Why Stimulus Package = Stock Market Safety Net ~ The Risk Averse Alert

Friday, February 13, 2009

Why Stimulus Package = Stock Market Safety Net


Repeat after me...

In no way is provoking financial panic in the interest of any large holder of risk assets. The ease with which an $800 billion stimulus bill flew through Congress — a sum far beyond anything ever before appropriated — proves it.

Vote this leading stock market expert at FeedTheBullAh, political consensus is a dangerous thing when, on one hand, you've got $4 trillion sitting on the sidelines in money market funds, while your other hand is reaching for a bailout.

THAT was Geithner's message on Tuesday.

Why do you think the Tory Press is so busy berating the guy?

He told the Goldman Sachs Roundtable (and others) straight up: You want to be saved? Save yourselves!

Like I have said before, a game of financial chicken is playing out. And unless Wall Street suddenly has developed a death wish, there is no way they are going to provoke the rage of the nation and the world driving financial markets lower. Not when they have $4 trillion sitting on the sidelines available to plug balance sheet holes.

Drag before Congress a few CEOs whose firms bear direct responsibility for this mess and what do you get? A "voluntary" mortgage foreclosure moratorium from Citigroup, JP Morgan Chase, B of A and Wells Fargo (all of whom paid the House Financial Services Committee a visit the other day). Their appearance was no slap on the wrist. Rather, it was a fair warning.

So, there's a rough sketch of my sense of fundamental reality. And technically speaking, all is well, Mademoiselle...


$NYA

What is not to like? Volume in particular paints the right picture. It's just like July 2002 - March 2003. Ditto RSI and MACD divergences ... but this time it's so much clearer.

That said, though, it's not 2003. Today, the black hand is exposed. Just how it might survive depends a lot on politics. Bottom line, per the market's pending, counter-trend rally, you can forget about so-called financials leading like earlier this decade. In fact, it looks like the group will be an albatros for a long time to come.

This is why upcoming rallies are likely to be the screaming, bear-market kind ... sharp moves in an orgy of short squeezes ... outright war. This is time when everyone jockeys for position. The die largely has been cast. What in the end comes of it remains untold.

Near-term, the general direction appears higher ... but intermediate-term, Dow 3600 still looks good.


$COMPQ

There are Elliott Wave analysts arguing certain indexes are forming a "contracting triangle" — a form occurring just prior to the final move in the direction of the larger trend. If this is true, then we can expect November's low to be taken out very soon.

However, I beg to differ.

First, let's forget about the questionable 3-3-3-3-3 subdivisions of component waves you see within the contracting triangle drawn above (particularly during January's decline). And let's pretend meager volume registered during the formation of wave c of C (late-December '08 thru early-January '09) is not odd character for a "third wave of a third wave" (which typically is the most dynamic Elliott wave).

Rather, let's consider the behavior of RSI and MACD. If the mid-August '08 peak marks the end of wave 2 (of five waves down from October '07), then if the presently forming "contracting triangle" is wave 4, why have both RSI and MACD failed to display typical behavior?

In other words, if the market were one move away from bottom (i.e. wave 5), underlying indications revealing building strength should be presented by relatively improving RSI and MACD behavior, wave 4 versus wave 2. Yet quite the contrary is seen.

Could this be foretelling a monstrously hard move lower, much like everyone and your mama seems to think? With fundamental reality mentioned at the start being what it is?

Sorry, I'm not biting. Rather than five waves down from October '07, I see three — A-B-C — ending November '08. Presently forming are three waves up: a counter-trend rally. This is occurring within a larger Elliott corrective wave whose ultimate objective could result in major stock indexes being smashed back to levels last seen in 1994 sometime over the next few years.


$BPNYA
$BPCOMPQ

Under the covers, not only does the market's relative condition appear considerably improved, several measures likewise lie at critical inflection points.

Taking in the past two years ... given the more positively poised state of this indicator — both applied to NASDAQ and the NYSE — you see why I am bullish here.

One other observation for those who think the market is about to crater...

If this were true, you'd think far fewer issues on both exchanges would be flashing Point-and-Figure buy signals (which is what the Bullish Percent Index measures). Rather, what you see is underlying strength defying the market's apparent weakness. My bet is the apparent divergence resolves with a rising market.


$CPC

And the Magic Eight Ball still agrees...


Fast Money
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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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3 comments:

sdmikev said...

Hi, Tom-

Any thoughts on how the pre-market cliff-diving this morning fits into your outlook? Unless this is a monumental head-fake, we'll be gapping well below 800 on the SPX at the open. That looks to me to be a major support failure. Next stop November lows?

-Mike

TC said...

Writers of Put contract hedges I wrote about recently will be put to the test. Dollar strength is interesting. It suggests capital is being raised selling assets overseas. Another steep RSI dive to the sell side at the open should be rapidly met with a bid exploiting the imbalance. My outlook is unchanged.

sdmikev said...

Thanks, Tom. Good to hear someone saying something other than "load up on puts, it's time for the plunge!"
-Mike