The Legislative Improbability of a Financial Meltdown ~ The Risk Averse Alert

Wednesday, January 21, 2009

The Legislative Improbability of a Financial Meltdown

I'm not going to micro-analyze the stock market tonight. Truth is yesterday's low could be retested. This is not outside the realm of possibility following today's installment of volatility '09.

Pat on the back time...

Flashback December 31, 2008: Volatility to Usher in the New Year?


Don't confuse this, though, with the freak show that passes for journalism these days. In other words, there is good reason to temper one's sense of urgency hastened by the fact our financial system is bankrupt. Without a single piece of legislation yet passed into law under the new administration, there's little chance imperialist sharks are about to shock Congress to its senses and bring it to immediately declare null and void all manner of debt securities created on Wall Street and the City of London over the past 20+ years.

And toward this necessary task, apparently, only the Congress offers any hope of affecting its accomplishment. Clearly, the Treasury Secretary-designate is a Eunuch. So, until proven otherwise, this makes his boss the same as the old boss ... which to little ol' you and me is about as worthless as could possibly be.

Pity I see many of the same jellyfish in Congress as were swimming there before the election. Surely, last year's Emergency Economic Stabilization Act and its $700 billion TARP demonstrates how easily jellyfish can be moved.

However, the one thing making today different is the simple fact political cover once amply provided by the Executive branch has left the building. The last line of imperialist defense against 100-1 opposition to financial bailout is no longer available.

It's a big deal, especially during this time of transition. The work of thieves is made more difficult.

Now, do you suppose I might have some technical presentation backing my claim that, no unpleasant surprise is about to sweep over the stock market ... the sort of thing that might bring the Congress to move strongly against Wall Street?

As I indicated yesterday, it appears strong hands are sitting back, and allowing selling to play to their advantage. Today, I bring you evidence suggesting shares are, indeed, being accumulated...

$NYAD cumulative

This is the Cumulative NYSE Advance-Decline line. As you can see, there has been no wholesale dumping of stocks over the past two weeks. In fact, downside pressure appears to have been rather well contained.

What's most revealing is the divergence between the NYSE Composite and the Cumulative NYSE Advance-Decline line. The latter suggests the majority of stocks have been well-supported since the November 21, 2008 bottom. Contrarily, the former gives the appearance stocks remain under considerable pressure.

This contrast is intuitively harmonious with yesterday's observation regarding diminishing volume of shares exchanged during the present sell-off. It substantiates my claim we are witnessing a bear trap.

$NAAD cumulative

Interesting. The Cumulative NASDAQ Advance-Decline line is not quite as compelling. Yet we can at least say the stock exchange favored by boiler rooms all across America is showing a pulse ... barely.

Contrasting the NASDAQ Composite's performance to the NYSE ... seeing how on the surface NASDAQ appears to be performing better ... holding up as one would expect in a market assumed poised to move higher ... taking its typical leadership role (which for years it has done in both directions) ... then seeing how under the covers (as reflected by the Cumulative NASDAQ Advance-Decline line) NASDAQ does not at all appear convincingly healthy ... we have something of a [not-so-faint] red flag to check back on, post-melt-up.

I would be glad to see the market hold up now and begin on its course to a new, post-November 21st high. However, if strong hands must put the fear of chaos into the hearts of most casual observers over the next day or three ... well, I will be neither surprised nor disappointed.

Today was a taste of the melt-up to come. Patience...

Fast Money
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