Building Up to Spectacular Collapse ~ The Risk Averse Alert

Monday, December 14, 2009

Building Up to Spectacular Collapse

How might one best summarize the character of today's market?

Well, first it appears the fundamental backdrop is one saturated with complacency. This has made for moments over the past 4+ months wherein stocks, after having begun to fall of their own weight and subsequently goosed via well-orchestrated, CME-driven short squeezes (occurring at the open of trading in particular), could be made to seem still attractive, thereby detracting any pressing concern about the viability of the market's advance off March bottom.

Over recent weeks, however, there appears some difficulty in generating any kind of meaningful follow-through to these attempts at keeping the market levitated. Indeed, the tendency causing stocks to begin falling of their own weight appears to be setting in ever sooner. The task of feeding such complacency as is restraining any concerted wave of selling apparently is becoming more difficult.

On one hand, this stands to reason given how far the market's counter-trend rally off March bottom has come. Surely, there is good reason among the bullish camp simply to wait for a pullback before allocating fresh capital to stocks, and that is why it is becoming more difficult to draw in new money and drive the market decidedly higher.

Yet on the other hand, it appears any meaningful pullback is being purposely forestalled. Trading off late-October's bottom most emphatically reveals this. Nevertheless, that the bulk of the market's subsequent advance occurred on notably light volume speaks of an entirely contrived move that came about more or less because complacency (which is not to be confused with fearlessness) is holding in check any concerted wave of selling.

So, what could this dynamic be revealing about likely prospects? Quite simply, the probability of sudden, spectacular collapse is being raised. Considering abundant evidence demonstrating the market has not been climbing the proverbial wall of worry, there is every reason to believe that, once further attempts to squeeze prices higher are definitively proven futile (much as is now becoming evident), the market likely will crater rapidly in a self-feeding downward spiral.


Were the fifth wave of wave C off March bottom forming a rising wedge (tentatively delineated above with green lines), the likelihood of spectacular collapse would find technical basis in the realm of Elliott Wave analysis, as a rising wedge, once completed, typically results in rapid return of gains made during its unfolding.

One thing here is certain. Underlying technical weakness continues building. Yeah, yeah, yeah, but indexes keep rising, you say. Again, though, this condition likewise substantiates an increasing probability of spectacular collapse kicking off the market's anticipated decline slated to take major indexes much, much lower than was reached in March.

Hat tip to those hopelessly insolvent, major banking institutions floating massive secondary offerings, as well as the New York Stock Exchange whose short-sightedness allows this. Today, these bodies are making it incredibly easy for anyone with eyes and a functioning brain cell to realize equity is toilet paper ... trash ... DEAD MONEY.

Something else to think about, too...

If this is how shareholders are treated, how much less concern could there be for depositors?

Fast Money
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