Cheap on the Way to Cheaper ~ The Risk Averse Alert

Thursday, September 09, 2010

Cheap on the Way to Cheaper

Endlessly we hear about there being so much "pessimism" underlying present financial conditions, but all we see is rampant complacency. In fact, this notion of "pessimism" really appears mistaken — a confused conclusion about altered enthusiasm for the financial system's claimed resiliency existing higher up the capital structure.

Complacency in the stock market clearly has been registered by diminished volume during periods in which the market has been rising over the past year or so — a phenomena persisting to today. Were it not for players willing to hold positions strictly on technical grounds rather than liquidate their stakes, it seems unlikely what little buying interest we have seen mustered over the past year (and all the more recently) could keep the market levitated in such a manner as has been the case.

Here we have analyst after analyst claiming stocks are "cheap," yet none of this is drawing in added long interest, as testified by persistently diminishing volume. Those holding, then, apparently are patiently waiting for the world to recognize this "value" they see.

The question is when? Under what conditions will the so-called "risk on" trade finally become firmly established once again ... like the good old days?

Well, no one can say. Nevertheless, it might be certainly concluded the moment is not right now. The last thing this market needs is a strapped debtor with an honest streak! Are you kidding? Today's securities-based finance was built on the same powder keg (but bigger) made the legacy of the 1920s: unchecked leverage that worked brilliantly ... until it didn't.

And now an antsy Englishman confirms yet again: unchecked leverage that once worked brilliantly ... ain't workin' any more.


Risk on? Not today, but thank you for revealing it is not being increased as much as it might otherwise appear.

Given increasing difficulties surrounding issues of risk and yield (these ultimately determining performance) the "cheap" equity trade thus appears the same easy mark as ever over the past thirteen years. Indeed, their vulnerability could be only the greater now that strong hands have moved their risk higher up the capital structure (showing no sign yet of any change of heart toward the efficacy of this position).

Being that what's largely left now in the equity pool are sharks with a whole lot of liquidity chasing what little yield is available, might not a rush for the exits, then, be the easiest thing to manufacture via some trade seemingly ahead of the curve, because it is the curve itself? How hard could it be here to press against the wall that long trade presently believing stocks "cheap," thus making these folks double up (or prospectively doubling those believing much the same)?

The point is if no increased, long equity bid is being motivated here — even if only for technical reasons — then the path of least resistance lives on the short side. It's that simple.

Fast Money
* * * * *

© 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.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!