The Ghost of FDR Forestalls a Stock Market Collapse ~ The Risk Averse Alert

Wednesday, November 05, 2008

The Ghost of FDR Forestalls a Stock Market Collapse

It is hard not to be disturbed by the spreading collapse of the global economy...
This, of course, is the predictable fallout from the collapse of the grotesquely unregulated, Anglo-American game of Structured Finance.

(Check out "The Subprime Primer" for a colorful look into the Wall Street securitization process.)

Seeing the impact of a severe financial dislocation rattle the global economy so ... and considering this on a day when the stock market once again cratered in a most unusual manner (5% days may be the recent "norm," but in the grand scheme of history such large percentage moves are relatively rare) ... one might rightly wonder how the stock market could be in the midst of a bottoming process ... possibly poising for the biggest rally since 2003.

Well, let's put on our thinking caps and take a trip back to the year 1933...

FDR's 'Hundred Days'

And let's consider the following quote from the NY Times story headlined, "Obama Wins Election; McCain Loses as Bush Legacy Is Rejected"...
"Mr. Obama led his party in a decisive sweep of Congress, putting Democrats in control of both the House and the Senate — by overwhelming numbers — and the White House for the first time since 1995."

Well, how about that. We have us a Federal government controlled by Democrats. Not that this crop — particularly those in the party's leadership — has much in common with FDR. Yet this new situation does represent a potential — a spark — for achieving legislative consensus toward a uniquely American policy solution addressing the widening financial and economic breakdown crisis the world presently is facing.

And the puppets of chaos apparently have been instructed this potential is to be avoided at all costs.

Given Tuesday's Democratic party sweep, you might say the game of financial chicken has been turned up a notch. All the more reason why you should put away "business as usual" thinking, I would say. The economic and financial news might likely remain bad. Yet the potential for an historic round of political gamesmanship has just gotten about as good as it gets.

Let me be blunt...

A financial/economic collapse at this particular juncture would represent nothing less than the political suicide of that very aristocratic element responsible for bringing us to this extraordinarily vulnerable point in the first place.

In other words, further chaos likely will be delayed ... at least until such time as mid-term elections draw near. This is all very simple math if only you believe this highly geared game goes way beyond Wall Street.

OEX 5-min
NYSE 5-min
NASDAQ 5-min

I thought the relative position of major indexes following today's thrashing might shed some light on potential, near-term zigs and zags in the stock market's bottoming process...

Yesterday, I suggested "there's little reason to suppose a sharp, V-shape recovery is about to develop here." As you can see, the OEX (consisting of the cream of equities ... which I otherwise characterize in military terms as the stock market's "generals") is leading the way in the market's rollover following last week's surge.

Thus, the well-capitalized hands who trade in such large cap issues as make up the S&P 100 are more aggressively cashing in their most liquid, widely-owned holdings. Being that traders of stocks in the S&P 100 might be considered the market's "strong hands," this is not what you would expect when the stock market at large is slated for a monster rally. Thus, the case against a V-shape recovery is substantiated.

So, then, the market is slated for a bout of weakness?

Well, I might borrow a phrase from ESPN's Lee Corso and say, "Not so fast, my friend!" Despite having no real definitive reason for supposing there might be one final move above yesterday's peak, I recognize the possibility. In light of this I might also suppose indexes will not fall much further before making this final turn higher and completing the bounce that began last Tuesday (10.28.08).

It seems if ever there were a moment when "chaos forestalled" might be displayed, and a taste of short-squeeze, melt-up possibilities demonstrated (resulting in indexes rising no further than intra-day October 14th), this is one such occasion. Again, this would all be within the framework of the stock market's bottoming process. So, let's not lose sight of this if the market, indeed, erases today's thud and turns higher...

Fast Money
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