A Crisis of Confidence Goes to Washington ~ The Risk Averse Alert

Tuesday, July 15, 2008

A Crisis of Confidence Goes to Washington

How the eyes of our Lady 520s widened watching the President have his Judas moment before the Press Corp today. The pressure bearing down on a faltering ideology — a shaken revelation for the world to see becoming allegory of guts spilling onto a field — was palpable ... that is, in the financial/economic line of questioning. Could Posterity possibly have been any more embarfassing?

(Embarfassing - adjective: the sort of embarrassment that makes you want to puke.)

The Ladies saw a new low evidencing weakness for all with eyes that see ... and in the very strange scene, the growing possibility of diamonds coming their way. Or at least something solid gold... It was quite a show. Most was status quo. But when the President entered our Ladies' world, everything went all a twirl.

From what I have read Mr. Hoover could at least keep his composure...

Have no fear! Our uber-misguided Congress guarantees a hyper-inflationary-charged, stock market melt-up in response. Why Speaker Thatcher is calling for more stimulus. Talk about euphemistic. She should be called it "spiraling-cost-of-living vote bait." More crumbs for mice while finance unsound reigns supreme. Let's call it by its cold, hard, politically correct name ... where "politically correct" is weighed by an extraordinary standard brought forward in abhorrence of tyranny.

Still, once the national debt bumps over $10 tn shortly, some few months of time bought and paid for by the U.S. taxpayer (it's just as well; the cost of a clue must come one way or another) might just get the animal spirits and their hot sideline money fueling a market melt-up. Yeah, that's it. That's the ticket. A reasonable possibility anyway...

Hey, how about that Senator Jim Bunning (R-KY)... To Bernanke's face today he said, "The Federal Reserve is a systemic risk!" How's that for bolstering confidence...

May Day! May Day!


Well, we had our "falling out" ... and with increasing volume of shares changing hands. Just like January.

And the correct answer to Final Jeopardy brings panicked form to a crisis of confidence whose truth is marching on...

[5:00 p.m.]
The following chart of the S&P 100 (5 days) presents a possible scenario for tomorrow. Hard, sustained selling that might not get under way until late in the day seems to "fit" the character of the market's entire decline since 5.19.08. It's one of the reasons I did not pull the trigger today and add more Put contracts to my current position...

OEX 5-min

The general idea I want to put forward here is the market could hold up going into tomorrow afternoon's trading (Wednesday, 7.16.08). The S&P 100 might not take the above form. In fact, chances are it won't.

POP QUIZ: What happened at 3:00 p.m. today raising the possibility the market might hold up a bit more before falling apart? (As if the past ten days hasn't been enough torture for our Beauties at the July 520 exp...)

[2:15 p.m.]
Forgive me if these comments are getting too technical, but per the S&P 100 chart included with 1:00 p.m. remarks below the channel is drawn simply to help target wave 5. There is nothing set in stone per this Elliott Wave Principle construct. More often than not, wave 5 will reach the upper end of the channel formed by waves 1-4. Sometimes, however, it won't.

In the present instance, it might have been better to assume wave 5 would fall short of the upper end of the channel drawn. That's because wave 4 retraced so much of wave 3. As such, it might have been better to assume wave 5 would fall short of the upper end of the channel.

If nothing else, you see why I am more or less intent on keeping the Elliott Wave analysis in the background. I feel giving it too much focus to an audience less familiar with the methodology might result in readers losing sight of the forest for the trees...

[1:00 p.m.]
Here's a picture of the S&P 100 (2 day chart), showing the objective of the market's present bounce... Wave 5 of c should complete somewhere near the upper end of the channel formed by waves 1-4 of c.

(NOTE: wave c , subdividing in five waves, is forming from this morning's bottom around 10:00 a.m.)

OEX 5-min

[9:00 a.m.]
A special message to those several readers who have joined my Trade Notification list over the past few weeks...

Per JULY OEX 550 PUT position I suggested at the time I received your request to join my Trade Notification list...

If, by chance, you went long more than one JULY OEX 550 PUT contract, consider taking some profits — sell one or more contract (to close an existing position) — sometime after the market opens. However, continue holding one (or more) contract in anticipation of further market declines later in the week.

If you have just one JULY OEX 550 PUT contract, determine your own comfort level continuing to hold this position. You may want to lock in your current profit. Although I am anticipating much more selling to roil the stock market before Friday's expiration, nothing is set in stone. So, consider this morning's likely sell-off at the open as an opportunity to avoid being a pig and potentially getting slaughtered. Indeed, this is why I sold my JULY OEX 570 PUT yesterday.

I am expecting a bounce once trading proceeds today, taking the S&P 100 near to unchanged on the day, possibly resulting in the index closing near its high for the day. At that time I probably will be going long another PUT position. Those on my Trade Notification list will be promptly notified.

