One More Moan for a Missed Opportunity... ~ The Risk Averse Alert

Friday, October 31, 2008

One More Moan for a Missed Opportunity...

Alright, I finally finished the Elliott Wave analysis I promised you the other day...

20/20 Hindsight Meets $20 Million Foresight

Pardon my continuing to kick myself for missing the golden opportunity the market's October decline presented. I only do this in the hope we learn something from it. Take a look at what hit me between the eyes tonight. How could I be so blind?


As you know, I am always looking for divergences — positive or negative — at turning points.

September 17th... there were the oft' noted RSI and MACD divergences relative to the July 15th bottom ... just as happened at bottom, March versus January. Oh yeah, I was all over that.

But look at volume going into the September 17th low relative to July 15th. Was this anything like March versus January? Quite the opposite! Volume in March diverged from January, and in so doing, confirmed bottom. Contrarily, volume in September widened ... this at a lower low than July ... confirming an urgency to selling ... and man, did we see a lot more of that!

I completely missed the volume clue. I wanted to show you, so next time maybe you'll wake me up.

Remember back in late-July when it had become clear imminent "capitulation" was moving off the table? MACD was rising to its 0 line and I indicated this needed watching. Yet look ... by September 17th it was solidly negative ... and falling like a rock. What was I thinking! Talk about your deer in the headlights...

That's enough crying for now over one big miss on some serious bank. So, let's play connect the dots...

OEX 5-min

Red dots ... a price-RSI divergence at a new high. That's a negative ... as in bearish ... and all the more so because the first print reached a buy-side RSI extreme. No wonder, then, once the price-RSI divergence registered it took two days for OEX to trade slightly higher.

Black dots ... a price-RSI confirmation of a new high. That's a positive ... as in bullish.

Green dots ... a price-RSI divergence at a higher low. That's a negative. This is what I was looking for when on Mr. Market Twitter I wrote, "Upon a higher index low coinciding with a lower 5-min RSI low will the market again be about to turn lower in its bottoming process." If you look at the 10-day chart of the NYSE Composite Index in yesterday's post, you will see this condition developing just before the market came unglued last week.

Connecting the dots it looks like we have a mixed bag.
Now take a look at the 1-year S&P 100 chart above, and pay particular attention to the early February period when, like now, MACD was just beginning its break higher. Do you see how it came back down ... right at the start of the month no less? Well, Monday is the first day of trading in November, and all four of the Fast Money traders tonight said the new month's end would find the market trading higher, so be aware...

Fast Money
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Anonymous said...

Tom: Re: November v. February: One striking difference in the two time periods; Credit is now becoming more liquid. Also, in February the BSC and Lehman situation was well known to be faultering. Now we have in place bailouts and guarantees. Additonally, its well documented that lots of cash is waiting to be invested, unlike February.
Thus, I would propose that any dip would be significantly less at this point. I am much more intrigued as to the effects of year end selling / portfolio repostioning for tax purposes and a new Administration in place. The outcome of the election will al least add some degree of "certainty". And as we all know, uncertainty is not liked by Wall Street! Perhaps, then, a slight retraction after the election when the financial community can "plan" for the next admistration policy's? Of course, the cash on the sidelines may push the market higher as investments are made based upon the elections outcome? No doubt, certain individual equities will be affected (both negatively and postively) by the elections outcome. This would also dovetail into the year end postioning of accounts for tax purposes too.

Shemp (Cramer) has noted that the S&P call option is high as institutions are using that instrument to "bolster" the market. I note that the SSO has not demonstrated the same negative divergence when the overall market declines. I suspect SSO, DIA etc., and Call options are being purchased with each dip - thus negating the price dips in those instruments, which, recently, are not reflective of the actual decline when the indices dip (S&P, INDU etc.).

True supply and demand at work in the aforementiond ETF's etc., and showing the lack of interest in individual equities. That lack of interest in individual equities now, may change after the election and bolster the market.

This should also then be positive for the ETF's.

However, the big unknown is the hedge funds and the year end redemptions (for tax purposes) that most likely will occure. This , I suspect will also put pressure on individual equities, as postiosn are closed out for redemtions.

The caveat is that the volatilty (premium) of options makes them very expensive historically and comparitvely speaking. For the small invester, perhaps the instrument of choice (for the time being) may be the long ETF's (and/or ultralong ETF's) rather than options - due to the increased premium expense?

As a trend trader, its my belief that the market is now poised for the typical 50% bear retracement, with perhaps 10% of that underway already.

Your comments, as always, would be appreciated, considering the aforemtnioned inputs.

