A Moment of Truth ~ The Risk Averse Alert

Thursday, July 08, 2010

A Moment of Truth

First, a brief word on "fear." When investors truly are fearful, what would they naturally do?

That's right, they would sell their holdings upon any rally offering a better exit price.

And as fear were thought to be increasing, even to some extreme among a wide swath of interested observers, what should one expect then?

Right again! The volume of selling should increase during rallies.

Yet quite the opposite has occurred during advancing periods for fully one year now. So, what must one conclude?

Correct! Fear is in no way ruling the day. Rather, complacency abounds.

But what of fear instead is being reflected by little willingness to press long positions? Well, why do you suppose the European Central Bank has been belatedly forced into fantasy land with their version of a banking system stress test? Do you think it might have something to do with confidence melting faster than ice cream on a hot summer day?

Now, if this stress test portended convincing substantiation of fundamentally healthy, European bank balance sheets, then do you suppose those firms responsible for the buildup of assets on these balance sheets — companies like Goldman Sachs — would be seeing their shares accumulated in anticipation of more solid business coming from these banks whose soundness is stress test assured?

company chart (GS)

Finally, regarding the cruel misdirection precipitating fear of a "double dip recession" ... would a European bank stress test be at all needed were there not real concern over outright collapse of the global financial system? Obviously, no stress test would be necessary had implosion of the shadow banking system three years ago ushered in some mere inventory adjustment typical of recessions, rather than a fearsome systemic contagion whose destructive impact threatens total breakdown of a grossly leveraged scrap heap once the greatest industrial engine on the planet.

Thus, talk of a "double dip recession" rather reflects a psychological operation intending to keep suckers holding their positions, so strong hands might continue their slow-drip distribution of shares while there's still a market.


Maybe I was a bit rash supposing yesterday's surge was something other than what had been expected. Maybe I was steamed about missing a trade I rather thought might take a day or two more to develop. Maybe I overestimated selling pressure needing to be exhausted prior to any significant turn higher.

Certainly not missed, however, is some clear sense about how foreboding has been the technical damage since late-April top. Yet notwithstanding this, some are betting their lives the lows for 2010 already are in.


During today's Fast Money Halftime Report the Bullish Percent Index briefly was presented in remarks claiming the measure reveals how "oversold" the market is right now. But is this really so?

Last week's market decline to new lows, post-April peak were confirmed by this measure. Were the market "oversold," we might have seen some divergence here instead.

More telling, though, is the fact this week's solid market reversal has proven not nearly as positively impactful to the Bullish Percent Index as was the case when the market turned higher in early June. Indeed, the effect has been rather pathetic.

So, what is this saying?

Well, those interests who going into the start of this week's trading were being challenged to step up to the plate and provide a bid — who on Tuesday were slapped in the face following a successful start to the day, forcing them to provide a more determined bid on Wednesday — have operated on a relative handful of issues in order to protect their options exposure that, as of last Friday, was being imminently threatened.

Now the question is whether a further challenge to these positions might be made before next week's options expiration. There's opportunity (potentially) to some other interest wishing to seriously press this exposure as a means of offloading a whole lot more dead equity than might be slowly shoveled down Doug Kass' throat. Something of a moment of truth might be in the offing.

Fast Money
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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.

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