* * * * *

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Nu Frugal said...

Man, you were spectacularly wrong today. But I like your writing anyway.

TC said...

"Spectacularly wrong" only in that collapse demonstrating capitulation did not begin before the close. 520s might be in jeopardy, but then again, maybe not.

sdmikev said...

I actually added a few more 520s midday today for $0.10 as lottery tickets. My cost basis on the 520s is now around $0.40, so any big dive tomorrow and I could very well be in the green again. Also added a few 1800 NDX puts shortly before the close that I'm quite confident will pay for today's lottery ticket purchase and then some before they expire.

I agree with nu frugal about your writing, Tom. Always a blast to read. And the predictions have been pretty spot on. You have almost perfectly nailed the price movements, even if the time frame has been a bit less compressed than we'd like. If you were any better at this, it would actually be a bit creepy. I made sure to take a few antacids today (and I'll take twice as many tomorrow) as this thing seems determined to come down to the wire.

Here's to a wild and woolly Thursday. Keep up the good work!


nu frugal said...

Sorry I didn't mean to come off snarky. That is what I meant...I was watching the twitters until the very end and was like, man, this guy sticks to his guns.

I wish I understood better why you think THIS is going to be the ultimate capitulation (followed by the melt up)---and not just another in a series of dives. Is this where Elliott Wave comes in? Thanks again for the cleverness.

sdmikev said...

Speaking of cleverness and Twitter, I'm curious about the Gunga-ga-lunga clip. Will the market achieve total consciousness tomorrow? Will Paulson pull a Judge Smails by tossing his putter through an awning and yelling at Spaulding (AKA the Shrub) to get his foot off the boat? Should we all simply focus on seeing the capitulation and being the capitulation (Nuhnuhnuhnuhnuh...)? Or is it time to yell "DOODEEEE!!!" and just get the hell out of the pool?

Me and my Al Czervik commemorative loud plaid pants are dying to know.

TC said...

Mike - LOL!

Just by the fact we can rather confidently say the market probably has lower to go gives us the "total consciousness" necessary to succeed. So, the intended message is as simple as that.

(But the one with buggar boy is the one I had in mind next ... should success, indeed, come our way.)

nu frugal - Very cool. I appreciate your kind regard. Yes, it is largely an Elliott Wave consideration raising my "total consciousness" toward the possibility of a melt-up. Believe it or not, the form the NASDAQ Composite has taken since 1998 first alerts me to this possibility.

Then, too, just consider the magnitude of the ground the stock market covered from 1982-2000 in general, and from 1995 in particular. This was no small feat. It came by strength, not weakness ... at least as this applies to the dynamic defined by contemporary financial structures. As such, the present arrangement likely will not go down without a fight.

Although I believe today's dynamic is more complex and exotic than existed in 1929, I also realize there is nothing new under the sun. Yet, within the confines of our contemporary dynamic it seems there remains ample wiggle room still to navigate forward with some semblance of normalcy.

That's not to say gas prices might not go to $10 a gallon and the incidence of food riots might not grow and signs of physical deterioration might not rise around us. Indeed, that's not even to say a hyper-inflationary blow-out might not develop over the interim of the months ahead.

However, despite these threats, as long as the possibility remains alive to maintain some semblance of viability to underlying financial structures ... as long as the main players recognize the greater danger to the value of their financial claims as a result of allowing one or another to pull the plug ... then, even if some greater part of the value of these claims is to be lost to inflation, the stock market could still spectacularly rise.

Just when another 1930s style deflationary collapse might develop I could not say. Must this be the underlying circumstance coinciding with the Dow Jones Industrials' decline to the vicinity of 3600 sometime over the next few years? Again, I could not say.

A "deflationary collapse" would affect financial things that matter a great deal today. Yet, do these things really have to matter -- do they have to be such a driving force -- three years from now? In my mind they don't. Alternative structures can be put in place facilitating robust economic stability, while present claims can be reorganized and revalued (some, of course, to zero).

Yet, even in this more desirable alternative, you can imagine how the Dow Jones Industrials might still sink to 3600. The reorg could not help but change the game. After all, you cannot separate the stock market's spectacular performance over the past 25 years from the present arrangement so desperately out of balance.

So, thinking the present dynamic has some possibility of being sustained in some less than entirely disruptive fashion, I personally liken the present moment to mid-year 1929. The first half of that year was lousy, too. The viability of the game was being challenged. However, the masters of the universe pulled through with a last-gasp rally to the edge of the abyss. I suspect similar conditions characterize our present moment. So, again, I see a melt-up possible.

But first, and foremost, this likelihood gains probability through considerations raised using the Elliott Wave Principle...