Volume SCREAMING ~ The Risk Averse Alert

Monday, November 09, 2009


Strange as this might seem, days like today are a gift. What is being revealed before our very eyes is the greater likelihood that levels last seen in the latter-'80s, early-'90s lie ominously on the horizon. Not that this is any surprising development. Indeed, signs of this probability have been building for months. Still, today's further confirmation is nevertheless assuring.


The market climbs a wall of worry and this is built with increasing volume of shares offered up for sale. Worry translates into fear ... and fear translates into shares sold. So, where are they?

They're being held! Why? Because there's a vibrant fantasy believing last year was but an aberration. The conviction supposing holdings are set to make a comeback apparently is solidly glued to the imaginations of those money managers who know no different. Yet this time is, in fact, different. Volume, both today and throughout the market's counter-trend rally off March '09 bottom, is screaming this loud and clear.

So, how does this make more probable a stock market collapse to levels not seen for nearly twenty years?

Well, initially, who do you think is going to dive in further as prices invariably pull back to points within the range thus far recovered since bottom (using up what limited buying power they apparently possess)? And who do you think is going to offer up their shares for sale once a new bottom, far lower than that set in March, inevitably is reached (only then willingly capitulating)?

The very same weak hands who fail to see the wisdom of selling substantial portions of their equity holdings right now! The dreamers who apparently have a hankering to become victims of a living nightmare (much as they were last year). Have no doubt. A calamity is drawing near. Inasmuch as volume conveyed the exact same foreboding message from March 17th through May 19th, 2008, it is all the more loudly screaming, "Danger!" right now.


Uh, so where's the upside leadership, oh trend-leader NASDAQ? Out to lunch! (Yet again $COMPQ fails to outperform $NYA.) Therefore, the message remains SELL, SELL, SELL!


Was there ever a more timely insight than was presented in my Valuable CBOE Put/Call Ratio Education? The short side clearly has grown gun shy. This fact is shown by relatively fewer call option hedges being put on over the past couple months as the market has drifted higher. Funny how this consistently happens near tops. A sudden (and likely devastating) reversal of fortunes appears near, then.

By the way, I am still loving my $SPX Elliott wave count. Either an a-b-c-x-a-b-c [up] is forming in the second wave position (of five waves down), or an a-b-c irregular flat (since October 28th). The latter scenario is thought more likely for two reasons.

First, desperation being revealed in the effort to hold up stocks — this principally via CME-driven short squeezes of which this morning's was but one among many executed since March bottom (RSI taken on a rocket ride is your clue, with persistently shrinking volume confirming the ruse) — would find added time lending opportunity to offload still more grossly over-priced shares were next to unfold an a-b-c zig-zag down followed by 5 waves up. Thus, the a-b-c irregular flat [up] seen unfolding since October 28th would be labeled wave a of 2, an a-b-c zig-zag [down] wave b of 2 and five waves up wave c of 2.

Second, unlike early-October when the Dow Jones Industrials similarly led all other indexes into new high ground, this time around could prove more foreboding. Were the above scenario to unfold, then broader indexes like the S&P 500 would fail reaching new highs, post-March bottom, whereas the Dow Industrials probably would again set a modest new high (during formation of wave c of 2 in $SPX), much like it alone did today. A disparity like this would represent the last nail driven into dead equity's coffin.

Right animal spirits necessary for maintaining a sustained advance should have NASDAQ leading the way higher, not the widely held Dow 30. Trouble is right animal spirits had a stroke last year. And now, leading the Dow 30 higher, what remains of animal spirits is showing all the signs of an impending, massive heart attack. There will be no safety found in these most widely held issues as the gargantuan mountain of debt being piled on to mask the financial system's bankruptcy fails to deliver any lasting, meaningful improvement in the physical economy's performance. Absent this, large sections of this debt mountain will crumble, and so too all equity likewise will be taken out and shot.

So, disheartening as today was, there simply is no good reason for backing down one wit from the long-developing case strongly suggesting that, in the grand scheme the stock market's collapse appears imminent...

Fast Money
* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!


archer said...

I'm very taken with your analysis, and independently (but glad to have the confirmation) went net short, and perhaps not as wisely, lightened up on my anti $ bets (on the theory that while the greenback is clearly a long term sell, a dollar short right now looks like a very crowded trade, and a meaningful stock market downdraft is likely to be accompanied by a dollar bounce, perhaps bigger than it "ought" to be by virtu of shorts getting out of the way.)

My concern now is that there appears to be a concerted effort to keep the party going. Some investors I know believe if they can keep the market aloft through Thanksgiving, it will be even easier to push it around on the low year-end volumes (recall last year, for instance). Can you address this in a future post? Thanks!

TC said...

I am not so sure the same correlation we saw last year with a collapsing stock market and a rocketing U.S. dollar is likely this time around. Rather, a mass dumping of Treasuries (whose effect would rocket interest rates) and a commensurate dollar collapse might instead be in store. After all, our nation's third largest creditor (Great Britain) is on the ropes and fast approaching a moment where their "friendship" might be forced to show its true colors. So, be careful.

To address your year-end concern, consider the volume trend throughout the course of the year... During the first two months while stocks were tanking volume was increasing every step of the way lower. Granted, some of this selling came from weak hands. Yet might the larger portion of it possibly have come from those strong hands who endured last year's throttling only to add to the misery once long-term capital gains could be locked in at a time when capital gains taxes could be deferred until 2010? If so, then what's to stop this group from securing further, long-term capital gains now that their remaining position has appreciated in value over the remainder of the year since bottom?

True, at this point it might stand to reason that strong hands would defer any significant sales once again until January. Yet there has been some interest over the past three months keeping a lid on every advance to nominal new high ground, apparently slowly bleeding the interest whose year-end actions you fear.

TC said...

I would like to add in substantiation of my above stated hypothesis supposing strong hands have been dumping shares all year long is the fact that volume spikes over the duration of the post-March bottom, counter-trend rally have been occurring at times when bullish interest was most heightened (i.e. at the peak of respective third waves). Consistently following these volume spikes have come brief bouts of selling, demonstrating buyers at these peak are weak hands, thereby implying sellers are strong.