Dead Financials Offer First Whiff of Weimar Germany Redux ~ The Risk Averse Alert

Friday, August 28, 2009

Dead Financials Offer First Whiff of Weimar Germany Redux

Did you know that, for every $100 in insured deposits the FDIC has 22-cents in its deposit insurance fund?

FDIC List of Problem Banks Surges, Putting Reserve Fund at Risk

Just doing what I can to push things along the path of least resistance ... and speculating that, at virtually the same moment financial markets crater long lines could form outside many a community bank.

Let's step back for a moment and review the big picture presented by the ultimate barometer gauging financial health perceptions by way it measures the movement of money at the frontier of risk: in the stock market.

NYSE weekly

Long-time readers might recall that, near the conclusion of last year's throttling my RSI-based hunch was that a rally similar to late-2001, early-2002 was likely. Indeed, levels to which indexes presently have risen long have been anticipated. True, I thought it possible these levels might be reached much sooner than has happened. Likewise, over the interim reasonable fear crept in and it became prudent to suspect a different path might be taken in reaching this objective.

Well, now that we're quite near the upper end of levels long thought possible, let me add something to an observation I recently made in distinguishing the July 2002 - March 2003 bottoming process from the post-9/11 bounce.

(I believe the market's present rally more closely resembles the latter and will similarly end badly.)

Observe how volume peaked at the culmination of the July 2002 decline, then subsided during October '02 and March '03 retests. Along with improving RSI — notably remaining on the sell-side (i.e. below 50), revealing a healthy dose of underlying fear — volume behavior likewise was typical of a bottoming process (i.e. selling exhaustion was demonstrated).

Contrarily, volume at the March '09 bottom was quite near its peak for the market's entire decline from October '07. Nothing characteristic of a significant bottom has been demonstrated. Thus, in addition to an RSI reversal most conclusively depicting a rather odd measure of fearlessness, volume presents further evidence that, March '09 was no more bottom than was September '01.

NYSE weekly

So, levels last seen in 1994 more or less appear a slam dunk. You can quote me on that, Mr. Tenet.

Indeed, a trip back to 1987 is by no means out of the question. And have no doubt. Even worse is quite within the realm of possibility. Such is life when leverage unwinds upon a decimated physical economy.

Yet, here again I draw your attention to volume. Let's consider the "wall of worry." Observe how volume was consistently growing all the way to the October '07 top. So, then, what might we conclude?

How about this... The wall of worry seen over the long-term could grow even bigger. Five years from now we could regularly see 15-20 billion shares exchanged per week, say, as the market reacts to a new order hyper-inflationary explosion resulting from pending collapse of the current order, an event whose likelihood has considerable supporting evidence both technically and fundamentally.

In other words, volume's consistent increase right up to the market's October 2007 top suggests the ultimate top is not yet in. So, following conclusion of this still-unfolding bear market, there's reason to look north of October 2007. Indeed, one might look at what presently is being coined a "dash for trash" — the incredible short squeezes in stocks like AIG, FNM, FRE, C, etc. — as reflecting the wave of the future (no Elliott pun intended). To wit, stocks generally will be driven higher because they can be.

Such could be life in fullness of reality where misguided cowards in influential positions (a.k.a. Monetarist Monkeys) — actors no more talented than bomb sniffing dogs, and no less well-trained and rewarded to boot — effect a whole lot more of their limited specialties. This is the new order hyper-inflationary explosion of which we presently are receiving but a first whiff in the "dash for trash."

This is to say that, looking north of October 2007 does not imply a return of some happy status quo. Rather, think Weimar Germany ... and brace yourself for a putsch. While you're at it dig down deep inside yourself and consider how you might react. Will you be as wise then as you are right now, not being a sucker buying into belief in a "new bull market?"


You see the channel guideline last presented here a week ago. Its upper end is the lighter red line. Were five waves up from March '09 presently forming the fifth and final wave (as suggested last Friday), then the upper end of the channel gives an estimation of upside potential.

You also see what instead might be forming: a "rising wedge" over the entirety of wave C since March '09 bottom. At present the lines you see containing this prospective rising wedge are entirely arbitrary. Yet I wanted to throw out this possible scenario. The present climate seems perfectly ripe for drawing in a good many more suckers, don't you think? This could take time. A rising wedge wave C whose 3rd wave presently is forming — with a 4th and 5th wave still to come — would lend such time.

Considered with regard to a high probability stock market collapse pending it stands to reason every effort will be made to maintain optimistic appearances for as long as possible. And on this note it appears no strange coincidence that the situation, technically, appears much as it did during the first half of June.

Duly noted.

Fast Money
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