Substantial Downside Risk Recognized ~ The Risk Averse Alert

Wednesday, August 31, 2011

Substantial Downside Risk Recognized

The S&P 500's fourth straight month lower is in, making today's "Word on the Street" a logical follow-on to yesterday's perspective on equities insurance (i.e. options)...

Seymour, usually more measured and biased toward a glass half-full perspective, is apoplectic, openly describing today's trading environment as "rigged." Another word for unsustainable?

I agree the market is troubled, while being among a decided consensus of active interests is little concern. It's well enough underlying softness is widely felt. This should put a lid on any prolonged advance, as well as a floor under the market, at least for the moment, biding time to confuse even those fearful.

Thus, prospects over days ahead presented yesterday, finding the market holding up during the initial portion of its renewed turn lower, appear supported both by the market's technical, as well as psychological state at the moment.

Duly noted, though, is a panic's risk amidst shattered nerves — a panic like no other in anyone's lifetime, sure to feed on itself, prospectively making today's index levels lofty, indeed, and possibly not to be seen again for decades to come. There's no mistaking this credible, worst case scenario still remains far from the lips of the consensus whose present fear I share. So much, then, for too much bearishness here. Most are not bearish enough.

One thing standing out in the market's bounce off this month's bottom is leadership U.S. trading is displaying in contrast to European and Asian counterparts. Still, this dog has a tail whose euro-zone lynch pin and banking sector more generally appear diseased. So, thinking back to 2008, when "cures" were not forthcoming as trouble entered the breach, what did we learn about shock therapy?

And just to review, this is not 2008 because Lehman Brothers supposedly was a weightier dilemma to then contemporary regulatory arrangements, whereas now an entire continent can blow, and some triumvirate of central bankers named Larry, Curly and Moe has got the situation under control, this on account of legislative changes serving to institutionalize the legitimacy of the disease that brought 2008's "liquidity crisis" while accomplishing little else (save trapping lenders of last resort). No, it's not 2008. It's much worse now. Confidence is shattered.

That's why a retest of August lows might come sooner than most right now appear willing to suppose. We might be looking at an a-b-c wave down to $SPX support at 1050-ish over the next couple weeks. The climate in Germany certainly appears increasingly ripe for shock therapy.

Fast Money
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