President Brit for Brains Trumps Paulson ~ The Risk Averse Alert

Thursday, November 13, 2008

President Brit for Brains Trumps Paulson

Speaking today at the Manhattan Institute, President Bust, doing his best Larry Kudlow imitation, took up the "free market is the best path to prosperity" banter ... bringing the deep pockets who back this historically discredited notion — only just recently reaffirmed a dangerous philosophical position by yet another financial fraud of John Law proportions (which, in fact, is the true story behind the collapse of Structured Finance) — to respond favorably ... symbolically rewarding Sir "Brit for Brains" with a big green lollipop.

Apparently thinking the nation needed more evidence showing credibility is not one of his strong suits, the President also said:
"History has shown that the greater threat to economic prosperity is not too little government involvement in the market, but too much."

This curious observation incredibly comes at a time when the Federal Reserve has more than doubled its balance sheet in a matter of weeks ... and the Treasury Secretary has extorted $700+ billion from American taxpayers largely for the sake of bailing out City of London offshore financial havens where the greater preponderance of OTC derivatives originate.

So, I guess we'll just file this executive policy statement under "Do as I Say, Not as I Do!"

Still, showing who's the boss (and in the process putting Secretary Paulson in his place) the President — stoking the flames of his devotion to a failed ideology, blowing so much hot air into what can only be described these days as fanciful thinking — aroused the masters of myopia to faithfully respond with their wallets.

I only wish I had known sooner about the President's visit to Wall Street on the eve of this weekend's emergency G20 summit in Washington. I might have connected my forecasting dots and recognized how his well-spun trip to Fantasy Island might coincide with the bounce I was anticipating.

Because as sure as you can say, "Mr. Speaker" (without stuttering like Gordon Brown), this weekend's summit probably will end in discord. Therefore, following any extension of today's turnaround, get ready for more gnashing of teeth ... coinciding with the market's ongoing bottoming process.


Today's huge reversal higher saw a very notable pick-up in the volume of shares traded. There are two things I have to say about this.

First, unlike a similar reversal higher occurring on September 18, 2008, today's followed a period during which indexes have been declining on diminishing volume (i.e. since November 5th). Indexes contrarily had been declining on increasing volume in the early-September period.

(I wrote about the early-September period in One More Moan for a Missed Opportunity, noting how increasing volume going into the market's intra-day low on September 18th should have been seen as a loud and clear warning sign of what lied ahead.)

And second, in 20/20 Hindsight Meets $20 Million Foresight I presented a chart of the NYSE Composite Index showing why I suspect the market, over the duration of its ongoing bottoming process, might not fall much further than it already has. Today's reversal higher accompanied by a notable pick-up in the volume of shares traded suggests there is a vested interest whose intention is to support the market at these levels. Thus, my earlier view is substantiated.

OEX 5-min

One thing bugging me... Today's reversal occurred immediately following the worst 5-minute RSI reading since the market peaked on election day. No price-RSI divergence registered prior to the market's turnaround, much as I had indicated yesterday would likely be the case. This is a bit unusual.

Given this, I am suspicious the market's decline since election day (11.4.08) indeed ended today. Rather, I suspect the market might abruptly reverse lower again, bottoming sometime over the days ahead at a level only slightly lower than was reached today. This, then, would terminate the market's decline since election day and set up for a rally to the upper end of the trading range that has been forming over the past month...

Fast Money
* * * * *

© 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.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!


Greg said...

Hi Tom,
After early selling today should the rally pick back up extending into Monday on positive G20 news, pushing the S&P to 1000 or higher, might be a good time to purchase short ETF's. Do you have any thoughts on what short ETF would give most bang for the buck and what would be your entry and exit point? In this market I definitly want limit orders in the system. Thanks for your comments.

TC said...

I'm not sure the scenario pushing the S&P 500 upward to 1000 or higher going into Monday is quite ready to develop yet. Given Thursday's stellar volume, it seems the rally should continue, but I'm just not sure this is going to happen. However, you know how it goes in this game. One's outlook could change in a minute!

You ask a good question about ETF trade entry points because I believe the market will be range bound for some time. I was very close to pulling the trigger on long, index-tracking ETFs yesterday. Yet because index 5-min RSI set a new low going into bottom, I thought I would wait for a price-RSI divergence to form before I entered a trade. Obviously, that did not happen (and this is why I am suspicious about Thursday's rally extending).

But to answer your question you could simply enter index-tracking ETFs upon indexes reaching the boundaries of their respective trading ranges over the past month. In this case you could have gone long yesterday, looking to close the position and go short when indexes trade back up to the upper end of the past month's range. (Still, I would be looking at price-RSI action to drive your decision-making.)

Per ETFs offering the most bang for the buck I have been using ProShares Ultra ETFs.

On the long side I trade DDM, SSO, QLD, UWM, MVV, SAA.

On the short side I trade DXD, SDS, QID, TWM, MZZ, SDD.

I also recently mentioned in my Mr. Market Twitter a firm offering 3x leverage, index-tracking ETFs. I have not looked into these yet, so I will refrain from making any further comments here.

Per the sector of the market prospectively offering the biggest bang for the buck (particularly on the short side), look at index tracking ETFs following small- and mid-cap indexes. These sectors, particularly since October, have been outperforming the large-caps both on the short- and long-side of the trade...