If a Rising Tide Lifts All Boats, the Market is Sunk ~ The Risk Averse Alert

Friday, May 08, 2009

If a Rising Tide Lifts All Boats, the Market is Sunk

Everybody seems rather giddy ... so much so that, pending any near-term correction, the trade they say is without doubt on the long side.

Well, I quite disagree. The better trade, I believe, is closing long equities positions ... and fearing stocks might sink in a fashion similar to last year.


Fascinating how this year's opening swing down, then move back up, mirrors last year's up to this same point.

All the more interesting is the fact RSI and MACD measuring NYSE Composite Index performance are at their best levels since October '07 top. You would expect this just prior to a final leg down (in this case, an Elliott Wave 5th wave).

Likewise, judging by the recent past, how much better might one expect underlying technical conditions to get here? So, the question is this. Come October 2009, could the NYSE Composite be approaching levels last seen in 1994? (Ballpark 2800)


NASDAQ is on the same page. The target here is 750ish.

Now, a lesson in how to measure animal spirits...

As you already might be aware, action on the NASDAQ contrasted with the Big Board can give you a sense of the prevailing trend. NASDAQ consistently leads the way. When speculative spirits run high NASDAQ disproportionately benefits. When fear prevails NASDAQ is punished.

What do we find on this front presently?

Well, on the surface it appears NASDAQ is leading the market higher. COMP is up 10% this year. NYA only 4%.

Now, COMP did not sink as badly as NYA into March '09 bottom. Yet bottom-to-top NYA is up 43%, COMP only 39%. So, where's the leadership?

The absence of proper/healthy/convincing leadership — animal spirits — is further exposed contrasting the cumulative advance-decline lines on NYSE and NASDAQ...

$NYAD cumulative

First reaction here might be positive. But what of the divergence between the NYSE cumulative advance-decline line and the NYSE Composite ... first in January '09, relative to early November '08 (which divergence ended badly into March '09 bottom) ... and now, relative to January?

It has taken a more positively decided period of predominantly advancing trading to carry the NYSE Composite to where it stood in early January '09. An overriding weakness — effectively masked — is thus exposed.

I would argue this better reflects a market being driven by blind spirits — "this must be bottom" — than animal spirits. Proof of this lies in NASDAQ...

$NAAD cumulative

NASDAQ's cumulative advance-decline line has barely made it back to where it stood at the start of the year. Not exactly the picture of broad participation characteristic of animal spirits.

Were what passes for politics and policy considered credible, then it seems the picture here would be different. So, then, if a rising tide lifts all boats, it is rather apparent the tide is not rising.

And why should it?

How long will it be before debt needed to keep the financial system afloat crowds out equity? Will Uncle Sam's commitment not lead to this? What of another panic to further extort financing from Congress?

Judging by the trade in stocks across both major U.S. exchanges, I am not the only vested interest keeping powder dry. Animal spirits clearly are not loose on NASDAQ. The risk of last year's ugly performance repeating is, indeed, real.

Which is not to say this will happen. Rather only that it could. Trading this week raises the probability.

This prospect is in keeping with a view fearing present levels could be the best seen over the next five years or so. Again, this is just one possibility.

Truth is no one is suggesting levels last seen in 1994 could be reached later this year. I dare say, however, the possibility is assuredly reasonable. See for yourself in this 40-year chart of the S&P 500 Index.

Come what may, I remain in the camp believing any further upside likely is limited. Maybe we topped today, maybe we didn't. We're very close.

Fast Money
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Paul Davis said...

Great analysis; I agree with risk perspective at this time. Look at 92040310 chart (VLE arith) - complete W now, back to Sept/Oct gap level. Appears crap/roulette/blackjack operators (the GS boys) have successfully reeled in enough new customers (suckers) to unload the goods on. This player is taking his winnings home - the party is over.