The Fundamental Case for a Coming Stock Market Capitulation ~ The Risk Averse Alert

Saturday, June 13, 2009

The Fundamental Case for a Coming Stock Market Capitulation

At the conclusion of Friday's post I indicated that, both fundamentally and technically, the probability of a coming stock market capitulation is growing. Let me briefly expand on this.

The technical case anticipating capitulation originates with formulations put forward in the Elliott Wave Principle. This outlook is subject to ongoing assessment of various underlying technical measures in a more dispassionate analysis whose conclusions, I submit, are more so objectively grounded than emotionally charged.

Those who consider technical analysis as so much "hocus pocus" underestimate the wisdom of the masses. Legendary Hollywood director Billy Wilder, in commenting on the first, pre-release screening of his 1950 movie "Sunset Boulevard" (which event resulted in an unexpected disaster, forcing a rewrite of the opening scene), noted that people in the role of film critic are idiots, individually, yet collectively they are genius.

There might never have been a more succinct statement summarizing the value of technical analysis ever spoken.

Let me give you an example of collective genius...

Did you know that in horse racing 60-70% of the winners go off at odds of 5-1 or less? How is it that, in the majority of instances some significant segment of the betting audience has a bead on the winner? Each, taken individually, has their own unique reason for betting. Collectively, their rationale runs a wide gamut. Yet their thinking nevertheless converges on the horse that is the eventual race winner.

The technical analyst evaluates odds — probabilities — based on what is known historically. Much like a horse racing handicapper knows a horse going off at 5-1 has a better chance of winning than does a horse going off at 20-1 (statistically speaking), so too does a technical analyst likewise know how "the trend is your friend."

That's why one might cite a still rapidly declining 200-day moving average and score anyone (Shemp) claiming "a new bull market" has begun off the March '09 low. Not until that bad boy turns up and indexes are trading above it will I join in the chorus. This is my unswerving position given the market's present [technically vulnerable] condition. Case closed.

Tonight, I want to make the fundamental case for capitulation still to come. With the average investor given so little independent thinking as takes root in American history — so much of what passes for investment "intelligence" is contained inside a box relegating the affairs of mankind as being more or less "unpredictable chaos" — I thought I might better speak about that sinister element of contemporary circumstance aptly named "El Swindle Grande."

Could it be any plainer that, fundamentally speaking, costly, bald-faced, political swindle is the trend that's your friend? Truly, if you ever wondered what it might have been like to be living in 1776, the bitter taste of financial tyranny to which we are being treated should satisfy your curiosity.

Look, if you think the case of a U.S. Treasury Secretary, formerly CEO of a firm (Goldman Sachs) with a long and storied history of involvement in activities contrary to the spirit of principle making the United States of America unique among all nations of the earth, submitting to the U.S. Congress a 3-page draft bill demanding $700 billion to bail out an elite group of financiers whose reckless behavior brought the world to the brink of financial collapse, was an "outlier" — an unpredictable event not likely to occur again — you should not be investing in the stock market, because the intrigues of subversion are too foreign to your better instinct for giving authority the benefit of the doubt.

If you think the dismantling of Glass-Steagall in 1999 has had no part in increasing financial risk to the net effect of accelerating our nation's headlong plunge into insolvency, this via the compounding of leverage, then you have no business investing in the stock market because at the foundation of a stable investment environment is, in fact, a sound credit system.

If you think the elimination of the "uptick rule" in July 2007 and the subsequent unraveling of the stock market was a mere "coincidence," you might just as well find something good to smoke because you are likely to do better for yourself than you would investing in the stock market. The need for ready capital throughout a capital-starved credit system will trump any company's fundamentally sound balance sheet every time, come hook or crook.

If you think the war for Independence ended in 1783 and all with the private financial trust backing the British Empire has remained copacetic and accommodating ever since, then you really have no business investing in the stock market. That war continues to this very day and last year's fleecing of the American taxpayer was only its most recent battle. On the horizon is an attempt to take down the reserve currency status of the U.S. dollar, and this battle is likely to proceed regardless of the outcome of the present attempt to extort financial tribute from the health care system of the United States.

If you think the incessant bashing of the U.S. government coming from media outlets both on the left and on the right is unlikely to one day precipitate an insurrection, then you might have no business investing in the stock market. Do you not fathom the full risk we face when institutions supporting a government "of, by and for the people" are likened to a corrupt mafia? Truth is representative government is the only hope we have for a return to a stable investment environment — one where we need not worry so much about when and where the next private sector swindle will originate, and how much material damage will result.

Now, step back and re-examine the history of the Troubled Asset Relief Program (TARP). These days some in the financial community claim the program was unnecessary! But are they in making such a claim admitting the whole thing was a swindle from the get-go?

Look how the TARP was pulled off: both in how it was legislated, as well as how it was carried out once it became law. Consider the buttons that were pushed ... the infrastructure employed to effect an outcome whose result placed an entire people hostage to a game proven a broke down fraud ... the wanton disregard for victims of real estate foreclosure (whose number vastly exceeds speculators motivated by greed).

Keep this in mind when you entertain how financial tribute from the U.S. health care system might be won in spite of what likely will become growing resistance to the reform effort.

Just listen to dire fiscal warnings coming from the President (and do your level best to hold down the gag reflex as you receive your full dose of sugar coating in slick talk speaking about "improving the quality of health care")...

Fundamentally speaking, how does one not smell capitulation? Indeed, if the President were serious about addressing our nation's fiscal problem, the first order of business might better find him exhorting the Congress to investigate what role the London office of AIG had in bringing that company (and our nation) to its knees, and asking whether this was an act of war against the people of the United States perpetrated by the financial backers of the British Empire.

Instead, he and the Congress are buckling to a vested interest whose ability in directing public perception goes so far as to virtually regard principle put forward in the Preamble of the U.S. Constitution as though it were some quaint relic not terribly applicable to our present circumstance. Such is the face of our terrible political weakness (and I might add the nature of a wild card potentially set to explode, ending the careers of those representatives who have done more to make investing in the stock market a fools game than a viable venture suitable for a sane person).

So, how might this health care reform swindle play out as institutional opposition builds? How might the efficacy of buckling become more widely appreciated, such as was the case last fall when the threat of the day was with the very banking system itself.

Or so they claimed...

Bottom line, the fundamental trend that's your friend more or less exists in an environment conducive to outright chaos and extortion. This is becoming so evident that there is little risk in crying it from the rooftops.

Most times one ought rightly fear being regarded a "Chicken Little." Sometimes, however, one ought just rightly fear. I believe now is one such moment.

And so concludes the fundamental case for anticipating capitulation in the stock market. To wit, I hardly believe I am alone in this reasonable fear of something "unforeseen" becoming the next Act in El Swindle Grande. The harvest is, indeed, plentiful and the political climate ripe for transferring further, undue power into select private hands...

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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

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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