...

company chart (FNM)

It is not the [huge] magnitude of the moves FNM has made this year I'd like to draw your attention to. Rather it is the price-RSI form I believe we should anticipate unfolding in most major stock indexes. This kind of volatility makes trading stock index options a turkey shoot. It is precisely what I am expecting...

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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.

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.

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