1980 No More ~ The Risk Averse Alert

Wednesday, September 29, 2010

1980 No More

Back in the day — the early-1980s — the Federal Reserve was a cloistered, secretive body whose deliberations by and larger were kept a mystery. Today the Federal Reserve is a bunch of blabbermouths whose disparate opinions among voting members are made widely known without delay.

This contrast is raised because, back in the day a great opportunity in the stock market lied ahead. Today, contrarily, an historic reckoning appears at hand, and bigmouths like the Fed chairman and Boston Federal Reserve President, Eric S. Rosengren, only make obvious the fact that, deep-seeded, fundamental systemic problems are the ultimate source of the stock market's vulnerability.

Back in the day there was wide latitude for Fed accommodations of every sort (including greater openness). Today, however, the only latitude the Fed maintains is power to publicly engage one incompetent blunder after another, the likes of which presently are being manifest with threats to monetize dog droppings if this might enliven animal spirits among a much larger mass of captive interests than existed thirty years ago.

This subtle observation is something both young and old investors alike probably are well-served to appreciate. Sometimes we get caught up in the moment and fail to step back and consider our radically changed "cultural landscape." History is replete with contrasts that, in hindsight demonstrate changed states as representing anything but progress — indeed, quite the opposite. This is one such moment. The reality of it is obvious, although not yet widely acknowledged.

Enter a mind stuck in the past (but one among majority interests)...

If only we were in the midst of a bull market! Then, this report of short interest building in stocks leading the charge during this month's exceptional rally might mean something different than it does.

Now, let's think about this. First and foremost, whether or not a short squeeze is behind this month's rally is irrelevant. Stocks most certainly are not being accumulated, and this is all that matters. Volume (or lack thereof) plainly reveals this fact.

Likewise, diminishing volume — the perpetual trend since March '09 bottom — demonstrates that, hope-filled suckers, bruised and battered, largely are holding their positions rather than increasingly offering them up for sale. The market's levitation over the past year has been achieved as a result of this, allowing time for wiser players who rightly fear the moment opportunity to reduce their exposure and raise capital.

(Not long ago I made the case claiming their distribution was done, and I am standing by this conclusion.)

One obvious question not covered in the above report is this: who are these shorts? Well, their names we cannot know, but the depth of their pockets is plain. These are not weak hands. Were they, would their number continue rising while the market's levitation persists? Of course not.

So, cite an increase in short interest all you wish. That strong hands likely are building it supports the view that, this is not a bull market. These positions aim to profit during the approaching train wreck and, as is being amply demonstrated, are not subject to being squeezed.

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.

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