A Kiss-of-Death, Love-Fest on Wall Street ~ The Risk Averse Alert

Thursday, June 26, 2008

A Kiss-of-Death, Love-Fest on Wall Street

Do you ever remember being in school and being asked a question that, at first, seemed a curve ball, but when you learned the answer your reaction was, "Duh!" Well, I have got one for you.

First, though, have no doubt: I could go on a wishy-washy journey of uncertainty about what might unfold next in the stock market's capitulation.

I could once again, today, reference the NYSE and NASDAQ McClellan Oscillators and (contrary to my position stated just yesterday) suggest these now might be supporting the position I raised on Monday, where I called attention to the possibility the market might be about to bounce, much like it did last November - December '07.

However, having closely watched today's trading unfold ... having seen with my own eyes its tone being exactly like the market's advance from its March 17, 2008 low to its May 19, 2008 high (except today, accompanying meager buying interest reflective of a crisis of confidence there existed a good bit more willingness to offer up shares for sale) ... there's just one conclusion anyone in their right mind should make in characterizing today's action:

Wall Street was smitten by the kiss of death.

This was freely given even before the market opened ... when Goldman Sachs placed Citigroup and General Motors on their "Conviction Sell List." Then, it was returned in kind when Citigroup put Morgan Stanley on theirs.

Not the kind of love that plays well in a theater whose audience has been quite adeptly smelling smoke over the past few months. That lil ol' crisis of confidence turned into infant vestages of downright fear.

And the kiss of death moved to touch everyone's wallet from the opening bell to the closing gavel.

So class ... now that all the clues are on the table, I will ask you: what naturally follows the kiss of death?

C'mon. The answer is so simple!

A FUNERAL! (I know ... DUH!)

OEX 5-min

This is the same short-term S&P 100 chart I presented yesterday. Right off the bat you should note the "You Are Here" label has not only not moved, it has gone backward.

I am principally attempting to demonstrate price-RSI similarities here...

First, draw your attention to the two declines I have delineated by vertical red lines. Both were preceded by brief periods when the S&P 100 was rising while its [buy-side] RSI was diminishing. Obviously, the magnitude of the more recent declining period (beginning late yesterday and extending through today) is much greater than the former (6.17.08).

Now, zero in on the circled blue area. Imagine it being of comparable magnitude in relation to the S&P 100's decline from late yesterday through today. That's the funeral train I suspect will be barreling down on the stock market any moment now.

If my assessment here is correct, the next couple days could be the most negative period since last summer's top.

One other thing worth noting here... RSI registered during today's decline did not exceed its worst reading registered during the formation of the channel contained by the parallel gray lines. This suggests today's decline has much further to go.

NYSE 5-min

Again, despite today's bloodbath, RSI on the broader NYSE Composite did not exceed its worst reading set during the index's initial move lower in its current leg down. Ditto, then, the likelihood there's more selling yet to come.

NASDAQ 5-min

Same story at the Pump and Dump. Oh look! Another "running correction" (wave ii of 3; an Elliott Wave Guy thing) ... As I noted on the chart of the S&P 100 presented in "The Letter 'L' Brought to You By Don's Big Forehead" (that headline CRACKS ME UP!), this is a very bearish formation. To see it followed by today's gap open lower only adds confirmation NASDAQ is about to take a Big Dump.

Investors IntelligenceThis is a chart I came across showing the differential between Bullish and Bearish Investment advisers taking data from the Investors Intelligence weekly survey.

Taking a cursory look at this one might suppose the stock market is just a capitulation away from forming a solid bottom.

Indeed, it appears the 2nd half of 2002 could offer something of a price-sentiment window into the current period ... particularly considering the market's July '02 capitulation and subsequent bottom basing.

What Was THAT?

The above link is to a post appearing on Barry Ritholtz's "Big Picture" blog. He was soliciting opinions about today's decline.

One reader, following a couple dozen negative comments, suggested the market must be ready to reverse given how many people were bearish.

Although in some ways I would agree with this assessment (the market could rapidly reverse following its pending capitulation), I felt it appropriate to comment on this reader's remark. My observation might have some bearing on how you might best look at the above chart plotting the differential between bullish and bearish investment advisers...

"When the bank for the British royal family (RBS) is 'forecasting' continued credit market troubles ... when the European Monetary Union is essentially declaring war on the Fed with threats to drive the exchange rate value of the dollar into the depths of hell ... you must appreciate how these are, indeed, extraordinary times in which we are living. Therefore, resorting to analytical points of reference which in the past have proven statistically meaningful may now prove an exercise in futility."

Indeed, haven't we just seen this bear out with Jim Cramer's disclosure a couple weeks ago revealing the S&P Oscillator is registering a reading indicating the stock market is extremely oversold?

And have we not again seen this via Jon Najarian's noting the "Volatility Spread" might be indicating a prospective stock market bottom is at hand?

Ditto what the Bullish-Bearish Investment Adviser differential seems to be suggesting.

Granted, I will be the first to admit all these indications probably are signaling a turn is near. Yet, might not all things pointing to a pending bottom ... and all things supporting my view for a stock market melt-up (look over to the left) ... need tempering, largely out of consideration for the $3.5 trillion pile of cash sitting on the sidelines?

I mean, after all, it is there for a reason...

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