The Rabid Bite of a Dead Dog ~ The Risk Averse Alert

Friday, September 17, 2010

The Rabid Bite of a Dead Dog

Returning to last night's OEX monthly chart...

OEX monthly

RSI 50 — essentially yesterday's "support" (see 1988-1990+), now seen "resistance" — could prove a pivot point for some months and years ahead, much like the late '80s and early '90s. Thus, OEX support at March '09 low might persist, much like OEX resistance at August 1987 peak did.

Yet then again...

Fear of a credit bubble's unwind rather likely will operate differently upon equity than did confidence during that bubble's effortless inflation. Indeed, we vividly see this dynamic already at work in bonds and gold.

So, a stock market collapse, indeed, could be imminent, putting the ultimate objective for the corrective wave unfolding since October 2007 squarely in the crosshairs. A sub-200 OEX could be reached sooner than most imagine. The question is when might the throttling begin?

NYSE McClellan

On one hand, a still positive McClellan Oscillator (its ominous divergence from August peak notwithstanding) suggests the market's levitation might persist.

On the other hand, the McClellan Oscillator twice since late-May bottom was on the positive side of its balance, yet the market nevertheless turned south and took the oscillator into the negative.

Now, with the market prospectively nearing a decisive turning point the measure of selling restraint thought largely behind its advance so far this month might persist despite a weakening McClellan Oscillator. A useful point of reference here is seen during the week or so leading up to late-April top.

OEX 5-min

Seeing today's lift to a new high for the month confirmed by 5-minute RSI, there is reason to suppose the market's levitation could continue a few days longer, and that should about do it.

With 51% of individual investors surveyed by the American Association of Individual Investors now bullish, and with NASDAQ this week outperforming the NYSE by a couple percent it appears suckers are convinced that, somehow, someway, the credit bubble blown over the past couple decades can be sustained indefinitely. There even was talk of swapping Irish sovereign debt for equity. But why not just swap it for a pot of gold at the end of a rainbow? Might as well when prospects for further leveraging the globe's fantastic mountain of financial claims are zero.

This fact — the fallout from shattered confidence — apparently is lost on just about everyone. Few are figuring it into their forecasts. Cite all the lovely tails they like, the dog is an ever-expanding indebtedness, and it is as good as dead.

Fast Money
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