Critiquing Investment Advisor Sentiment in a Bear Market ~ The Risk Averse Alert

Wednesday, February 10, 2010

Critiquing Investment Advisor Sentiment in a Bear Market

There is no shortage of analysis framed in a bullish mindset. You see this, for example, in discussions of sentiment. Much more often than not the viewpoint given takes perspective in a bull market's frame of reference.

The flaw in such analysis, of course, is in the assumption yesterday's troubles could not possibly multiply. Little, if any, thought is given to dynamics one might reasonably expect in a bear market...

Investors Intelligence

From an Elliott Wave guy's perspective the fact that, the ratio of bullish-to-bearish investment advisors recently reached a high exceeding best levels back in 2007 when major indexes traded substantially higher is both significant and extraordinarily bearish.

Per sentiment's present pullback ... well, on one hand recovery seems a reasonable expectation here. Yet on the other hand look where the bull-bear ratio stood in May 2008 ... and then again in August 2008. Not exactly a case of making lemonade when sentiment was turning up lemons.

Bottom line: this most certainly is not 2007. Thus, although sentiment's recovery along with the market might appear a reasonable expectation, a sudden return to the basement on both accounts is by no means out of the question.

SPX 5-min

Judging by price action in the industry benchmark S&P 500 following last week's throttling, recovery does not appear imminent. Rather a mere consolidation of last week's losses appears to be occurring. This suggests selling thus far endured since mid-January top has yet been exhausted.

Certainly an a-b-c zig-zag up from last Friday's bottom unfolded to end at yesterday's peak. Yet further corrective action appears to be developing since. Thus, correction of last week's losses resulting in a relatively narrow, sideways trade could extend into next week.

Given how wave 2 formed an "irregular flat," wherein wave b of 2 fell below the end of wave 1, one might rather expect wave ii of 3 to alternate from this. As such, then, bottom to wave i of 3 should hold during formation of wave ii of 3.

Consider this a gift. Why? Because when last Friday's bottom to wave i of 3 is exceeded, there's a good chance wave iii of 3 will have begun. Opportunity to score some fat 500-1000% or more gain on a stock index option put position likely will rapidly commence.

Fast Money
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© 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.

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