The Risk Averse Alert

Friends...

Before I begin I would like to direct your attention to the left column of my blog. Today I added a new element called "Mr. Market Twitter."

Twitter is a micro blogging service. I will be posting comments there throughout the trading day, as well as brief, concluding observations after the market closes. If you're interested in following along, just click the link saying, "follow me on Twitter" and you will be taken to my page.

Okay...

Now, raise your right hand and repeat after me: I promise not to freak out if the stock market opens strongly higher on Friday.

Truth is I am afraid this could happen. Before I explain why you should not worry, allow me to humble myself.

I feel as though I should have been more wary of what NASDAQ's performance was suggesting, both prior to the stock market's May 19, 2008 peak and then again subsequently. After all, I had recently brought to your attention (in Another Not-So-Kudlow-esque Chart Fest on May 15, 2008) how NASDAQ behaved differently — seemingly stronger — leading into the stock market's top last October '07.

I should have kept this analysis at the top of my mind when the stock market began pulling back on Monday, May 19, 2008, and particularly as it was bottoming on Friday, May 23, 2008. Even then I noted how NASDAQ was holding up much better than those other major indexes I typically present here.

Once again, too, when the stock market bounced last week (May 27-30) it was plain the NASDAQ Composite recovered a good deal more of its prior week's loss than did the NYSE Composite. Indeed, I had even forecast this likelihood!

This performance disparity — NASDAQ v. NYSE — should have caused me more concern in light of my May 15, 2008 analysis. Unfortunately, it was not until yesterday I returned to reconsider its significance in the presently unfolding period.

Yet, even supposing the stock market was looking a lot like it did in the latter half of October '07 (much as I suggested yesterday), I still thought an opportunity to bail out of my June OEX 620 Put would soon present itself (i.e. today or Friday) before any worrisome move higher developed.

Well, as I duly note from time to time, nothing is set in stone. Today's trading, though not far off from what I expected, quite likely alters the plan.

Not that my confidence is shaken in the outlook for which I have become increasingly certain.

Nor do I suspect much delay at all in my forecast's manifestation. I continue believing a steep sell-off is at the door, because ... as certain as anyone can be about such things ... the evidence continues conclusively supporting this likelihood.

My point here simply is this. Here I am ... saying, "Bulls make money, bears make money, and pigs get slaughtered" ... holding a position whose value had nearly doubled as recently as Wednesday (6.4.08) ... having duly noted a relevant analytical concern just a couple weeks ago ... and what do I do? I drop the ball!

Sure, hindsight is 20-20. Still, I should have been more wary, particularly since I practically saw it coming (in as much as I rightly observed in my May 15, 2008 commentary a noteworthy relationship between the NYSE and NASDAQ whose relevance presently has become apparent).

So, having somewhat misread circumstances since the May 19, 2008 top ... and being keenly aware of out-of-the-money options premium volatility ... I want to sincerely apologize for what might seem, right now, a vexing, nerve racking predicament.

Of course, I cannot tell you how to feel. Rather, I can only assure you there's much good reason not to worry too much ... not even if the market rockets higher out of the gate on Friday.

The stock market is so close to coming unglued — and in a big, big way, too. You will do your nerves a favor simply keeping in mind this week's heightened volatility. It's a sure sign some vested interest(s) are, indeed, several orders of magnitude more nervous than either you or me. But to be honest, I really am not the least bit nervous here. There simply is no need.

Let me just assure you. I am considering all realistic Elliott Wave possibilities that defy my present forecast anticipating an imminent stock market meltdown. I positively must conclude the market's underlying technical condition — shown through various measures I have reviewed here before — continues supporting my conviction the outlook I have consistently maintained has the highest probability of coming to fruition.

If only to convince you, let me repeat something I said last Friday in "Elliott Wave Guy Takes Aim in Stock Market Turkey Shoot."

"[I]t's important that, as time proceeds, you ... confirm all remains well. You want to see everything still falling into place, as was originally anticipated."

I have not seen one single thing "under the covers" — not one! — that brings me to doubt in the slightest "the negative outlook the Elliott Wave cautions."

Believe me, if there were anything challenging my outlook and raising my concern, I would share it with you. In fact, I am practically stunned everything is more or less proceeding precisely as one would expect prior to the market collapsing.

I know all too well how just one day's trading can radically alter expectations. I have seen none of it for weeks now, though. This is most unusual! You might not appreciate this, but I surely do.

Not even today's strong advance had any damaging impact threatening to obliterate my analytical stance, and thus my dire forecast. In fact, today's trading only confirmed the heightened probability the stock market is about to collapse.




You've seen this chart before. It plots the daily differential between advancing and declining issues traded on the NYSE. You might recall my previously noting how this measure was contracting as the NYSE Composite was rising from its March 17, 2008 bottom.

Typically, when an advance has healthy underpinnings you would see the advance-decline differential expanding ... rather than contracting. A widening advance-decline differential indicates a growing swath of issues are behind the index's rise. This is a healthy sign.

Quite the opposite occurred during the NYSE's advance from March 17th through May 19th.

This, then, raises suspicion in the viability of the post-3.17.08 advance. When those fewer issues causing the index to rise stop rising themselves, the market becomes more vulnerable to a reversal of fortunes. It is as simple as that.

But, alas! Look at today's advance-decline differential ... it blew out of its weeks-long, contracting trend.

So, do you suppose this should call into question my outlook for a pending stock market collapse? Well, think again...

What have I been looking for? What underlying character — what tenor — have I been anticipating?

Did you guess irrational exuberance? Because this is what today's advance-decline differential demonstrates ... this by way of such fearlessness as led vested interests to step in and buy stocks in a big way.

Of course, were there not several other underlying technical measures still suggesting the stock market is much nearer a top than a bottom I might think differently. However, this simply is not the case. Just look at the NYSE and NASDAQ McClellan Oscillators. They are screaming TOP!

So, again, promise you will not freak out if the stock market extends today's advance. Truth is we might see even more evidence of a breakout in irrational exuberance ... through a fearlessness to go long equities at a time when financial vulnerabilities have rarely ever been so readily apparent. Such bold determination to bid stocks higher here — irrational though I consider it — indeed, would be a most welcome development at this late, pre-collapse stage.

I have so much more I want to say. However, I must get some sleep...


© 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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