Stage Set for Chaos ~ The Risk Averse Alert

Friday, May 21, 2010

Stage Set for Chaos

First, on failure of the U.S. Senate to even so much as debate the Cantwell-McCain Glass-Steagall amendment to the Restoring American Financial Stability Act of 2010 passed yesterday...

Possessing all the teeth and sanity of Family Guy's "Herbert" the Senate bill, like its companion passed in the House, rather clearly announces: get ready for bank runs.

Building upon a foundation of what already appears regulatory complicity facilitating blatant financial fraud over recent years, so-called FinReg possesses all the confidence-building allure of a mushroom cloud. Nothing ultimately bolstering stability is secured. Rather, ingraining a well proven means for precipitating chaos is the route "reform" is taking.

And for what? Assets to be had on the cheap, Lehman style, gaming a vulnerable system bankrupted by the same instruments "reform" otherwise further legitimizes.

One great difficulty is imagining how anyone in the know believes radically game-changing, "unintended consequences" might somehow be avoided pretending what's being reformed is not already hopelessly insolvent.

Be that as it may, so long as such denial prevails, then bank runs are a cinch. Legislation failing to restore confidence is destined to have this effect.


What's this? Is Uncle Benny's liquidity gusher running dry? Well, then, it's buhbye carry trade ... and hello bank runs. Given a glaring failure of the "flight to safety trade" to light up the safest of them all this week — and this in the midst of increasingly stressed credit markets — the crush for capital appears quite real.

Lender of last resort capacity to expand support (as it must) of a hopelessly insolvent arrangement evidently is bumping against physical reality. Further support needed to maintain the illusion of solvency of massively bloated liabilities simply escapes both the economy's ability to generate real wealth, as well as political feasibility to continue gutting the general welfare.

FinReg is a reflection of this reality. It is the free market preparing for rapid consolidation. Apparently, Congress doesn't "get it." However, Germans do.

Yet might even these be but playing their expected part in the presently unfolding, global drama? To wit, what is breakup of the Euro-zone when chaos facilitating asset grabs is the desired goal?


There are interesting technical similarities presently with the September - October 2008 period seen via the measure of S&P 500 momentum (MACD in the bottom panel).

First, momentum's current rate of descent is rivaled only by this prior period. Likewise its present dive, just like then, is occurring following a declining momentum trend marking successive S&P 500 peaks.

(That in the present instance declining momentum peaks occurred as the S&P 500 was rising, as opposed to falling back in '08, is thought possibly a mitigating factor lessening the ultimate impact of the market's presently unfolding decline.)

Then, consider present comparisons to the September 15-30th, 2008 period in the immediate aftermath of the Lehman Brothers bankruptcy. From May 6th to present we see a remarkable likeness featuring volatile swings in the S&P 500 failing to reverse a strongly negative momentum trend. This prospectively projects a rather ominous decline in the S&P 500 over days straight ahead.

The question right now is whether relative strength (top panel) might first improve a bit (although likely remaining biased to the sell-side, below 50) before making a challenge of its worst levels registered in October 2008 ... (and in so doing confirming the likelihood of still further selling ahead targeting levels last seen in the 1980s).

SPX 5-min

So, for now let's suppose the market's post-May 6th bounce formed wave c of 2 of five waves down from April top, and wave 3 has begun to unfold. Not to be flip flopping on the wave count, but this point of view well fits a prospectively dire, near-term outlook projecting a challenge of March '09 lows sooner than most observers believe likely (or, indeed, even think possible).

Just where in the course of forming wave 3 down the S&P 500 presently stands is difficult to say. Relative strength improvement indicative of buying support such as has been lacking over the past couple days appears to have begun developing today, however modestly. It is unclear, though, how this week's relatively less extreme RSI lows should be construed following on last Friday's deeper RSI dive to the sell-side. Nevertheless, that each new low the S&P 500 set this week was matched by a new RSI low suggests still more selling following on this week's decline lies ahead.

Fast Money
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