Sudden Destruction in the Light of Day ~ The Risk Averse Alert

Tuesday, November 17, 2009

Sudden Destruction in the Light of Day

1 But concerning the times and the seasons ... you have no need that I should write to you. 2 For you yourselves know perfectly that the day ... so comes as a thief in the night. 3 For when they say, “Peace and safety!” then sudden destruction comes upon them, as labor pains upon a pregnant woman. And they shall not escape. 4 But you ... are not in darkness, so that this Day should overtake you as a thief. 5 You are all sons of light and sons of the day.
1 Thessalonians 5:1-5

There's another thing Mr. Buffett ought be thinking about. His railroad investment is no sure thing, not even as a capital preservation play.

The Fast Money traders, too. Their collective thinking entirely disconnected from the reality of a global financial system's bankruptcy ... dressed up in more smiling and winking than the world quite likely has ever seen ... but reveals such vulnerable position in darkness as would be worthy of citation were the flaw in their perspective not so obscene. How can this be?

Truly, words like those above were made for moments like these.


Well, there's "Peace and safety!" Or at least that's the hope it seems with the widely-held Dow 30 recently taking leadership in the market's push higher. Looking at this index we see a couple noteworthy disparities, post-July bottom, from those broader measures typically presented here (i.e. $SPX, $NYA, $COMPQ).

First is momentum (MACD) early-August slightly exceeding May's best reading. None of the others achieved this feat. Yet other than this representing a manifestation — a demonstration; a proof — showing ill-placed complacency in equity as an asset class, there's nothing game changing about this particular disparity. The greater love given the widely-held Dow 30 by no means assures equity's peace and safety, although by the Dow's very leadership money behind the move quite evidently assumes so.

Second is the Elliott wave count off July bottom. Inasmuch as the wave count for $COMPQ differs from $NYA and $SPX, $INDU's wave count is different, too. I am just not sure how right now. The only quandary this uncertainty presents, though, is found in possibility the 3-month and running circle jerk thus far endured since July's monster short squeeze might continue a while longer.

Duly note volume characteristics in trading forming bottom, January-March, 2008, as well as that accompanying the subsequent counter-trend rally lasting to mid-May, 2008 ... and contrast this with present circumstance. The relative similarity we see throughout speaks of a like-psychology driving the movement of money ... a like-power to sustain the rally ... and of probabilities a like-outcome awaits.

And yet by the magnitude of money behind present, like-circumstance, the degree to which there might be no peace and safety must be regarded a rather frightening prospect! Indeed, though we may be sons of day, an unimaginable test of our very humanity in all probability draws near...

Fast Money
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Anonymous said...

Please explain what happens if earnings and PE ratio's support higher equity prices in 2010. While I agree with the technicals calling for a major correction or even a complete return to a bear meltdown, I'd like to understand the impact of good earnings on all this. As we know Meridith Whitney says it's mostly overvalued and has not clue why equities are at this levels. Perhaps she needs to read you bear on bear case? That said, there are many others who think valuations are fine. Now I'm a simple novice trying to apply simple logic to all this. It makes perfect sense to me that the dollar and earnings drive equity prices regardless of GDP or technical patterns. So please speak to what happens should this mystery rally actually continues until PE ratios support the current and/or higher levels. I'm not saying they will considering the profound headwinds, but I am asking what IF??? Thanks.

TC said...

Great comment. And I have some simple logic you can apply. Remember when Bear Stearns CEO Alan Schwartz appeared on CNBC two days before his firm collapsed? Everything at the company was fine, he said.

Well, he lied. Read that again. HE LIED.

Is this not part of the game? Looking around ... the Fed, the SEC, the CFTC ... every regulatory body you can think of ... have they been upfront and on top of the game, giving novice investors a warm, fuzzy feeling about the security -- indeed, the viability -- of today's investment environment? No! They've all been so far behind the curve in matters their organizations were intended to oversee as to demonstrate their effectiveness worthless, at least to the little guy.

Per your PE wonders ... how were BRKA's fundamentals prior to last year's near meltdown of the financial system? Shares of this company, managed by one of the most renowned, venerated investors of our time, were clobbered by over 50%.

PE ratios do NOT support the risk of a global loss of appetite for U.S. Treasuries. PE ratios do NOT support the risk of a concerted dumping of Treasuries. They do not support the risk of a dollar collapse. Those worth listening to in the mainstream are mystified by current valuations, uncertain how current fundamentals justify prices being fetched. Those who think valuations are fine have something to sell. (Buffett, being the exception to the rule, is seeking capital preservation ... willing for a time to accept a loss, even last year's 50%).

This rally, like last year's from March-May, is no mystery. It is meant to clear out weak hands on the short side of the trade. Could it last into 2010? Maybe. Will I fret over this possibility while downside risk of 50-80% is staring us in the face? I think not. Rather, I will continue seeking to confirm the bear case in an attempt to remain risk averse ... doing this not for the sake of defending my bearish position ... but rather for the sake of objectively seeing things straight, as this sight is guided by collective actions taken by market players spoken via various technical formulations I assess.

Might I be so moved to hedge my short position? That's a possibility.