All Praises to "Team Hyper-Inflation" ~ The Risk Averse Alert

Wednesday, November 26, 2008

All Praises to "Team Hyper-Inflation"

Is a taste of things to come about to unfold?

In A 401(k) Investor's Guide to the Year 1932 I spoke of the stock market's pending bottom, indicating, "once bottom is in an explosive rally could ensue, and carry indexes strongly higher with scarcely a pause." It's the "scarcely a pause" part I am curious about tonight...

As you know, I suspect the market is continuing to correct its September-October collapse. In other words, I still am assuming indexes have not bottomed yet.

Nevertheless, the market's ongoing consolidation of earlier crushing losses might make this moment one where a taste of things to come produces conclusive evidence the worst of selling is over ... despite the probability more selling — a retest of last week's bottom — remains on the radar.

What I am attempting to get at is this... Wouldn't it make perfect sense that, if the market is just one more decline away from bottoming, a strong, persistent rally might immediately precede this final move lower? This could serve to bring various technical measures to their most positive readings in months.

Indeed, you saw this yesterday in the chart of the CBOE Put/Call Ratio. My goodness, the most positive reading all year has just been registered! That's a good sign. It suggests the market's bottom is near. Confidence apparently is building.

This also is how one might read OEX Put-Call Open Interest. Right now, OEX open interest is notably slanted to the Call side ... which, given the extent of this (40,000+ more Call contracts open, versus Put contracts), is all the more peculiar at this [early] moment in the December contract's life in the "front month."

Now, given the market's performance over recent months, it really is little surprise the December OEX contract is revealing a preponderance of positions short-the-market being hedged by Call options. Yet the notable extent of this hedging suggests there's less conviction toward the likelihood the market's decline, indeed, will continue (which stands to reason given how far the thing has fallen already).

As such, then, it's possible some significant portion of open OEX Calls also are outright speculations initiated by strong hands possessing power to make the market move both in favor of these Call positions (i.e. up) ... as well as in favor of short positions being hedged.

Of course, the reason I suspect these things has everything to do with Elliott Wave-related considerations. A powerful advance ... with scarcely a pause ... "fits" right here ... as does a subsequent retest of last week's lows.

Adding weight to the possibility the market's present rally will continue with vigor are various technical measures which, like the CBOE Put/Call Ratio yesterday, might be poised to register their most positive readings in some months... like, for example, the Bullish Percent Index ...


As you can see, this bad boy has some way to go before it exceeds its election day peak. It has even further to rise if it is to best its September peak. What's clear here is the fact there's a lot of room for improvement in this measure were the market to continue its rise off last week's bottom.

This might be easier to visualize looking at the NYSE Composite Index...


I like how MACD has strongly reversed higher, halting this month's perilous turn lower. This, itself, suggests a good deal of pent-up, underlying buying strength has awakened. You should duly note, too, this measure has a good deal further to rise before it exceeds its mid-September peak ... which result I fully expect, as this would be further indication underpinnings forming bottom are building.

Of course, volume coming in once again today, as the market extended its advance to four days straight (woo hoo!), is a red flag. However, there's absolutely no reason to get excited about this just yet, though.

Remember, those who are short-the-market are well-hedged with Call options. They can afford to step aside and allow the market to rise further. Indeed, they might even profit.

Furthermore, prospects for their short positions will be all the better if volume continues to come in as the present advance continues. Their work driving the market lower (at the appointed time) will be made all the easier. Being well-hedged here, they can afford to sit back and assess the market's underlying condition, waiting to begin their move to drive prices lower once buying interest thoroughly weakens.

So, how likely does it appear the market will continue its advance, then? Well, let's have a closer look...

NYSE 5-min

We saw weakness early in the day, much as I had anticipated ... but rather than proceeding to be a dull trade subsequently, the market demonstrated a good deal of strength. RSI's performance today — start to finish — reads positive, positive, positive ... not too hot ... not too cold ... but just right.

The market truly appears to be in a great position to continue its advance ... and stat.

All praises to "Team Hyper-Inflation" (and while we're at it, let's bankrupt the Treasury) ... for a job well done.

(Be sure to sing these praises every chance you get ... and let everyone know you heard it here first ... the home of Tomstradomus ... and his mine field of slippery banana peels ... which is no place for any self-respecting Monetarist Monkey ... so hit the road Volcker.)

Fast Money
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