Mob Boss Enters His Own Great Depression ~ The Risk Averse Alert

Thursday, December 03, 2009

Mob Boss Enters His Own Great Depression

One wonders whether Mr. Bernanke even realizes where he might be heading...

Racketeer Influenced and Corrupt Organizations Act

When Senators on both sides of the aisle are vowing to do everything in their power to prevent his nomination from going forward in the Senate ... because he is seen protecting a corrupt enterprise, rather than providing voice (as he should) calling on Congress to clean up such criminal activity as precipitated a profound financial crisis threatening the very survival of the nation ... the die cast for a thorough investigation along lines Ferdinand Pecora pursued in his time gains greater urgency with each day we move closer to November 2010. Indeed, every complex criminal enterprise has its "fall guy" ... and the Ken Lewis incident cannot be helping Mr. Bernanke's cause.

Some might call this politics, yet let's be plain. Mr. Bernanke's claim to have studied the consequences of past financial crises absent any insight revealing how Alexander Hamilton resuscitated a bankrupt Continental Congress (a problem not at all unlike our nation's present dilemma) rather leaves his academic credentials vanquished — more or less discredited at a time when the U.S Treasury is uncontrollably hemorrhaging debt with no end to it in sight. Mr. Bernanke probably never should have accepted the President's nomination because, like Mr. Obama, he probably cannot survive a full term in the current environment.

So, finding every indication confidence among a growing number of Congressional Representatives in status quo arrangements is exhausted, and contrasting this with fantasy-filled analysis proceeding from that more pliant and accommodating, less penetrating financial press ... we have the makings for one wicked collapse precipitated by some "surprise" dwarfing last week's sovereign debt default. The writing is on the wall. As I have said once before, from this point forward shark-on-shark action will be the principle force driving a still grotesquely leveraged casino into the ground.

NYSE McClellan

Something is entirely wrong with the technical underpinnings coinciding with the stock market's drift higher since October. This conclusion is rather plainly revealed by the McClellan Summation Index.

Stepping back from a most reasonably formed — both fundamentally and technically — extraordinarily bearish outlook whose case has been building, unchallenged, for many months, one finds solid basis for projecting an upcoming period of price weakness, such as was presented last Friday.


Price action over the past several weeks, having proceeded along lines projected when I reported "Bill Gross Seen Sweating Blood in His Garden of Gethsemane," is seen conforming to the alternate Elliott wave outlook put forward last Friday.

One thing different you might notice here is the point at which wave v of 3 is seen ending. The reason for this slight modification simply tightens the relationship between price action off July bottom and coincident underlying technical conditions. This relationship was highlighted in October when I reported, "An Exciting Top Sighting" and is characterized by deteriorating technical readings coinciding with a fourth wave's formation versus a second wave's. Indeed, we see much the same technical deterioration over the interim from July bottom revealed in the McClellan chart above.

Furthermore, there is nothing at all set in stone suggesting this recently elaborated, alternate Elliott wave count assigned to the advance off March '09 bottom is more valid than the wave count more often presented here...


Here again is that view. This wave count most emphatically raises the possibility of pending collapse resulting in major indexes finishing negative on the year. Its validity likewise is confirmed by deteriorating underlying technical measures.

However, considering flat price action over the past few weeks, it remains entirely possible wave v of 5 might form a "wedge" — a unique Elliott wave construct appearing in fifth wave positions following a move that traveled "too far too fast." This could result in the stock market maintaining its strained buoyancy over the past few months, possibly leading indexes to hold up through the end of the year.


Much like occurred just prior to the Dubai World surprise, short equity interests today hedged their position to a greater degree than has been the case most pointedly since mid-October. It is uncertain whether this is any more significant now than was the case, say, mid-September, and then again mid-October. Yet that some notable measure of short equity position hedging is occurring following relatively range-bound trading over the past several months becoming even more narrow over the past few weeks might be suggesting power to draw in an adequate number of suckers on the long side is waning, thereby increasing the likelihood stocks are about to fall of their own weight.

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Greg said...


This linked analysis suggests that the DOW could continue up to 11,300 (it closed Friday at 10,388) before the start of the epic downturn that is expected after this bear rally completes.

This is in line with the current stock broker euphoria which pegs the bear sentiment at historic low levels. By the way, note that the current bull/bear ratio on the linked chart is approaching the September-December 2007 levels when this bear market began.

More and more investors are starting to take short positions. Bob Prector with Elliott Wave International advised his paid subscribers to go in 200% all short last week. However, based on the comments from some notable "bear" analyst, the current bear rally could indeed continue through the end of this year and perhaps into March 2010. A further run-up of the DOW would not be good in the short run for anyone with a short position unless they have the guts (and the money) to hang in until the downturn begins. Another 1000 points on the DOW would wipe out most shorts with a 200% position. In fact, the short squeeze caused by even another 100-200 point rise in the DOW would cause an artificial rise in the DOW as a result of the shorts having to buy stock to cover their positions. A look back over the months since March 2009 shows that each time the shorts started to come back into the market thinking it had topped, a short squeeze pushed the market higher resulting in another "bull rally" causing yet more investors to jump on the bull market train out of fear of missing it.

It is looking more and more like we are repeating the fall of 2007 scenario and the big drop may be postponed until March 2010.

TC said...

Hey Greg. Thanks for pointing out the article in the Inflationist ("Using Fibonacci Numbers in Trading to Predict the Market"). I left a comment with that article, so you can read my reaction there.

Wow, that bearish sentiment (16.7%) among investment newsletter writers is something! It's even lower than was the case at the market's peak in 2007. I have been [silently] expecting this, as it is typical of Elliott 2nd waves (or b waves) for underlying technical readings to better those registered before the 1st wave [down] began unfolding. I think it matters less that bullish sentiment has yet to exceed peak readings in '07. This at least shows some investment newsletter writers have enough sense (barely) to temper their bullishness after a 60% advance off March bottom. Yet that fewer bears exist here, after last year's near collapse of the global financial system, whose reality is by no means contrived for the sake of dramatic effect (like might be said of the collapse of LTCM in '98)? Insane! (But in a good way because this goes some way toward confirming my extraordinarily bearish outlook.)

About Prechter advising his subscribers to go short... I thought that, when he suggested earlier this year the DOW was on its way to 10,000, he was too optimistic. I was wrong (because I thought this counter-trend rally would top out sooner than it has). As for right now, the short side appears better hedged than the long side. Likewise, with many observers seemingly supposing December will finish on a positive note, as though this were a natural expectation given December is one of the best months historically (how many times have you heard this recently in the financial press?), I am alert to the possibility the market could be throttled going into year end, as I have been suggesting.

stephen said...

This at least shows some investment newsletter writers have enough sense (barely) to temper their bullishness after a 60% advance off March bottom. Yet that fewer bears exist here, after last year's near collapse of the global financial system, whose reality is by no means contrived for the sake of dramatic effect.