The End of Fantasy ~ The Risk Averse Alert

Wednesday, November 03, 2010

The End of Fantasy

Forget about the bankrupt Fed. As soon as our financial system's former masters of the universe — now kings of denial — are forced to face up to rampant, systemic fraud existing at the foundation of a wide swath of residential mortgage backed securities, the Fed's $600 billion will be blown out in a New York minute or less via highly correlated derivatives risk.

Ditto Congress. A reinvigorated Republican party desiring to downsize government — this at a time when fast becoming the obvious root cause of a collapsing U.S. economy, a disenfranchised citizenry, and an out-of-control Fed are misguided policies facilitating enormous crimes in the financial sector ... policies put forward on the watches of the same old tired, Republican leaders in the House and Senate — might better whistle past the graveyard if the party's so-called discernment of the electorate is cause for making a weak and inept government even more so.

Time for promoting fantasies is expiring. The world outside the U.S. simply is not willing to play along, while at the same time funny money no longer holds power to steal valuable, physical assets. A great discrediting is gaining steam, and there is nothing left for incompetents to do but continue acting incompetently.

Now, what about today's real surprise? Of course, I am talking about the NASDAQ Composite exceeding its April 2010, intra-day high. What of it? How does this alter my near-term view and beyond?

Despite the fact this marketplace for more speculative U.S. equities has been marching to the beat of a different drum for quite some years now, this fact in no way diminishes the significance of the NASDAQ Composite index today setting a new intra-day high, post-March '09 bottom. Indeed, a couple new possibilities enter into the picture as a result.

First, the Dow Jones Industrials Average might join NASDAQ in new high ground, post-March '09 bottom before the end of the market's rally since late-August is reached. No big deal, really. Ditto if other major indexes do the same. Still forming since late-August across all major indexes (including the NASDAQ Composite index) is seen wave c of an a-b-c corrective wave [up] from late-June.

Second, there now is a better chance collapse taking out March '09 low will be delayed. Since this is the more consequential possibility resulting from today's NASDAQ surprise, let me elaborate.

To begin have no doubt: a swift, calamitous decline still appears imminent. The market's building technical weakness in no way whatsoever is diminished by lowly NASDAQ's surprise today. Case in point taken right from the horse's mouth...


Plainly, the gap separating NASDAQ's cream from its crap only is widening. Here the NASDAQ Composite is above its April peak and fewer than one-third the number of NASDAQ-listed issues setting new 52-week highs in April are doing so now. Pathetic!

True, selling threatening to upset the applecart continues to remain restrained. Yet there is absolutely no indication long interest on NASDAQ is broadening. Quite the contrary. Were animal spirits coming to life — were anything to do with the Fed and a Republican Congress, indeed, positive — then, surely, some indication of this would be showing up somewhere under NASDAQ's covers. There is nothing of the sort anywhere. Thus, NASDAQ finds itself vulnerable to a raid, and therefore too does the NYSE.

Again, a steep decline continues to appear imminent. Underlying technical weakness across the spectrum of measures presented here from time to time is conclusive. Nothing — and I mean not one thing — challenges this assessment. Although a collapse below March '09 lows could be delayed as suggested above, an imminent decline putting March '09 lows in the cross hairs is by no means out of the question.

Let me just say that, an a-b-c corrective wave from November '08 bottom to April 2010 top remains unaltered. The only thing changed today by NASDAQ's surprise is the wave count from April top. It appears another a-b-c corrective wave (this time down) is forming. (Equally thought possible prior to today was the prospect that, five waves down from April top might unfold ... a prospect made less likely by the NASDAQ Composite's move to new high ground, post-March '09 bottom.)

So, wave "a" [down] unfolded from April top to late-June bottom, and wave "b" [up] is just about completed. Next to unfold, then, is wave "c" down.

Following this three-wave decline from April top could develop the mother of all short squeezes ... particularly on NASDAQ. More on this sometime in the not too distant future, as I expect the coming wave "c" down (putting March '09 lows in the cross hairs) to be much like all other "c" waves since October 2007 top: fast, massive and beyond what most (including myself) expected.

Fast Money
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