Proof of Pending Doom ~ The Risk Averse Alert

Thursday, July 16, 2009

Proof of Pending Doom

Vote this leading stock market psychology expert at FeedTheBullThere's no doubt that, NASDAQ Composite — the index tracking all shares trading on the Pump & Dump — setting a new high today, post-March bottom, was mildly disconcerting, although not unexpected. Some comment, then, on its tendency to lead the market in both directions is in order tonight...

The question is: in which direction is NASDAQ leading?

The fundamental fact that, the global financial system is bankrupt has been the subject of my commentary over recent days. Tonight, we need to get technical. We need to look under the covers and discover why no "new bull market" is developing here. This view serves to confirm the fundamental fact that, the lynch pin of the global economy — structured finance — is dead and will not be resuscitated in any way, shape or form resembling the recent past. Without the securitization market and its capacity to produce trillions of dollars of fools gold the asset class called "equity," therefore, is doomed...


Let's leave aside the fact that, since March '09 bottom upside RSI ascent is profoundly one-sided and atypical the more gradual and balanced relative strength ascent associated with bull market moves. Indeed, if the phrase "short squeeze" could be given a picture defining what one looks like, RSI spikes in March and, even more so, over the course of this week would fit the bill perfectly.

Contrarily, much like increasing volume is the very picture of the "wall of worry" the stock market is said to climb, balanced relative strength over the course of an advance similarly reflects the impact of worried sellers. That's why typical relative strength in a bull market ascends much more gradually than what we've seen since March bottom. Worried sellers — not complacent holders — are a bull market staple.

On this fact alone there is good reason to suspect all the hootin' and hollerin' about a "new bull market" is from minds gripped by fantasy. Atypical RSI ascent strongly hints that, theirs is but a fine display of wish-filled delusion not at all unlike the "new era of technological" progress that a like-minded, inside-the-box crowd swallowed hook, line and sinker to rationalize NASDAQ's explosive rise in the Y2k period.

And speaking of Y2k ... curiously, NASDAQ was holding up — indeed, markedly outperforming — relative to the more staid NYSE during that period leading up to the market's major top. This, too, was much like last summer.

Hindsight, then, provides a snapshot of relative conditions wherein "denial" can be seen manifest.

Most certainly, too, one must conclude the same is being manifest right now.

Technical proof follows. The focal point of my analysis is relative to early-January '09. You see above where the NYSE Composite stands. The index is barely positive on the year.

Now, let's see what conditions under the covers look like...

$NYAD cumulative

Gadzooks! A "new bull market" at least has some appearance of being a credible claim. In fact, it seems there's hidden, underlying strength backing NYA's advance off March bottom ... with cumulative advancing issue participation over the duration suggesting that, once those issues causing NYA to "lag" finally catch a bid, the index will soon "catch up" in a manner in keeping with its better underlying technical condition.

Yet the real question is whether those greater number of cumulative advancing issues behind NYA's advance to date reflect something far less bullish? Is the divergence between the index and the cumulative advance-decline line, indeed, a danger sign? Does the index's lag in the face of markedly greater cumulative advancing issue participation represent a cold, hard reality ignored by those driving the broader array of NYSE-listed issues higher?

Could this be a vivid display of that very denial typically preceding a panic?

Methinks yes. Lo and behold! NASDAQ, in its typical leading way, offers all the proof we need that denial is the order of the day...


Much like the situation leading into Y2k top ... and much like last summer ... once again NASDAQ outshines the NYSE. COMP is solidly positive on the year, whereas NYA is barely so.

Now, you might be thinking underlying advancing issue participation on the Pump and Dump would be even more phenomenal than has been the case on the NYSE.

Ha! You would be so wrong...

$NAAD cumulative

The greater bulk of overpriced junk traded on the exchange favored by boiler rooms all across America just can't find a bid. All the heavy lifting is being done by a relative handful of issues. No matter which way you slice this, there is nothing bullish to conclude here. There's not even the appearance!

Yet, despite this, COMP is leading the charge off March '09 bottom. Those fewer components behind NASDAQ's advance continue their ascent absent broader participation necessary for sustaining a bull market. Money simply is not flowing into a wide swath of issues trading on the exchange consistently leading the stock market at large.

On the surface COMP appears to be leading. However, under the covers it remains in a death spiral. Yet this fact is ignored by those bidding up the handful of issues behind COMP's advance. There's a word for this...


So, returning to the question I began with — namely, which direction is NASDAQ leading the market? — the answer is lower. And because there is no more fools gold being created on Wall Street (not even Jesus could resurrect the securitization market), it is only a matter of time before equity capitulation seizes the day...

Fast Money
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