When the Enemy is Chaos, Get Smart ~ The Risk Averse Alert

Friday, July 11, 2008

When the Enemy is Chaos, Get Smart

Are you nervous? Why is that? Is not the crisis of confidence hitting the core of American wildcat finance giving you the sense things are about to get real interesting ... and quite volatile, too?


See that! The fun has just begun. Don't be taking to thinking today's resistance to a hard sell-off in the face of very disturbing action roiling the GSEs (FNM and FRE) must mean the market has already discounted growing financial stress.

Are you kidding? Acknowledgment of the full magnitude of a global crisis of confidence has barely sunk in. Most observers more or less still consider issues hitting the GSEs largely an isolated real estate matter related to the implosion of sub-prime mortgages. However, the problem goes right to the heart of an economy that can barely produce paper bags for itself. And so long as the status quo rests in belief profound economic and financial imbalances can be managed with this or that technical adjustment, chaos will rule the day.


There's a look at options expiration week, January '08. My money says we probably are about to see something of a repeat performance ... but worse.

You will duly note the S&P 100 was up over 1% on Monday, January 14, 2008. However, by Friday, January 18, 2008, the S&P 100 settled 6% lower than where it stood just one week earlier.

I am bringing this to your attention because indications from today's trade suggest a measure of resiliency born in belief Uncle Sam will save the day. No doubt, bottom fishers have plenty to hang their hats on. For example, sentiment among investment newsletter writers is quite slanted to the bearish camp. And even I will admit this probably indicates a bottom is likely to be reached sometime in the not-too-distant future. However, how much lower could the S&P 100 fall from here? Well, 500-520 remains my target. Chances remain quite good, I believe, much of this could be covered during July options expiration week.

OEX 5-min

RSI continues to spike up to buy-side extremes when the S&P 100 bounces to lower highs following declines to lower lows. In every instance since the 5.19.08 peak this has proven nothing more than a demonstration of underlying complacency paving the way for more selling.

And did you hear the cheer go up on the floor on the New York Stock Exchange this afternoon when the market turned positive? More complacency ... just begging for more negative action leading to further gnashing of teeth.

Now, we did see some positive price-RSI divergence with yesterday's and today's decline to new lows for the year. So, brace yourself for the possibility Monday continues today's turnaround. Try not to get nervous, though ... not even if the S&P 100 rises upward of 2%. Odds remain very good the stock market has much further to fall and could do so quite rapidly...

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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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