Insert Colorful Expletive Here ~ The Risk Averse Alert

Wednesday, August 06, 2008

Insert Colorful Expletive Here


Nothing has changed. However, this is both a good and a bad thing...

Good because confidence has met no compelling reason to be shaken. July's lows all too likely shall be taken out very soon. Indeed, this could even happen tomorrow ... at least hypothetically.

Bad, though, because, well, it seems that, when you take all the dollar liquidity made available by Wall Street's increasing control over the power of the purse — a condition that has gone parabolic over the past 25 years and is now approaching infinity with the blowout of Structured Finance — and combine this with well-entrenched circumstances making for willing bidders in one corner or another (I'm thinking mutual funds and pension funds in particular) ... power to postpone an inevitable(!) avalanche(?) of selling is apparently being facilitated. In the interim strong hands likely are taking their positions and preparing for both good and bad things to come.

(This, I believe, reasonably explains the market's rally from March 17, 2008 through May 19, 2008 ... as it probably will explain the market's pending melt-up, too.)

Let's not forget we are operating in an environment where bigger numbers prevail. There's more liquidity chasing more shares being watched by more money managers than ever before.

So, is this making for greater power to instill complacency in the face of extraordinary danger?

Well, by many accounts I would say yes. Just look what passes for financial journalism these days. Indeed, there should be little wonder why so few investors have ever even heard of Structured Finance, or are able to fathom how Wall Street blew out the GSEs with help from that shriveled prune of a criminal central banker, Greenspan.

Ignorance, however, is why the average investor typically loses. This is nothing new. Call it a "principal" of investing. Indeed, today we might say, "Same principal, different deception" when comparing present conditions to that of the late-1920s.

Weaving my way back home... We need not wonder whether today's "bigger numbers" financial domain also raises the probability of frightful shock waves moving onto center stage. Just think Bear Stearns.

I might suggest, then, fear — that most powerful human emotion — now stands more greatly empowered to precipitate an earth-shattering avalanche. Indeed, during the journey to Dow 3600 sometime over the next few years the likelihood of an overnight collapse in confidence — making October 19, 1987 look like a walk in the park — has risen to the point of being highly probable.

Similarly, I recognize how developments since the market's peak last October '07 might resemble the lead up to a devastating smash en route to Dow 3600 ... should this in fact come to pass ... much as seems increasingly likely.

This also is why I would claim, even now, the market's lows set last month could be taken out tomorrow...


$COMPQ
$NAAD cumulative

The lower chart might give you some better sense why I call NASDAQ the "Pump and Dump" ... as if its record over the past ten years were not enough to convince you.

Do you remember the television commercials, pre-Y2k, claiming NASDAQ was the exchange rising to become "the stock market for the next 100 years?" Well, you would never know it by the majority of shares trading there!

If you map NASDAQ's cumulative Advance-Decline line to the Composite index's advancing periods over the past year or so, you see just how consistently thin has been underlying participation in each and every instance. The present one is no different.

Just look how the Composite index continues holding up despite the inexorable decline of the cumulative Advance-Decline line. Stunning!

The cumulative Advance-Decline line reveals the bloodletting on NASDAQ has continued unabated throughout 2008 while COMP has more or less trended sideways. Let no one be deceived... This condition is most conducive to a 10% down day.

Likewise, were July's retest of the March bottom a solid base from which NASDAQ's advance since could be at all technically justified, then the cumulative Advance-Decline line at the July bottom would have been higher than where it stood at the March bottom (i.e. it would have diverged). Instead, just the opposite occurred. Beneath the covers, then, we see reason for readying a wave buh-bye to "the stock market for the next 100 years."

Before I slip away from this Roach Motel of Wall Street, take a good look at the magnitude of COMP's present bounce. It's quite a contrast to what's going on at the Ritz-Carlton...


$NYA$NYAD cumulative

Unfortunately, the duration I have chosen to display NASDAQ and NYSE cumulative Advance-Decline lines does not give you the full picture showing how the NYSE is in much healthier condition than NASDAQ. You do, however, at least see some sign of a pulse — some broader participation of all issues trading on the NYSE — whenever the index has risen over the past year.

What do I make of this? Well, the NYSE is where the real money is at. And because a pulse here has remained discernible, this suggests the U.S. stock market is not about to roll over and die ... despite NASDAQ ... despite financials.

