A Tremendous Amount of De-leveraging Lemming Stampede ~ The Risk Averse Alert

Friday, June 19, 2009

A Tremendous Amount of De-leveraging Lemming Stampede

So what will take this market down? What could possibly go wrong? Well, I will tell you what. It's the same thing that carried the market higher from 1982-2000 ... and then drove it down from 2000-2002. It's also the same thing that visited the stock market last year and is having its way right now...

There it is. Yes, you might even call the leading edge "smart money." The underlying force simply characterizes human nature.

The lemming effect is the reason why no man these days wears a stovepipe hat, and why changes in fashion stick.

It is why most people start smoking, and it played no small part in helping Barack Obama win the White House (this despite financier-friendly policies over 100-1 opposed when the TARP came up for vote in Congress last fall).

Indeed, the lemming effect probably will have profound impact from here on out should any severe bout of selling suddenly sweep over the market. Fear is a powerful emotion. Following last year's throttling, sensitivity toward suffering any more financial pain no doubt is elevated. As I have already suggested, if the March '09 low is taken out, there could be an avalanche of selling thereafter.

With "a tremendous amount of de-leveraging still to do" (this according to Jack Bogle of the Vanguard Group) it is only a matter of time before overexposed institutions, starved for capital, bring on the cry, "Sell, sell, sell!" ... And follow the lemmings will.

Mark these words, because the lemming effect, principally, is what drives the stock market's direction. Always has, always will, and this has been understood for thousands of years.

Now, with this in mind we should also appreciate that, a great deal of effort probably will be made in an attempt to prevent the March '09 bottom from being violated. So, in anticipating a 5-wave decline toward levels last seen in 1994 (Dow 3600) we might better expect that, the first and second waves likely will keep major stock indexes trading above March '09 lows.

Let's give this probability some fundamental, historical perspective...

Back in 1929 following the Crash, an effort was made by Wall Street insiders to stem the damage brought on by leverage gone bad. Vested interests with nothing (and everything) to lose pooled their resources, and with much fanfare began buying up beaten down issues. That is why, when the likes of Cramer talk up the attractiveness of owning financial companies whose secondary issues are being floated in an effort to raise capital, you would be wise to recall this bit of history. Same crap, different day. And we likely have not seen the last of it (which is why March '09 bottom might not soon give way).


Maybe FDR was wrong when he said, "let me assert my firm belief that the only thing we have to fear is fear itself -- nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance." He might better have added something about irrational exuberance, too (and beaten that Monetarist Monkey hack, Greenspan, to the punch).

Now, I don't claim to be an expert in the driving forces behind options trading affecting the Volatility Index. However, something does not stir the Kool Aid seeing implied volatility decline such as it has over the past couple days, at a time when the relative strength and momentum of the market's advance clearly is fading...


You have to love the S&P 500's volume trend over the past week, too. Fear is building ... and appears to have a lot of room to grow.

Likewise, judging by observations shared by Fast Money trader Jared Levy, the probability of an imminent period of pronounced selling is elevated. Although this is not any surprise here, Levy sure does present some welcome technical news.

(You can listen to Levy's remarks simply by clicking the Word on the Street icon below. His insight can be heard at around the 4:00 mark.)

Fast Money
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