Poisoning the Chicken Feed ~ The Risk Averse Alert

Wednesday, December 03, 2008

Poisoning the Chicken Feed

So, did you check out the Bespoke Investment Group piece I pointed out yesterday?

Eight of the ten worst trading days in 2008 occurred after the market set its intra-day low on October 10th. If ever there was evidence of a Nervous Nelly Shakedown, this is it. Strange how these sharp breaks are unfolding within an otherwise sideways trading market. In all my nearly twenty-five years of closely following the stock market I have never seen anything like this. (Isn't that always the way?)

Surely, it's the kind of thing that really gets the chickens clucking! I'll have more to say about this shortly.

I added a new link under "Compelling Voices" over to the left. It's from Legg Mason's Bill Miller. He says it "looks as if the bottom has been made" in U.S. stocks.

Tonight, I am going to entertain this possibility. There is a solid case to be made for it. On Monday I hinted to its likelihood after noting the preponderance of commentators predicting the market would remain locked in a bottoming process lasting some weeks and months...


Back on Maria's birthday I presented a chart of the S&P 100 detailing a possible Elliott Wave count of the market's decline from October '07 - July '08. This decline formed a channel, as you can see above. The channel contains five waves, just as I had suggested on September 11th.

As you know, I have strongly suspected for many weeks now the worst of the market's decline is over. The mystery has been is bottom in? Considering the markup on the chart above, the answer is a resounding yes!

And how the Nervous Nelly contingent abounds...
"Most market analysts have hopes for at best a tepid performance as the market closes its worst year since the Great Depression."

"There's scant hope a sustained upside run will carry through the balance of the year."

My favorite quote, though, is this...
"Most agree that the current climate favors stock-picking over broad-based index plays, and many advisers are saying that diversified portfolios with a bias against risk are vital until the economy stabilizes and the market becomes safe again."

What record percentage of NYSE-listed stocks hit new 52-week lows in October? It was over 80%. If you are one among the majority who apparently agree with the above advice ... who fear the worst might yet come tomorrow ... let me be the first to wish you good luck finding those stocks "with a bias against risk."

Here is an instance where we can relish being in the minority, because at this point one is well-advised to favor "broad-based index plays."

And get this...
"Sam Stovall, chief investment officer at Standard & Poor's, ... told CNBC he is ... calling for a 'downer in December.'"

"Schaeffer's remains net short of the market, meaning that it believes stocks as a whole are likely to fall."

"Many advisers will continue to look for safe havens through December, buying high-quality debt that may not provide incredible returns but at least guards cash positions and keeps powder dry until the environment gets safer."

Oh, that's rich ... "until the environment gets safer." Like that will be coming anytime soon! If you haven't read "No Sugar Tonight," this might be a good time to get your bearings on a realistic scenario that could set stocks screaming higher. (On this note the performance of Sears Holdings is a recent case in point.)

Hey, did you know December is historically one of the stock market's best months?

OEX 5-min

Pay no attention to the timing of wave 2's end suggested above. The point simply is wave 2 appears to be forming a complex correction. Its actual completion could be some days away.

Bear in mind, too, this view is assuming the market's awful decline this year is over ... done ... finished ... and the strongest advance in five years is somewhere on the horizon. RSI coincident with the formation of wave 1 certainly supports this possibility. As you can see, it is rather atypical. Strength building every step of the way higher is not the norm.

So, that's a quick look at some basic evidence suggesting bottom is in.

Could major indexes soon break above their respective 50-day moving averages and rapidly rise up toward their 200-day moving averages, then? I, for one, would not be the least bit surprised...

Fast Money
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