Complacency Laid Bare ~ The Risk Averse Alert

Friday, December 04, 2009

Complacency Laid Bare

Last month a worse than expected employment report met a monster rally, much to the consternation of fantasy land observers who equate falling employment with deteriorating economic conditions such as feed declining stock prices.

This month a better than expected employment report met a monster give-back (following an easily predicted, CME-driven bleed of dumb-money fund managers dim-witted enough to welcome the news in this still grotesquely leveraged environment).

What gives?

Well, people cost money. And when you've got a mountain of debt service, labor costs have a way of eating your limited financial resources. Better your company trim its labor force as much as possible, freeing up capital needed to pay your liabilities.

So, assuming corporations are able to maintain currently depressed revenues only if they refrain from further job cuts (which conclusion one might make from today's employment report), the message that went up at around 9:45 a.m. EST today was, "We're screwed! SELL! SELL!! SELL!!!"

Oh, and Mr. President...

During your town hall meeting today in Allentown, PA you were asked whether enough had been done to restore regulatory oversight of the financial system. Without hesitation you correctly answered, "No!" So, what gives with that incompetent Treasury Secretary of yours who believes there's no need for a return to Glass-Steagall?

And wow, Bank of America's record secondary offering — an act of Team Fraud accounting for today's notable bump in the volume of shares exchanged on the Big Board — plays right into circumstance making fund money "dumb," as index funds in which BAC is a part had no choice but step up and buy in order to maintain balance among all issues in these funds. Nice work (if you can find it)!

Indeed, this is a perfect segue into compelling evidence the market's advance off March bottom is frightfully contrived and doomed to collapse...


Another manifestation of the "wall of worry" is presented via put option hedging of long equity positions. The greater is apparent worry underlying buying support at a bottom, the more put option hedging will be in evidence, increasing the likelihood support will hold for a time.

Contrarily, the greater is apparent complacency underlying buying support at a bottom, the less put option hedging will be in evidence, increasing the likelihood support will not hold. These are instances you see highlighted above.

Now, what I am stating here is a broad generality whose greater meaning is found in the context of Elliott Wave constructs seen unfolding. Thus, there is nothing confusing about the fact that, although long equity positions have been relatively less hedged since March '09 bottom, this has yet resulted in the market falling apart and taking out March lows.

Following the market's peak in October 2007 you see a couple instances above where, at the start of brief counter-trend rallies in which long equity positions were only slightly more greatly hedged than has been the case since March '09 bottom, soon afterward a renewed bout of selling ensued. You might think that, with even less long equity position hedging such as we have seen since March bottom the market already might have further cratered on several occasions. Yet that it hasn't speaks for the Elliott Wave form presently unfolding.

What is it? Oh yes, wave C of (B). A c wave is an Elliott third wave, typically the most dynamic ... as in possessing a greater measure of strength and longevity. And a b wave ... in whose unfolding the analyst typically is led to conclude "something's not right" ... as in a monster advance finding long equity positions remaining relatively unhedged every step of the way higher ... demonstrating a super-sized dose of complacency among the investment community.

You probably have been hearing an ear full from analysts chirping about a bull market. They're dreaming. And their complacency — unhedged — is laid bare for all to see.

Fast Money
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