Bear Porn ~ The Risk Averse Alert

Friday, November 13, 2009

Bear Porn

I am this close to featuring porn clips in an ongoing effort to help shed light on the current investment environment using video. This might lend keener insight into today's seemingly prevailing theme featuring an expectant profligate (I've gotta get back on top, now!) and an accommodating whore (whose initials are CME) ... you know, a pair of misfits turned group action, driving the stock market ever so immodestly higher since early-August peak.

Hmmm. Bet that might get my readership up ... among other things. No, I won't do that. Indeed, my point already has been made ... almost.

Ah! That'll do it. The "bear on bear" scene relayed amidst a raging backdrop, blissfully ignored, is the message clearly being delivered these days...

CME-driven short squeezes whose reality during the greater bulk of the market's advance since March bottom plainly has been demonstrated during those several moments when relative strength (RSI) was taken on a one-way rocket ride (showing profound imbalance between the buy- and sell-side — a most unhealthy condition were this advance's longevity thought assured) ... which action, itself, is proven to have been initiated by the bear camp, this by a diminishing volume of shares exchanged with each new lurch higher: these are realities being blissfully ignored. Yet they entirely speak of great bear on bear action.

Why do these things happen? Why would bears want to squeeze the market higher? Well, just as is true in nature, the reason is, first, because they can, and second, there's something to be gained in the action.

Let this fact sink in: the bear camp is entirely in control of the market's counter-trend rally off March bottom. Were it otherwise, the above cited conditions would not be so glaringly present.

And this is why we should be alert to the possibility some intrigue or another could come sweeping down upon our world, seemingly from out of nowhere, creating conditions putting all bears once again on the same page, and leading to the most precipitous drop ever to hit the stock market. I think the efficacy of this position is lost even on most who are bearish today. That is why, whenever I come across the bearish views of others, having their company does not concern me. More or less none appreciates the probability of spectacular collapse.

Investors Intelligence

Not that the company I keep is an overwhelming force among investment newsletter writers. Stunning how few appreciate the lasting significance of last year's disaster and are instead apparently enamored with this year's turnaround.

"Turnaround," though, is a misnomer — an understatement. The counter-trend rally off March bottom has been a monstrous move with scarcely any precedent! And there's nothing to fear about this? No reason to think some substantial giveback might be in order, even were one long-term bullish? Such a sentiment among investment newsletter writers (who should know better!) surely substantiates my thesis believing those who continue holding their equity stakes are demonstrating poorly reasoned complacency.

This should be particularly alarming given what has been shaping up over the interim of the stock market's counter-trend rally off March bottom. Such is now presenting a notably bearish backdrop...

$NYAD cumulative

Though you can club 'em by the dollar and raise 'em by the penny, this does not alter reality that, despite broad upside participation, NYSE-listed stocks are being distributed from strong hands to weak. This is the message conveyed by the NYSE Cumulative Advance-Decline line, contrasted with the fact the NYSE Composite Index has not yet even reached levels last seen the week Lehman Brothers was taken out and shot (September 15, 2008).

Furthermore, were March '09 a bottom prospectively of lasting import, we would have seen a divergence in the NYSE Cumulative Advance-Decline line at that bottom, rather than confirmation showing NYSE-listed issues more or less across the board were being thrown to the wolves coincident with the NYSE Composite Index falling to new lows.

(Duly note, though, how RSI and MACD measures of the NYSE Cumulative Advance-Decline line's movement were, in fact, diverging at March bottom. To what degree present divergences (beyond what already have registered here, near top) might be further demonstrated remains to be seen. Duly note, too, how the NYSE Cumulative Advance-Decline line, itself, is diverging relative to this week's NYSE Composite Index advance, which, by Wednesday, had come close enough to its counter-trend rally highs as to make the advance-decline line discrepancy a bit more than a curiosity.)

$NAAD cumulative

As per oft-noted NASDAQ leadership ... it's still good. NASDAQ continues leading the U.S. stock market right down the toilet. The recent bout of selling to hit the Pump and Dump stands out like a sore thumb on NASDAQ's Cumulative Advance-Decline line. The sea of analysts chumming the waters with baited claims suggested tech-related businesses are less affected by recent financial turmoil, and so present more promising prospects in recovery from last year's far-reaching disaster, simply finds no basis in reality where the rubber meets the road.

Smart money seeks its own, and apparently discovers none of it in NASDAQ-listed issues. These must be folks who, for example, hear of college campuses banning Amazon's Kindle and actually start connecting the dots. (Bezos might better start greasing some big endowment palms.)

Considering the big picture, animal spirits necessary for sustaining an advancing stock market must — must — be willing to spread a wide net of speculative love to NASDAQ-listed issues. That this is not happening indicates distribution of equity across both major U.S. exchanges is a trend still very much in force.

Judging by disparities noted here today, it is as plain as day all things are not what they seem. And that is why one would remain most wise not only fearing the worst, but further fearing its descent upon the scene in the worst way possible — in a breathtaking collapse seemingly coming out of nowhere...

Bonus Thought

I gave some consideration to the possibility 2009 might end out like 2003. This touches on reader Archer's comment the other day, requesting my thought on money manager performance pressure going into year end...

SPX monthly

Although you might say relative strength is similarly positioned now as then, I will not ignore the larger dynamic revealing building weakness making the present moment less like 2003.

First, RSI divergence at 2007 top versus Y2k. That's a new development. Likewise, it came following RSI's first prolonged trip to the sell-side of its range over the course of 2001-2003, itself among the first-signs of building weakness.

Then, there's RSI confirmation at March '09 bottom. Although similar confirmation occurred at the '03 low versus October 1998 ... shouldn't March '09 confirmation of RSI's '03 low, which itself occurred on the sell-side of RSI's range, be seen subtly significant? This certainly appears the case when similar such confirmations have occurred on the buy-side of RSI's range over past years.

So, now with RSI having reached a point of balance — correcting itself in a market with a confirmed sell-side bias — is not greater risk that, the confirmed selling trend might soon resume?

Fast Money
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