Timely, Timeless Perspective ~ The Risk Averse Alert

Friday, December 26, 2008

Timely, Timeless Perspective

I know how it is sometimes...

You sense a growing financial vulnerability ... greatly compounded by leverage ... atop an economy that can no longer add jobs in even the most mundane forms of employment (say, like retail). You read commentators who see everything going to hell in a hand basket (and in a NY minute, no less). And you shiver to think how these historic risks might affect your well-being. Sometimes, you just want to...

(Thanks, Sam.)

How did things ever get this bad? Is that "the" question? Or should we ask, instead, is this more or less the same as it ever was ... this fraud and this deception?

Here's where the wise investor gets religion...
That which has been is what will be,
That which is done is what will be done,
And there is nothing new under the sun.
(Ecclesiastes 1:9)
This fundamental background brings me perspective. Surely, it lends value to technical analysis. We can look back and witness how a highly liquid money pit (the stock market) reacted when the earth supporting it (the economy) quaked. It has happened many times before, you know...

SPX weekly

Just a friendly RSI reminder saying bottom probably is in (for now). And if not, then surely it is near.

The lines, too, are more than just curiosities. In days finding the stock market supported by a crumbling layer of leverage (built up through Structured Finance) ... it appears the end of the line is being reached. The market's formerly rising trend apparently has ceased.

Now, what develops during the present bounce remains to be seen. Could it be something like 2001-2002? This seems a rather reasonable probability...

SPX weekly

Just look how sharp, counter-trend rallies resulted in weekly RSI returning to a point where buy-side and sell-side strength came into balance. The same might be in store presently. This is a likelihood decidedly fitting a distinct Elliott Wave possibility.

The lender of last resort is all in, propping up finance, as a leverage unwind is attempted. In the process government guaranties once implicit are now explicit, putting you and me on the hook. Extraordinary developments, indeed. Frightful, too, because the underlying "economy" must wither, now that its lifeblood (Structured Finance) has dried up.

That's the Catch 22. It also is why the price tag on a so-called "stimulus package" is just shy of $1 trillion. Regrettably, this sum is far short of what's necessary to stop further financial chaos.

You see, accounting principles share one critical thing in common with investments in physical economy. It's the time factor. With physical economy you cannot just flip a switch and expect instant, wealth-enhancing productivity to be added — the very thing necessary if the grotesquely leveraged financial economy and its mountain of sacrosanct derivative securities are somehow to be kept intact.

Thus, the stock market ultimately faces the consequences of decades of disinvestment in the physical economy, where real wealth is generated. Leverage added over the interim — having reached the limits of its expansion — virtually guarantees more trouble ahead.

Yet like physical economy the world of finance does not turn on a dime. Indeed, the TARP demonstrates this. Leveraged finance dies hard. So too, then, do animal spirits manufacturing melt-ups bringing momentary profit.


Even if bottom is not yet in and another trip lower still must unfold, chances are both RSI and MACD first will rise to somewhere between the red and blue lines you see drawn above before the market again turns lower and retests November's low.

In other words (speaking in Elliott Wave terms), if five waves down from May have not yet completed ... if wave 4 presently is forming and wave 5 still must unfold ... chances are good underlying technicals will show stronger readings upon the completion of wave 4 than was the case during the formation of wave 2 (early August).

This, too, is in keeping with a conclusion I made last Friday, wherein I noted how RSI and MACD had confirmed the market's advance off bottom every step of the way. This, too, suggests the market has higher to go.


Now, here's another technical reading nearing a critical inflection point. Taken in combination with others I mentioned the other day, we might conclude that, if in fact a 20-25% melt-up is in the works, it should get under way sometime during the next couple weeks, tops...

(Don't look at the CBOE Put/Call Ratio in absolute terms. Rather consider the possibility its present performance might bear relative similarity to the two prior periods I have highlighted. Thus, it might tend to remain positioned for some days/weeks ahead in such a way as over the past 15 months has signaled a top was at hand.)

Fast Money
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© 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.

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