A Date With Doom: MARKET CRASH LOOMS ~ The Risk Averse Alert

Friday, March 25, 2011


Despite contrary appearances, Christmas is not just around the corner. Volume as light as during the pre-Christmas 2010 period — a time of year when trading typically is subdued — confirms yet again that it is not a broadening long interest propelling the market higher (as would be the case in a healthy bull market whose advance is likely to continue). Rather, increasing restraint among those already long — be they holding on for dear life, suckers for the "global recovery story," or both — in large part has been the force behind the market's advance, increasingly so, particularly over the past 18 months.

One seems hard pressed not to imagine that, following 2008's heart attack the need to migrate risk higher up in the capital structure — this out of sheer prudence — would become acute. Seeing an increasingly static long interest persisting despite many a contrived (CME) goose higher in the market confirms this dynamic. Thus are stocks vulnerable to simply falling of their own weight.

Indeed, the market's technical state continues strongly supporting this probability...


Consider, first, relative strength (top panel). During the market's late-February, early-March bounce RSI maintained a buy-side balance (above 50) while momentum (bottom panel) continued fading (although still registering on the positive side of its balance). Thus did selling restraint demonstrate denial of pending trouble. This is particularly noteworthy on account of abundant technical weakness displayed at the market's top on 2/18.

Then, last week, as the market fell to a new low off 2/18 top, RSI smartly confirmed this move. In the process, too, momentum accelerated lower and, indeed, was taken into the negative. Growing underlying weakness thus was confirmed by both measures.

Again, this follows on the heels of a multi-month advance in the stock market whose technical foundation has been specious at best (a point of fact exposing belief in the "global recovery story" to be woefully shallow), with no shortage of measures persistently deteriorating right up to 2/18 top. This critical matter of circumstance raises odds that, the market is on the verge of collapsing.

Now both relative strength and momentum (without so much as any positive divergence registering at last week's bottom) have come right back into balance. This, of course, yet further demonstrates denial of pending trouble.

Seeing both measures suddenly reverse upward without any indication registering concern that, further decline might yet ensue reveals how complacency rules — fearlessness — as is generally true right up to the moment the market comes unglued.

NYSE McClellan

The very same is revealed by a remarkable surge in relative breadth accompanying the market's lift off last week's bottom. Again, seeing this occur following months and months of persistently building weakness, the likes of which was further confirmed last week, only more perfectly sets the stage for the market's upcoming unraveling.

For this week's very suspect start (entirely CME-driven) and pathetic follow-through to result in a further, upward shift in relative advancing breadth without any hint of trepidation as otherwise might have been displayed following last week's selling, well friends, this is a gift. Complacency is so thick a crash probably is imminent. In fact, I don't think one has to go out on a limb to give an 80% probability to the likelihood that, a 25-40% decline in major indexes is slated to develop over days immediately ahead.


Taking a longer view of the NYSE Advance-Decline differential we find the relationship between its 10-day and 200-day moving average just perfectly poised for a date with doom.

As a matter of fact, I was thinking today: given Bernanke's criminally fraudulent hacking away at excess capacity throughout the globe, what better way to get rid of that excess existing in the financial realm than to take out before the end of the first quarter (Thursday) those many high-profile bulls tripping over themselves these days with sophistry so thick as to possibly offer what might be the only way remaining to safely entomb Japan's damaged nuclear reactors? Their names are well-known. Their number is countless. Suckers every one...

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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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