Indeed, I consider this evidence supportive of my pending melt-up thesis. If you were to look at the NYSE's cumulative Advance-Decline line over the past three years, you would see all the more clearly just how healthy is the underlying situation on the NYSE relative to NASDAQ. Whether this persists while both indexes melt up is irrelevant. In fact, it probably won't (much as happened 1998-2000). Yet, being that the NYSE is where the real money is at ... and being that the NYSE's cumulative Advance-Decline line clearly suggests the Composite index is merely correcting gains made from 2002-2007 ... there's reason to believe the stock market's ultimate doom (i.e. the Dow 3600 train wreck) is not at all imminent.

Nevertheless, what about right now?

Well, maybe the money required to lift the NYSE Composite in some similar fashion to its strong advance off its January '08 low simply has not been forthcoming out of rightful fear for the financial future. Maybe it was deemed better to seek out value on NASDAQ, which explains why COMP has been thoroughly outperforming the NYA of late.

So, the exchange where the real money is at has been revealing clear signs of trepidation. Hmm. What could this mean?

How about this...

Every little stinking bit of proof I have presented for days ... weeks ... months ... suggesting the stock market probably would suffer a frightful sell-off before bottoming and subsequently launching into melt-up mode ... remains all the more valid today ... despite this maddening frustration over the seemingly endless delay in this long-anticipated moment's culmination.

Which leads me to this final remark...

Every added day the inevitable is delayed (for, indeed, we are all quite aware how fraught with risk of insolvency is the entire financial system) only proves all the more how the take down of Bear Stearns was entirely orchestrated for the sake of facilitating Wall Street's thorough and expedient takeover of the institutional priorities of our federal government.

When you call yourself an American and do more to prop up the Bank of England, well, that's not the kind of activity likely to maintain the status quo between the People and their representatives in Congress.

"There is nothing hidden that shall not be revealed."


[5:00 p.m.]
Well, if time were not so critical, I might be more encouraged by today's trading. However, because time is, indeed, of the essence, today's meager advance and RSI weakening simply are not providing enough technical evidence suggesting the stock market might succumb to sustained selling from the get-go on Thursday.

OEX 5-min

We might need to see further RSI weakening on still [slightly] higher OEX readings before this torture ceases, and the door once again opens to the possibility of a giant thud rapidly unfolding.

All I can say is the sooner the better. My forearm can't take much more flipping off the Street...

* * * * *

© 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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2 comments:

main st. mogul said...

TC, I am confused again, because just the other day you told me the 87-like plunge has been "off the table for awhile."

Is it back on the table, now...even "likely"? Where on the table is it...sounds too close to the edge.

By the way, it is nice of you to recommend a resource for learning EW (The EW guy's bible) I was wondering if you have a similar reference or two for better understanding options.

thanks

TC said...

Back in May I was suspicious an October 1987-like crash might be how the market's anticipated capitulation would unfold. This largely was a function of circumstances that had developed up to the moment I put forward this proposition.

For several days a crash scenario remained within the realm of credible possibility. Each day leading up to May '08 expiration was proceeding in a similar fashion as occurred going into October '87 expiration.

However, not long after I wrote the above post it became clear trading, post-May '08 expiration, was not progressing as I thought it might. This is when I more or less stopped supposing the market's yet-to-unfold capitulation might resemble the crash of October 1987.

This did not alter my outlook for some form of capitulation taking the S&P 100 below its March 17, 2008 low, though. Rather, it only changed my sense about the manner in which this long-anticipated capitulation might develop.

The need for maintaining analytical flexibility remains ever present. So, although I would suggest there are underlying technical indications the market's decline from its May 19th peak witnessed a capitulation, I still am inclined to suppose the S&P 100's multi-month correction has yet to reach bottom. Not only that, but in the course of doing so the trip might get wild ... first down, then up.

From an Elliott Wave Guy's perspective ... entirely possible ... without any doubt, too.

It could all unfold over the next three days. BANG! OEX sinks to 520 ... then rockets right back to 570 ... all in a heartbeat ... all before next Friday's expiration.

This scenario is different than 1987. But the effect could be similarly spectacular.

Only time will tell. So far, so good. The moment here is critical.

I don't have any options-related recommendation ... other than the approach I advocate. Patience pays being alive in moments of forecast volatility.