My best to you,


TC said...

Credit spreads are, indeed, coming down now that the U.S. Treasury has become a "Sovereign Wealth Fund" guaranteeing [Wall Street created] Structured Finance liabilities.

Per claims Treasury and the Fed made to Congress in order to ram through legislation allowing Treasury to effectively become a Sovereign Wealth Fund, the Minneapolis Fed just issued a report debunking these (I linked to this report at the conclusion of "Shining Cramer's Apple"). Add to this disturbing report the fact bonuses in the tens of billions of dollars are reportedly being paid out at Wall Street firms, post-bailout. So, just how "vital" the bailouts and guarantees are is questionable to say the least.

In much the same light do I see the upcoming push for a global financial regulatory body. Just as government bailouts and guarantees are beginning to appear a fraud, so too will this effort likely be.

Look, the simple FACT is this. The mountain of Wall Street liabilities created under the rubric of "Structured Finance" (whose spread could not have been so wide-reaching without OTC derivatives originating in City of London offshore financial centers) are built upon a collapsing physical economy. Absent any concerted global reorganization geared to increase the productive capacity of sovereign economies, the current attempt to maintain the viability of derivatives-based securities ultimately will prove futile. No piecemeal attempt to address this will have any lasting impact. "Stimulus packages" are better called bribes. Likewise, Public-Private Partnerships are to a sound, constitutionally organized credit system as windmills are to nuclear power plants. The Tory press is, indeed, culpable in promoting less than what the United States is in need of ... less than what is necessary for the nation to survive. Both sides of this mind control enterprise -- left and right -- are sleeping with the enemy. And the enemy is an old world aristocracy whose money and mouthpieces back the likes of Gordon Brown, Tony Blair, George Bush, John McCain, Barack Obama, Nancy Pelosi, Barney Frank, and a whole host of other political personalities ... making these folks out as possessing credibility and power, when in fact they have all the credibility and power of a hooker.

Per sideline cash you say is waiting to be invested... over the entire course of this year there has been upwards of $3.5 trillion sitting in money market funds. It was there in February and it remains there now.

As for post-election "certainty" you suspect might produce a bullish undercurrent I addressed this in "A Political Assessment of Crash Probabilities." Once the new crop of Tories is installed in the White House and in Congress, chances are ill-winds once again will blow from London causing another chaotic environment at some not-too-distant moment, and the new crew of traitorous political cowards will bend. 2008, indeed, can be summarized as the year when this trend became the savvy observer's new-found friend...

Let me be clear. We find ourselves operating in the midst of a new paradigm. So, put away thinking whose applicability once had a place in the past. It no longer has a place in a highly-geared environment lacking the capacity to generate real wealth enough to honor all financial claims. The potentially negative impact of this underlying current will continue until such time as a global financial and economic reorganization pursued in the spirit of the American System of Political Economy is instituted. You might hear talk of "de-leveraging," but without a massive build-out of the global physical economy, the promise of "de-leveraging" will prove a lie. The name of the game remains "Inflate or Die" (and this goes way beyond mainstream thinking on the Fed's role; the Fed is a paper pussycat, and for all intents and purposes it is effectively insolvent). This game requires continuously gutting the wealth-generating capacity of individuals, communities and nations. That's been the way for decades now, and it remains the game now. Truth is it has reached a phase where it has become difficult to hide in some God-forsaken corner of the globe.

So, as for projecting movements in the stock market, and various sectors and issues ... doing this based on developments external to the market ... there's really no point going there.

My take on call options is they probably are as much being used as short position hedges as they are being purchased by institutions for limited-risk, long speculations. If anything, Shemp's observation will make all the more likely these options positions expire worthless. Indeed, this particular circumstance goes some way to confirming my suspicion about a bottoming process lasting some weeks to come. I wrote about the current situation reflected by options-related data in "No Love for Monetarist Monkeys."

Issues surrounding hedge funds probably are being overplayed in the media. With government bailouts and guarantees now in place, there's a new "put" in town enlivening animal spirits. The "Greenspan put" might be dead, but the "Paulson put" is alive and well.

I completely agree with you on there being much better near-term prospects trading ETFs as opposed to options. The golden opportunity for trading options the market's recent swoon presented is one I regret missing. That said, though, I cannot stress enough how it is solely in the event of having forecast such extraordinary opportunities will I ever choose to speculate with options. Outside of such relatively rare occasions as these ... I consider options much too risky. Regrettably, I did not forecast the October collapse. Life goes on.

Soon, I will address opportunities presented by ETFs...