Turning the Market Clock Back to 1973-1974 ~ The Risk Averse Alert

Friday, October 10, 2008

Turning the Market Clock Back to 1973-1974


Here comes a chart you are going to want to print and tape to your forehead.

But first, this message from Shemp...

Jim Cramer Suggests a 1929-like Collapse is Not Off the Table

You've got to love the Hoover-Bust comparison. And his Chris Cox comment ... priceless.

I really don't think history is about to repeat itself, though. Rather than a deflationary contraction, a hyper-inflationary blowout appears our generation's more likely course.

As long as current financial structures are desperately supported by whatever means possible ... as long as their viability as claims against real, physical, economic activity are deemed beyond reproach ... as long as leverage's ongoing restructuring can be managed in some fashion not leading to social chaos and a complete economic breakdown ... then it seems one can expect an outcome quite the opposite of what occurred in the 1930s.

However, as we presently are witnessing in the stock market (and will continue to see, as well) there is a hidden cost associated with this attempt at maintaining the legitimacy of financial claims born of Wall Street's Structured Finance (which credit-creating machine is now deceased, leaving some quadrillions of derivatives overhanging in the balance).

You don't need to be a well-seasoned analyst to know this week's record swoon has nothing to do with the fundamentals of business. Rather, it was largely due to heavily leveraged speculators draining the stock market for much needed capital to meet margin calls on structured securities they control.

And who pays for this? Mom and Pop investor saving for retirement, or a child's education.

Thus says Mr. "Connect Z. Dots" anyway ... who, by the way, vigorously opposed the $700 billion financial system bailout.

But enough of recriminations and charges of corruption against the President, the Treasury Secretary, the U.S. Congress, and all other monetarist monkeys who behave as though the U.S. Constitution were some quaint relic!

It's time for another soothing installment from the lone voice calling for calm and patience...


NYSE weekly

What you see here is the classic picture that's worth a thousand words. I believe it amply supports two key facets of my current outlook:
  1. There is much more selling still to come.
  2. The stock market is nearer to bouncing than it is to falling apart.
You will notice I indicated the ultimate bear market objective might be reached as soon as next week. Truly, I believe this is highly unlikely. Just look at the sell-side extreme RSI has reached. Like I said yesterday, this screams "Bounce!" However, as always, nothing is set in stone.

Yet, assuming the bulk of selling for the moment has largely passed ... will a rip-roaring rally likely commence?

Well, I really don't know. However, I am inclined to suppose all of this week's losses will be recovered sooner rather than later. Just how quickly this might happen, I cannot say with any certainty, though. Initially, I was thinking a turn higher might develop rather rapidly. However, I also suppose the market's recovery might drag into next year.

Psychology, no doubt, is fragile here. Yet is not every deeply entrenched sentiment precisely the thing the stock market is famous for abusing?

How many people back in 2000 told me they could not sell their stocks because they might miss another year's 20% gain? So, what did Monsieur Market do? He served up a heaping helping of abuse.

And now... how many people have been made fearful, and are likely to panic here and sell their holdings? I suspect these Nervous Nellys will regret this decision in relatively no time at all.

Thus, expect Monsieur Market to bottom, then do his level best to lull those who continue hanging tight into a more trusting state of complacency (I defer to Monday's Fast Money poll, reported here on Tuesday under the headline "Food For Dow 3600").

I think this is a safe bet. I suppose this recovery's unfolding might take some time, too. (Yet I also suspect its early moments might result in a moonshot.)

Finally, I expect that, during the market's pending recovery, weekly RSI (seen above) largely will remain on the sell-side (i.e. below 50). This, in fact, is important because it will set the stage for the market's subsequent collapse.


$NYA

Quite possibly, the advance we saw earlier this year — from March 17th through May 19th — might provide something of a template revealing what to expect once bottom is finally reached. The first half of that recovery was far more dynamic than its end. This might again be in store.

The present thrashing is almost over, I think. There still might be a couple more wild swings yet, so, again, remain calm. True... all might not be well. Yet chances are Monsieur Market is not about to disintegrate.

I am fond of saying "the trend is your friend" because I believe it is true. However, there is a catch. The trend is your friend in a climate where there's balance. When balance ceases to exist, there are arbitrage opportunities leading to trends running against the grain.

Just look how deeply oversold every technical measure is right now. There's a sell-side imbalance. Today's near-record volume of shares traded likely came from players seeking to exploit this.

And speaking of exploitation, there is no insurmountable financial crisis. Rather, there's a crisis of intellect ... a crisis of historical sensibility ... a crisis of courage.

How do I know? Just Connect Z. Dots.

Truth is there's just one bankruptcy we need concern ourselves with: it is the bankruptcy of Congress.


Check out the chart showing "Banks Willingness to Lend to Consumers"...

Fast Money
(Think back to times worse than now. Is today's "crisis" being manufactured for some untold end?)


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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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3 comments:

Greg said...

Tom, the trend is indeed our friend and as I plug your technical analysis into my analytical brain I want to make sure of what you are saying about the forthcoming trend. Particularly, the timing of your current outlook set forth below. The order in which you list your outlook has me confused. Let me quote a few of your statements as the basis for my inquiry.

"my current outlook:
1. There is much more selling still to come.
2. The stock market is nearer to bouncing than it is to falling apart."

"Initially, I was thinking a turn higher might develop rather rapidly. However, I also suppose the market's recovery might drag into next year."

"And now... how many people have been made fearful, and are likely to panic here and sell their stock holdings? So, should we not expect Monsieur Market to bottom, then do his level best to lull those who continue hanging tight into a more trusting state of complacency?

I read the above to mean we are now moving into a trend of "The stock market is nearer to bouncing than it is to falling apart?" As far as the timing of this trend "a turn higher might develop rather rapidly. However, I also suppose the market's recovery might drag into next year?"

You believe, and I agree, that this recovery will "lull those who continue hanging tight into a more trusting state of complacency?"

And then, after the rapid or into next year bounce which lulls the die hards to hang tight we will see "much more selling still to come."

In other words, am I correct that your outlook is:

1st: The stock market is nearer to bouncing than it is to falling apart.

and then we'll see

2nd: There is much more selling still to come.

Thanks for your very helpful insight and quidance to help with the two rules of investing.

TC said...

Greg: You are 100% correct! You have read my outlook perfectly. And thank you for your kind complement, too!

TC said...

I made some modifications that hopefully clarify my thinking. Sorry for bouncing all over the map!