Draining Capital From a Dead Asset Class ~ The Risk Averse Alert

Tuesday, September 15, 2009

Draining Capital From a Dead Asset Class

Yesterday, one piece of the not-so-mysterious financial puzzle was presented in a picture showing seemingly boundless faith in the asset class called equity — this by the NASDAQ Composite's spectacular rally off March '09 bottom.

However, not shown yesterday was a review of the incredibly thin participation behind $COMPQ's advance...

$NAAD cumulative

To my way of thinking NASDAQ's cumulative advance-decline line reveals most issues listed on NASDAQ remain in a death spiral. Therefore, that relatively few issues are behind $COMPQ's meteoric ascent again speaks for the post-March '09 advance being but a counter-trend rally, rather than the start of a new bull market. Indeed, the very lack of broad participation on NASDAQ is seen the kiss of death still coming.

The exchange I affectionately call the "Pump and Dump" continues earning this moniker, and you don't need to take my word for it. Just look what $COMPQ has done since March bottom and see what's backing this move.

Now, step back and think about the underlying psychology driving this. There's boundless belief in the asset class called equity as the still dead majority trading on NASDAQ are held in hope they too might join the freak show minority driving $COMPQ's advance off March bottom.

$NYAD cumulative

Now, judging by the cumulative advance-decline line of issues trading on the NYSE, $NYA might be thought trading north of where it stood in May '08! However, nothing could be further from the truth...


Unlike $COMPQ, which has risen to and slightly through its downwardly sloping, intermediate-term trend line, $NYA remains far below its same trend line. This is rather odd, don't you think, given the seemingly broad participation of advancing issues on the NYSE?

No doubt, though, the NYSE cumulative advance-decline line reveals the character an Elliott Wave guy would associate with either a 2nd wave of 5 waves down (where underlying measures are performing better than they were before wave 1 of 5 down unfolded), or a B wave of 3 waves down (where the analyst might conclude "something's not right" with composite developments coincident with the bounce).

The ease with which smart money can fool the masses who fail to see in the big picture how capital is being drained from the stock market is the message to be gained here. Were this not so, then, given underlying participation, one might think $NYA would be trading much higher. But there it is, significantly lagging the much more narrowly supported NASDAQ Composite Index ($COMPQ). This performance disparity is substantively not unlike July-August 2008 before Wall Street came unglued.


And that relative conditions still look a lot like May '08 is no small consolation to this unrequited bear...

Fast Money
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