Bring on the Dancing Bears ~ The Risk Averse Alert

Friday, August 08, 2008

Bring on the Dancing Bears

Today saw the second largest advance in the S&P 100 since its July 15, 2008 low. The index's gain was less than one point shy of its best performance, which came on July 16, 2008.

Conspicuously missing, however, was any sign indicative of the wall of worry the market is said to climb. Remember, this wall of worry is something tangible, analytically objective and intelligible. Its presence largely is a manifestation of the most powerful emotion of all: fear.

No bunch of hapless purveyors of televised fantasies, citing this or that condition supposedly driving trading, are any match to the physical reality whose underlying circumstance is revealed by actions measured in dollars and cents.

And the one place providing a sensible read on fear driving trading is found in the volume of shares exchanged.


Today's volume happens to be the lowest for any advancing day since July 15, 2008. Hmm, some wall of worry...

Why, it's only the world's largest guarantors of mortgage securities (FNM and FRE), as well as the world's largest insurance company (AIG) — firms operating at the core of contemporary, wildcat finance — that continue tumbling into the abyss. Plainly there is little to worry about here.

So what if issuance of new, private-label credit is evaporating while old credits crater into twenty-two cents on the dollar oblivion. After all, the government of the world's largest debtor nation is backstopping every worthless security presently at risk with schemes likely making John Law roll over in his grave. Obviously, there is nothing here worthy of precipitating an urgent need to sell the riskiest of all financial assets — equities.

Never mind the fact U.S. government finances are hemorrhaging at a rate rivaling Wiemar Germany as it spiraled toward its hyper-inflationary breakdown crisis of November, 1923.

Never mind this insanity is occurring voluntarily, rather than at gunpoint.

Oh no, there is not a thing in the world to worry about. That is the nice thing about fantasy.

However, the reality about today's relatively weak volume is it confirms analysis put forward in the 5:00 p.m. update below. Within the context of the S&P 100's advance since early Monday (8.4.08) today's volume simply is indicative of exhaustion of the move higher. This is more or less a certainty, too.

Nevertheless, the March 17, 2008 through May 19, 2008 counter-trend rally quite thoroughly reveals just how complacency — the antithesis to the wall of worry the market is said to climb, evidenced by diminishing volume — can persist.

Yet, recent analysis highlighting the present period's marked similarity to December '07 seems all the more relevant, too. No more does today's upside penetration of the S&P 100's 50-day moving average signify a change in trend (given today's relatively weak volume behind an otherwise spectacular advance), than it did then.

[5:00 p.m.]
Having lost power from 9:20 a.m. through 10:45 a.m., I did not witness in real-time the greater bulk of today's hefty short squeeze.

However, by the time I saw what was happening I nevertheless thought the market's screaming move higher might come undone as the day progressed, and lead the S&P 100 to close significantly lower. As I indicated, the decidedly negative nature of yesterday's decline appeared a harbinger of things to come.

(For the record: it still does.)

With pre-open futures having significantly deteriorated as the market neared its open — moving from positive overnight to decidedly negative — I thought this could be how the trading day might proceed following the initial launch higher shortly after the open. In many instances the trading day, indeed, mimics overnight futures action. However, today, this was not meant to be.

All angst and disappointment aside ... I am cautiously optimistic looking forward to August options expiration week ... and glad I am at least holding a couple 560 Puts. These present reasonable possibility of keeping me alive and well ... moving into the September '08 contract.

OEX 5-min

Although I am not quite sure which of the various possible Elliott Wave interpretations best suits the S&P 100's counter-trend rally off its July 15, 2008 low, I am standing by all recent analysis indicating this index will be strained to rise any further than it already has. Most critically, this conclusion lends a good deal of promise to August OEX Put position prospects over the course of the upcoming week leading up to Friday's expiration (8.15.08).

The way I see it, RSI coincident with this week's advance demonstrates characteristics of a "c" wave. This is revealed particularly by today's new RSI high registered while the S&P 100 staged its final advance to the upper end of the channel formed this week.

Now, the question is where do waves "a" and "b" begin and end? Well, at the moment it really does not matter. You see, even if this week's advance does not end the counter-trend rally beginning July 15, 2008 (and I do not suppose it does in fact), the market's path of least resistance from here should be straight down to at least 565 ... if not lower.

Like I said, the nature of Thursday's sell-off probably is foretelling things to come...

Today's rather unexpected and extraordinary advance only demonstrates more of the same levitation whose net effect leaves the S&P 100 relatively unchanged over the past two weeks or more. If this were not destroying open, out-of-the-money Put option premiums, I would consider the S&P 100's mid-air suspension of little meaningful consequence in the grand scheme of things. Be that as it may, though, the simple truth of the matter is my August OEX Put positions are by no means dead.

The S&P 100's first 10-15 points or so lower should come rather easily. August OEX Call open interest absolutely swamps Put open interest at strikes immediately below the market.

After that, what must be the market's increasing short interest could stage a challenge to those who have taken the long side of the trade over the past couple weeks.

I rather suspect that, what must be the market's increasing short interest has been partly, if not largely, behind the market's buoyancy over these past two weeks ... steadily building positions in compliance with the SEC's soon-to-expire (Tuesday) naked short selling regulation ... and preparing to hit the market hard during options expiration week as a matter of practical demonstration against regulatory interference ... aiming to make a point about liquidity short sellers provide the market during times of distress.

This, of course, is just a speculative supposition. However, were not everything (Elliott and under the covers) appearing poised for a smash lower ... were not every bit of disclosure coming from the core of contemporary wildcat finance reflective of something other than utter disaster ... you might call this wishful thinking.

The truth of the matter, though, suggests otherwise. The greater bulk of evidence, both technical and fundamental, indicates trouble is looming.

At the risk of being repetitive, I will say it again: nothing — not even today's most unwelcome surge higher following yesterday's promising decline — changes my outlook one bit.

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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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