Testing Capital Starved Hedge Fund Waters ~ The Risk Averse Alert

Friday, April 03, 2009

Testing Capital Starved Hedge Fund Waters

Looks like the touch of euphoria I anticipated going into end of quarter has arrived a week late. Although the market's advance this week was not nearly the magnitude thought possible, the expected effect has in fact become manifest. All the more reason to be on the lookout for trouble, I guess.

Indeed, yesterday's caution seems to gain further substantiation. Price action similar to mid-December '08 ... accompanied by underlying technical conditions suggesting the market's near-term path of least resistance likely points lower ... loom larger with rising ebullience coming from the most visible market observers.

Of course, I continue to agree with Cramer's general sense of opportunity here. However, I will not call it "a new bull market." Rather, upcoming months represent opportunity to batten down the hatches, because chances are we have not seen the bear market low. Pressure that began October 2007 probably has further to go.


These two charts quite accurately speak my outlook over the short-term (days), intermediate-term (weeks), and long-term (months). Right now, it's like early-April 2008.

Straight ahead expect some selling pressure. Then, through summer a nice bout of buying making back much of Composite Index losses last September-October. After that look out below.


Bullish Percent indexes are but another couple underlying technical measures suggesting a pause is in order here.

Probably most noteworthy here we should keep an eye on respective BPI RSI as the market pulls back. Hard to believe a derivative measure of a derivative measure could have forecasting value. Yet look at the situation early-February 2009... Bullish Percent Indexes were above respective 200-day moving averages, but RSI was squarely on the sell-side (below 50). What came of this was more hedge fund related (?) thrashing of the market.

That's not the situation right now (but we'll keep an eye on this anyway). Presently, there's got to be a few hedge funds still starved for capital wouldn't you think? Seems buyers are wise, then, stepping aside (as happened today) and testing selling urgency. Being that Q2 '09 is young we might be wise anticipating more of the same testing of hedge fund waters straight ahead...

Fast Money
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