Better Debbie Dow-ner Than a Hope-Filled Lemming ~ The Risk Averse Alert

Friday, September 04, 2009

Better Debbie Dow-ner Than a Hope-Filled Lemming

Anyone arguing the stock market is doing anything other than setting up for collapse appears without question a taco short of a combo platter. Volume is proof. Today's was in the top ten lowest for the year both on the NYSE and NASDAQ.

So, if I must beat a dead horse, let me show my more compassionate, animal-loving side and rather than whip the broad body of stocks, instead come crashing down on the beast's head...


The 30 stocks in the Dow Jones Industrials Average represent about 20% of the market capitalization of the entire U.S. stock market (and about 25% of the market capitalization of all NYSE-listed stocks). These 30 stocks, therefore, are widely held. And judging by the extraordinarily diminishing volume of trade in Dow stocks over the past few months, the operative word in that last sentence plainly is "held."

What we see, then, is the very picture of complacency: the antithesis of worry. Hard to believe, but there it is: poignant commentary on the madness of crowds at a time when the long-term creditworthiness of the U.S. Treasury is openly being questioned.

Thoughts hasten back to recent debate surrounding financial industry executive compensation and bonuses. I cannot for the life of me understand what is the "talent" in behaving like a lemming.

But seriously ... one wonders what is the greater rationale among money managers for holding their Dow stock positions ... whether it is based on some reasonable expectation or, instead, is largely hope-based. The answer might help distinguish the present moment from May '08.

To wit: last year's pre-collapse, counter-trend rally (March-May '08) — an occasion when the volume picture similarly demonstrated a growing, underlying complacency — probably found most money managers holding their equity stakes in the reasonable expectation that the stock market's multi-year advance likely was resuming. Thus, during the market's late-spring, early-summer fade the majority of money managers probably continued holding their positions, and, indeed, found reason to likewise add to them.

Now, however, one cannot help but suspect a greater measure of hope-based rationale justifying holding long equity positions. Were this hope decisively challenged, one might expect a different reaction than came immediately following May '08 peak. Rather than a slow, steady decline (like that from May-July '08), a swift avalanche quickly evolving into free-fall collapse contrarily could develop upon the faintest reassertion of last year's selling.

Still more complacency is revealed by the sharp VIX comeback following the past three days [diminished volume] recovery from Tuesday's [elevated volume] slap. Yet the derivatives (RSI and MACD) of the derivative (VIX) are seen as having only "reset," still remaining ominously positioned and suggesting next week might bring the first rumblings of the coming selling avalanche.

Fast Money
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