Hurry Up and Hyper-Inflate! ~ The Risk Averse Alert

Monday, September 29, 2008

Hurry Up and Hyper-Inflate!

Ouch! I did not see that coming. I should have consulted Miss Cleo.

Of course, the Paulson plan's failure in Congress was a fairly easy call. However, I really thought intra-lows set on Thursday, September 18, 2008 would hold.

So, what is implied by such a devastating decline occurring here? And what about new lows being set today?

Per the former question, I suspect those who charge SEC Chairman Christopher Cox is in over his head might have a case. I wonder how much of today's "shock and awe" was a function of the ban on short selling in financials?

Relatively speaking, volume came in rather light today. This is curious particularly given the magnitude of the decline. So, was absence of some greater measure of liquidity short-selling provides one major reason why today's drop was so severe?

Per new index lows being set today... that this is occurring in conjunction with an enraged national mood reflected in Congress probably plants the kiss of death on my melt-up thesis. Let's just say the probability dropped from, say, 30% to 10%.

About today's debate on H.R. 3997 — The Emergency Economic Stabilization Act of 2008...

Using my Mr. Market Twitter, I made an effort to highlight remarks made by representatives who took to the floor of the House of Representatives today as the bill was being debated. If you look into these, what you see is woefully little substantive argument against the legislation. Rather, what you find are more or less ideological objections (this despite free market ideologies held on both sides of the aisle having become largely discredited). None of it really represents an insurmountable barrier to those who promote this legislation, however.

What I am getting at is something probably will pass ... and soon enough to save the day ... at least for another week or three.

Next, consider today's market reaction as a scare tactic. Over recent days leading up to today's House debate, as well as following the bailout bill's defeat, fear mongering has been gaining traction. Just listen to Senator Chris Dodd (D-CT) and Fast Money's Jeff Macke. Is resistance to a hyper-inflationary bailout being softened?

Consider this quote from an article appearing on the OptionsMonster website today:
"Some traders are actually hoping that we close with a big down day, just to force home the point that we need something passed--and soon. The biggest reason for this need is actually in the credit markets, where many businesses and banks may cease to exist by the end of the week if something isn't done."
Of course, Shemp did his part to join the fright-filled chorus. (However, I do agree with comments he made about "protecting your nest egg.")

(For a summary of my reaction to the defeat of H.R. 3997, check out comments I made here.)

Let me be clear. What I am about to say goes for all my commentary...

I never form an analytical view toward the doings in the world without some tangible basis in technical formulations I use to assess the stock market's prospects.

In other words, I stand by what I said when I first concluded the Paulson plan was dead on arrival. Namely, "there probably is no immediate reason to fear a market collapse if Paulson's plan fails to gain traction."

Now, I have no intention of splitting hairs here. If today's decline was not something of a "market collapse," then there never was one!

However, you know my outlook over the next few years. It's over to the left under "Things I Believe." That's the sort of "market collapse" I'm talking about, and I don't see this happening here.

In fact, I will go out on a limb for the record... The probability of an earth-shattering collapse presently developing and rapidly carrying indexes toward levels last seen in 1994 is less than 30%.

The technical evidence supporting this stance simply is compelling.

Go back to last Thursday's post where I presented the NYSE McClellan Oscillator. There I noted how the present period was similar to March '08 when the market was putting in a bottom. The same kind of price-oscillator divergence as occurred at the March bottom is occurring right now.

Price-RSI divergences — comparing today's close versus the close on Wednesday, September 17, 2008 — exist in all the major indexes. Allow me to repeat my concluding remarks last Tuesday (9.23.08):
What I would like to see before any sustained move higher is a fall back toward last Wednesday's close (9.17.08) ... RSI and MACD divergences registering ... and volume continuing to display selling exhaustion. Then, a low-risk trade might be favorably set up...
A fall back toward the close on 9.17.08? Check.

RSI divergences? Check.

Diminishing volume displaying selling exhaustion? Check. (Although this circumstance is called into question by the impact the ban on short-selling is having, much as I noted in Friday's post. However, to my knowledge NASDAQ is scarcely affected by the SEC's short-sale ban. Yet its volume came in quite a bit today, too.)

MACD divergences? Well, only in the NYSE Composite. MACD on all other indexes sunk to a new, post-8.11.08 low. However, all but the NASDAQ Composite still remain above respective MACD levels registered on July 15, 2008.

So, I simply am not panicked here. I guess it helps not being exposed to today's selling, nor to any selling yet to come. I did not, and I will not, lose a dime.

Do I wish I had a position profiting from today's decline? I haven't decided ... been busy waterproofing my boots. There's blood in the streets! It might be near time to wade in for a spell...

This article was written for a fear-filled Congress. The closing quote is a sure giveaway!

Fast Money

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