Still More Gnashing of Teeth Before Market Melt Up Begins ~ The Risk Averse Alert

Thursday, August 14, 2008

Still More Gnashing of Teeth Before Market Melt Up Begins

It is painfully evident the stock market's present buoyancy has less to do with renewed interest in owning equities than it does a seeming lack of will to collectively sell at the current moment.

Whether one might think this is madness, given the fact credit market stress continues, is irrelevant. The lack of any concerted, fear-filled sense of urgency to sell and possibly precipitate a panic probably is a telling sign ... at least by some relevant measure anyway.

Needless to say ... of all people who are keenly aware of lurking, grave danger at the credit juice bar, we should be the least bit surprised once the market melts up as I suspect it will ... in the not too distant future.

However, I am not about to read too much into the market's present resistance to playing its traditional role as a forward-looking indicator. It might still be "business as usual" at CNBC, but the ruse the Bank of England's largest OTC derivatives junkie just pulled is bound to bring new meaning to "Mad Money."

Vain attempts to buttress a sense there is no longer much to worry about — which fantasy its purveyor's fear can only be exposed when eyes are turned away ... revealing just how so-called pillars of finance cowardly fess up — is not the kind of behavior breeding confidence, and stand as a clarion call to Dow 3600 sometime over the next 3-5 years.

Fine, you say, but what about right now?

Well, maybe the combination of $3.5 trillion sitting in money market accounts and a decidedly bearish sentiment among investment newsletter writers is enough to engender a mad dash from one sector to the next ... in spite of terribly persistent credit market risks.

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Still, I cannot give too much credence to the growing hoard of sideline cash. It has been building for some time, and as I have said before, Maria, it is there for good reason.

One might also say the same for present bearish sentiment. This, too, relatively speaking, has been persisting for quite some time. In fact, more or less all year..

Note how at the May peak there were fewer than three bullish investment newsletter writers for every two who were bearish. Still the market sank, resulting in most major indexes taking out respective lows set on March 17, 2008. Who is to say an even lower ratio might not become a self-fulfilling prophesy, then?

All I know is further wave of selling taking out July's lows remains a high probability. In fact, I am sure of it, Cramer. Once it is over, then you can have your "Bull Run."

The only thing presently defying certain discernment is just how Monsieur Market might fall. Will it be a slow, maddening drop, further manifesting the gnashing of teeth sentiment I thought possible a couple months ago (after assuming a 1987-like crash event probably was off the table) ... or will the next leg lower unfold rather quickly?

At this point I prefer assuming the former possibility rather than the latter.


I am assuming the NYSE Composite's ultimate bottom lies not much further below its July low. The vicinity of 7600 has been its target for months now. This is where it remains.

The present period is beginning to look just as similar to what followed the January '08 bottom as it does December '07. Up until now I have been considering this latter similarity as being more indicative of what probably is to come ... thinking bottom might arrive sooner rather than later, and with all haste given cyclical considerations discussed yesterday.

However, a sharp break lower simply has not been forthcoming. So, maybe death by a thousand cuts lasting into October and resulting in all manner of technical divergences further heightening the likelihood of the subsequent melt-up I am expecting will be the way things proceed.

Bottom line the NYSE Composite has not yet bottomed. Soon enough it is likely to fall and take out its July 15, 2008 low. Again, just how the move lower might unfold I cannot say.

Right now, a move up to the 50-day moving average might be in order before the NYSE Composite turns lower and finally completes its multi-month consolidation. Furthermore, the trip to bottom might once again bring rotation back into NYSE-listed stocks and hit NASDAQ relatively harder...


I wish I had sooner seen developments unfolding in the NASDAQ Composite as shown here.

First, consider the move down in November '07 ... up to the bounce in December '07. Note how this decline is much like the larger drop from the same starting point to the March '08 low.

Now, consider the bounce subsequent to each decline. The "like from like" similarity is uncanny. Here, too, we see the NASDAQ Composite presently appearing much like it did in December '07.

Does this imply NASDAQ is near to being throttled? Again, I don't know. I rather think not ... despite being quite sure the March '08 low will be taken out sometime over the weeks ahead.

If only I had seen this coming. I probably would not have so soon positioned myself strongly on the Put side. I am not happy about this misfortune. Still, I have little doubt this gaff soon enough will be atoned...

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