Larry Kudlow(!) Becomes a Cautious Bear ~ The Risk Averse Alert

Wednesday, May 26, 2010

Larry Kudlow(!) Becomes a Cautious Bear

Even before Larry Kudlow tonight called himself a "cautious bear" my mind already was firmly made up ... convinced the market's worst for now probably is behind us.

But thanks for the heads up, Larry! Like Gregg Hymowitz in March 2000 singing the "new era" song for tech, I shall never forget Kudlow's bullish bent in 2008, clinging to that dogma of his like a child with a brand new pet.

(Don't get me wrong. On high-level matters such as enabling the entrepreneurial spirit I appreciate Kudlow's interjection encouraging thoughtful consideration. But to suggest gutting Medicare and Social Security is an act wherein government could fulfill its mandate to "promote the general Welfare" is a position I find particularly offensive. Even the mere suggestion is a stark reflection of the nation's sickly economic health ... which is where discussion should begin and end.)

Regarding the stock market's health I am back to thinking that, but the first wave down from late-April top presently is unfolding. Recently, the view has been that, the first and second waves down from top already have unfolded and the third wave down was but beginning to form (since Thursday, May 13th).

Granted, that possibility still remains wide open ... and could lead to a rapid collapse over days straight ahead. Yet I suspect a swoon back toward March '09 lows instead might be delayed. Indeed, the technical case characterizing many indicators as "oversold" begs serious consideration here.

So, following is a prospective view of the first wave down from late-April top...


Relative strength's resiliency — presently diverging from its May 7th low, albeit ever so slightly — supports the Elliott wave count indicated above. Likewise does volume, which in formation of wave v of 1 is demonstrating selling exhaustion relative to wave iii of 1.

This frame of reference returns to a previously discussed view, and foremost was motivated once I took a gander at Bullish Percent readings on both the NYSE and NASDAQ...


The present, "oversold" state of the relative strength (RSI) of both Bullish Percent indexes — at absolute levels from which has reliably followed a rising market — tonight brought a change of heart returning my Elliott wave view to that indicated above on the chart of the S&P 500.

In fact, were it not for technical confirmation of the market's decline to date presented via the NYSE and NASDAQ McClellan Oscillators, I might otherwise suspect wave v of 1 completed yesterday...

NYSE McClellan
NASDAQ McClellan

It appears these two measures (presently improving) are setting up for a divergence to register once the NYSE and NASDAQ Composite Indexes fall to new lows, post-April top, sometime over days ahead. Once this occurs — notwithstanding the fact establishing a "bottom" here could prove a prolonged affair — wave 1 down from late-April top probably will have completed.

Now, allow me to draw your attention to profound weakness, relatively speaking, presented by every McClellan measure applied to both the NYSE and NASDAQ. To my way of seeing things this validates an Elliott wave view supposing there is great risk of additional selling over months ahead.

This view likewise is bolstered by current readings of NASDAQ's Bullish Percent Index relative to the NYSE's. That, suddenly, a greater percentage of NASDAQ-listed issues have bullishly configured point-and-figure charts (when for many months NASDAQ's Bullish Percent Index was lagging the NYSE's) substantiates my view that, the consensus believes tech does not need a functioning banking system to thrive. I beg to differ. NASDAQ's "leadership" here is as ill-placed as it was in August 2008. Thus, we find further indication suggesting there is great risk of additional selling over months ahead.

An outlook supposing that, March '09 lows could be challenged sometime before year-end indeed possesses considerable technical substantiation...

Fast Money
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