Bear Market Slam Dunk Contest ~ The Risk Averse Alert

Monday, August 31, 2009

Bear Market Slam Dunk Contest

With solid, technical reason to believe March '09 was not bottom to the bear market that began October 2007, let's talk "slam dunk." That's the forecast trip major stock indexes are slated to take to levels last seen in 1994.

Tonight's wonder is just how fast might the journey be?

Well, first, let's agree that, if March '09 lows are taken out any time over, say, the next nine months, the risk of spectacular collapse is likely to become extraordinarily elevated. Given the speed and technical decimation meted during last year's pasting, one would be out of one's skull to think the greater cause behind it was some irrational, mass overreaction. No! The motive for trimming equity found rationale in the sight of what Ben Bernanke is said these days to have stopped: another Great Depression.

No doubt, serious imbalances still make the climate ripe for gaming the system. Yet, too, there is something to be said for tons of fissile material backing a technically insolvent nation. There's reason for everyone to go along to get along.

However, let's not overlook an incensed citizenry who has had about enough of the Washington, Wall Street marriage. It just might be impossible to further perpetuate any semblance of recent decades' status quo in the measure necessary to keep Congress and the White House obeisant to its capital-starved monster.

Obviously, creditors have no problem with record home foreclosures. Obviously, then, there's every indication no more debt carrots will be forthcoming the masses. So, clearly, the marriage has entered a callous shakedown phase.

Thus, one must wonder, too, whether the very allowance of this massive shakedown of homeowners amidst a highly levered backdrop is poignant admission to the utter unsustainability of the incredibly fragile contemporary arrangement? Could creditors be grabbing what physical things they can before a stop is put to it out of principle brilliantly spoken in the single-sentence Preamble to the U.S. Constitution?

The wild card — the stock market collapse ace-in-the-hole — is in fact the American electorate. Since further sacrifice does not appear part of the national mood, then it looks like there could be a hefty price paid by today's heavy-hitters if the likes have any thought to maintaining their present political power. You think it's a dog eat dog world now? You ain't seen nothing yet.

Now, I could be giving the dull masses too much credit. Maybe there's a lot more Chip Diller — thank you sir may I have another — left in us. If so, then we could be looking at another route to the vicinity of index levels last seen in 1994. This would be a relatively slow grind lower lasting several years. Over the interim technical strength eventually would build in the face of an ongoing, general deterioration in stock prices. The worst of selling likely would come later rather than sooner, making defense of the March '09 bottom a prospect we can look forward to for many months yet.

Indeed, if October 2007 marked the start of an Elliott A-B-C corrective wave down, then wave A (completed in November '08) certainly could be viewed a move that traveled "too far too fast." Thus, once wave B (presently unfolding) is complete, wave C might logically take the form of a declining wedge. This most certainly is a possibility. And it is not the only scenario wherein is maximized the delay in major indexes reaching their ultimate bear market objective.

I've already called the March '09 bottom a Maginot Line because it represents a litmus test of the true value of the "full faith and credit" of the U.S. Treasury. This line holding for many months forward presently is thought critical to lessening the probability of spectacular collapse.

Call it a hunch, but I am not optimistic. I fear the worst.

Fast Money
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