A Big What If ~ The Risk Averse Alert

Wednesday, April 08, 2009

A Big What If

What if the market's anticipated advance still pending takes major indexes as high as will be seen for the next five years (or longer)?

Seriously. You should consider this possibility.

Must I rant and rave about why this might be? Of course not. The identifiable form a declining market might take knows no unique circumstance. Rather it simply reveals certain finite qualities about mass investor behavior driven by circumstances as varied as the weather. After all, we're all a bunch of lemmings, more or less, when it comes to money.

The point is a prospective decline later this year or sometime next taking major indexes to levels last seen in 1994 could complete the market's move lower from October 2007 in a fashion quite familiar to anyone acquainted with the Elliott Wave Principle. You can fill in the blanks identifying this or that vulnerability which may or may not be the real reason why the market continues its terrible slide. Lord knows there's more financial and economic frailty than any one man can shake a stick at.

I wanted to drive home this [altered] outlook I have been elaborating over the past couple days. I am afraid ... and that's putting it mildly.

If you're wondering why, suddenly, I have become considerably guarded in my near-term outlook (whereas up to now I have been more optimistic about the prospect of last year's losses being significantly recovered), well, about all I can say is perspective presented the past couple days ... having been in the realm of possibility (although to now largely unspoken) ... struck me with a certain sense of urgency calling me to push this perspective front and center right away.

Now, about the big "what if" I began with...

Imagine major indexes do in fact collapse over the months ahead to levels last seen in 1994. Consider then the market's initial rally off bottom. This could be something like the advance that has developed off March '09 bottom. Subsequent to this it then would be quite reasonable to expect a pullback — a retest of bottom.

Do you suppose this sort of thing could take more than five years?

It could and this is a big risk potentially affecting most every investor...

OEX 5-min

I'm not yet convinced the past four-and-a-half days of options writer's paradise are over.

Nevertheless, there isn't a single underlying technical measure causing me to raise an eyebrow. Now, some things might bring one to think the market presently appears over-extended and vulnerable to a bout of weakness. However, the present moment is one when what appears over-extended can become even more so. And there really isn't anything suggesting otherwise ... any breakdown taking the form of a technical divergence one then could cite as advising caution.

So, the view straight ahead still sees the market rising further. Just how soon and just how far remain a question. I'm wondering whether the bulk of the market's anticipated move higher might come before April options expiration (4.17.09). That's next Friday.

I haven't got an answer. As for clues ... well, the fact a full moon occurred on the day the market launched off bottom (March 10th) ... and the fact April 9, 2009 marks another full moon hardly seems credible evidence. Yet the positive way in which underlying technicals are shaping up, why not give the possibility a howl? (That's no plug for Arch Crawford, trust me.)

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Paul Davis said...

Thanks for being transparent in your most recent analysis of the market; it is a breath of fresh air to see someone who can look at both sides of the coin, and state without fear that there is much gray in the current picture.

That said, I would like to throw out again the possibility that we see a 5-6 day spike to the upside at some point, taking us to your near-term objective around 200-day MA's, or areas of last Sept. since most of the damage on the downside was done in a 6 day period, would it not be plausible that it works on the upside as well?

When/if this happens, that would appear to be time to head for the exits - in a hurry.

Greg said...

Looks like the train has already left the station. Will you be buying on any pull back?

TC said...

I quite agree, Paul. A rush up to 200-day moving averages is about the best one might expect here. Respective 200-day MAs have fallen to the lower half of the 6-day range in which most of the downside damage was done during early October. This is about 20% shy of where indexes traded on the day LEH collapsed (9.15.08). It was to this area I originally thought a recovery would extend. However, now I fear something less robust might be in store.

Greg: I am going to momentarily hold off picking up another OEX Call option position. Take note of how deeply index 5-min RSI extended to a buy-side extreme (above 80) coincident with this morning's launch higher. This raises my suspicion trading could be subdued for at least a few days. We could be looking at more options writer's paradise (i.e. a narrowly trading market) going into April options expiration next Friday (4.17.09).

TC said...

Ooops. Sorry, Greg. You asked if I was looking to buy on any pullback. Yes, I am looking. I'm reluctant to pull the trigger today, however. Not that I think any pullback will be devastating. In fact, I suspect it could be less damaging than even the past 4+ days. So, it's the time value drain I am looking to avoid here.