The Risk Averse Alert

A natural fear one might have here is whether the market's bounce off late-November's bottom is but a brief correction in an ongoing slide yet to be completed. Indeed, it's possible the stock market's decline from October 2007 — that is, this particular phase of it — has not yet reached bottom.

Wisely being open to this possibility, let's take a closer look at conditions over the past year when what amounted to mere bounces were completing, just prior to subsequent declines leading market indexes to new lows.

Bad news, bears... Monsieur Market does not appear on the verge of padding your position.




As you can see, a certain weakening pattern in the McClellan Oscillator (identified by horizontal green lines) developed prior to the NYSE Composite diving lower (at points identified by the vertical red lines). This weakening occurred while the oscillator was registering generally positive readings during a period of counter-trend trading in the NYSE Composite following a decline.

We see no such development currently, at least not yet.

Of course, none of the markup I have added can be argued as assuring the likelihood the market is on the verge of melting up. This possibility originates in the sovereign realm of Elliott Wave considerations. Bolstering this likelihood is the simple fact the McClellan Oscillator gives no present indication the market is about to turn over and decline to a new low.

One other thing...

If you look closely at the January-March bottoming period and contrast this with the October-November bottoming period, one seemingly subtle, but significant difference should be noted in the performance of both the McClellan Oscillator and the Summation Index. You see this at bottom (i.e. the second blue dot in each instance).

In the present period both the Oscillator and the Summation Index diverged in November (relative to October) as the NYSE Composite fell to a lower low. Contrarily, in March both the Oscillator and Summation Index exceeded negative readings registered in January, this while the NYSE Composite merely retested its January lows.

Indeed, the negative performance of the McClellan Oscillator and the Summation Index in the January-March period was one reason why I [rightly] thought trouble was in store.

Similarly, the positive performance we're seeing presently adds technical substantiation to an Elliott Wave view projecting a counter-trend rally over the near-term. There's more of the same substantiation revealed in the percentage of stocks in the S&P 500 currently trading above their 50-day moving average.

Finally, looking beyond immediate prospects, I came across a Bloomberg story reporting, "Q Ratio Signals 'Horrific' Market Bottom." I wonder if Bill Gross knows about this. It certainly confirms my longer-term outlook...




© 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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