Stock Market Generals Teeter at Cliff Edge ~ The Risk Averse Alert

Tuesday, June 03, 2008

Stock Market Generals Teeter at Cliff Edge

I believe I may have made a mistake...

The other day while Reading Between the Lines Marking Extremes in Volatility I considered "the role financials might play in the stock market's pending meltdown" and noted how "shares of [financial] firms have already arrived at the precipice in a flurry of selling."

Then, I went on to indicate "in the past volume spikes have stood as a sign of strong, underlying support."

However, this afternoon's Lehman Brothers induced market smack down led me to look again at my conclusion. I came away with a different view.

Before I summarize, I will remind you of the trailer article I linked to last week titled, "Private Profits and Socialized Risk." The view David Einhorn had on Lehman Brothers was not pretty.

Behold, then, the shaky ground upon which we are resting...

Witness the New York Times reaction to Mr. Einhorn, essentially laying the blame for Lehman's troubles at his feet. I might suggest the Times flip a couple words in its motto, so that truth might better read:

"All the Fits News to Print"

This aside, there is a technical reason I should reverse myself and suppose financials might, indeed, lead the stock market lower in imminent collapse. There is something critical missing in the charts of such stalwarts as LEH, MS, GS and JPM. It suggests trouble in financials might not yet be over.

Namely, when these stocks hit bottom in March, they all recorded peak volume of shares traded since beginning their declines last summer. Although relatively elevated volume is a crucial element of trading suggesting support might be forthcoming, there is one more thing needed before a bottom can be assumed likely. To wit, selling must exhibit some semblance of exhaustion. This is evidenced by volume of shares notably contracting upon a retest of a recent low (or upon setting a new low).

The one financial stock I can cite as having demonstrated some measure of selling exhaustion is C. The others cited above must be considered suspect to further selling pressure.

This strictly technical alteration in my view toward financials only goes to further elevate my certainty the stock market is on the verge of collapsing.

Think about it...

The Congress is aggressively venturing to reign in commodities speculators — today's hearing on "Energy Market Manipulation" before the Senate Committee on Commerce, Science and Transportation was quite a show ... Fed Chairman Bernanke is suddenly taking to doing his best Paul Volcker immitation on behalf of the U.S. dollar — interest rates are the Fed's only weapon on this count ... And the raft of claims suggesting "the worst of the credit crisis is behind us" is being capsized by rumors Lehman Brothers is facing a liquidity crisis.

Being the captain of the good ship Risk Averse Alert, I feel it my duty to give the command...

Mayday! Mayday! Mayday!

OEX 1-min

Here you see a chart of the S&P 100 over the past two days at one minute intervals.

Recall yesterday when I said, "I find it rather curious that, after today's mid-day bottom, RSI could recover to a level of buy-side strength higher than where it stood when today's commemoration of the Universal Studios fire began." You see the very same observation manifest in the above chart.

Also note the price-RSI divergence registered right around 3:30 p.m. just before the S&P 100 turned over going into today's close. This suggests no further counter-trend reaction (taking the S&P 100 higher) might be expected when the market opens tomorrow.

OEX 5-min

Following this afternoon's post-thud bounce, RSI recovered to a position of balance between buy-side and sell-side strength. Since the trend is your friend, this probably means look out below.

It was nice to see the S&P 100 set a new low today ... post-top registered on Monday May 19, 2008. This might seem a little thing, but it both confirms my outlook and suggests an acceleration of the stock market's decline could occur at any moment.

NYSE 5-min

Pretty much the same picture on the big board. The depths to which RSI has been sinking during the NYSE Composite's decline over the past couple weeks suggest an unusual degree of urgency in selling hitting the market.

Do you suppose this little subtlety goes some way to confirm my now long-held outlook?

You bet it does.

NASDAQ 5-min

Here we see a different picture. Apparently, the boiler room kids have an affinity for Looney Tunes. How does that Wile E. Coyote remain aloft after traveling over cliff's edge? It's quite a mystery! Still, the end is always the same in a long trip down to the bottom of the ravine...

Senate Commerce Committee Testimony Highlights
(This fairly summarizes the testimony whose entirety you can watch in this CSPAN video.)

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