The Difference a Day Makes: Beyond Pending Melt-Up ~ The Risk Averse Alert

Monday, March 02, 2009

The Difference a Day Makes: Beyond Pending Melt-Up

... And milk it for everything it was worth they did.

Next up, the mother of all short squeezes. I continue wondering just how quickly this might take the market straight up. To be sure, my thinking is not born of any sense of personal greed. Rather it is formed out of respect for what might be more confidently concluded from today's trade.

Let me first say all things technical support a turn higher here. The evidence is rock solid. Conditions anticipated last week have come to pass. I simply am not worried about the market coming unglued here. At least not just yet. Some soon tomorrow, though, suddenly appears quite probable.

Consider another aspect of the view presented Friday contrasting NYSE and NASDAQ...

October '02 NASDAQ was throttled well below its July '02 low, whereas the NYSE Composite held to its respective low set that same month. This dichotomy indicates capitulation — positive sign a significant, multi-year bottom is in the process of forming. The more speculative NASDAQ drained while a floor under the NYSE is buttressed.

Following October '02 bottom both exchanges caught a bid. Then, going into March '03 both indexes pulled back once again. This was when it became abundantly apparent a significant bottom was in place. Whereas in March '03 the Big Board had fallen back to its July-October '02 floor before again finding support, NASDAQ levitated well-above its October '02 low. Animal spirits, vanquished during October's capitulation, quite evidently were stirring again. And the rest is history.

Now, consider the situation presently. Today, not only did the NYSE Composite decisively take out its November 21, 2008 low, it closed below lows set July '02 - March '03. Contrarily, NASDAQ remains above both its November 21, 2008 low as well as its October '02 bottom.

Do you realize what this means? It suggests the stock market's ultimate capitulation has yet to pass.

If last October's thrashing produced the greater bulk of selling to be expected over the next few years, then we would have seen a subsequent period during which more speculative sectors (like NASDAQ) were subjected to relatively more intense pressure while the Big Board held to a strong floor. Yet nothing of this sort has happened. In fact, quite the opposite. Indeed, the largest of large caps have been absolutely shredded, whereas speculative small caps have held up relatively well. A sure sign in the grand scheme of things a multi-year bottom is not yet in place.

Consider this in the context of developments last July...


What do you make of similarity to the present moment? A period of profound selling sometime over the next few years indeed appears more likely in store.

I wanted to highlight this possibility because recently it seemed equally possible the market's present levels might provide a floor for years to come. However, this case appears to have been substantially weakened today.

Be that as it may, first things first: a recovery is imminent. It could be massive, rapidly carrying indexes up to the vicinity of respective 200-day moving averages and quite possibly beyond. I have some simmering thoughts on just how things might develop. No hurry to go into these right now. I'll keep you posted.

Fast Money
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