Contrasting Trepidation and Fearlessness ~ The Risk Averse Alert

Tuesday, October 25, 2011

Contrasting Trepidation and Fearlessness

That an unduly fearless, bullish consensus has developed during this month's spectacular advance — revealed yesterday via the NYSE McClellan Oscillator — is an inescapable conclusion but furthered by the NYSE Bullish Percent Index.

What's more, this technical measure also provides insight into such underlying trepidation in the face of an advancing market as I indicated yesterday is presently absent, but otherwise should be displayed were risk of the market's further collapse thought diminished or passed.


We'll be contrasting coincident behavior of the NYSE Bullish Percent Index during the initial, mid-year 2010 recovery following the May 6th, 2010 "flash crash" and its aftermath with the same during this month's recovery. As you will see, the green lines drawn above distinguish undue fearlessness from a healthy trepidation.


Last year, despite the NYSE Composite Index having in early-August repaired to a level exceeding its May 6, 2010 close, the NYSE Bullish Percent Index fell well-short of its May 6th reading. That's trepidation. This paved the way for the market's recovery of its April-May 2010 loss, and then some.

However, presently, we see the NYSE Composite Index nowhere near recovering ground it lost since its mid-stream bottom in June, yet the NYSE Bullish Percent Index now exceeds its reading at that time. No matter what issue one might raise pertaining to differences in magnitude this year's decline and recovery present in contrast with last year's, the Bullish Percent Index still very much supports the idea that, undue fearlessness currently is being displayed. Indeed, that the Bullish Percent Index confirmed the NYSE Composite Index's break to a new low earlier this month only the more suggests that, the present moment's apparent fearlessness is, first, conspicuous and, foremost, entirely ill-founded from an objective, technical perspective.

Despite the NYSE Composite Index's late-June 2010 bottom likewise being confirmed by the Bullish Percent Index, the market's subsequent recovery into early-August 2010 at least found a discernible lack of conviction in prospect that, the market's further recovery would broaden. Today the NYSE Bullish Percent Index rather suggests that, recovery of the market's losses since July is thought likely, if not certain. Thus does a contrary outlook anticipating the market's impending collapse gain substantiation.

Prospect of this end being reached sooner rather than later likewise is substantiated by the NYSE Bullish Percent Index's coincident behavior in relation to the NYSE Composite Index's performance, contrasting early-October 2011 bottom with that reached late-June 2010. As you can see, there has been a marked increase in underlying weakness (as measured by $BPNYA), and this despite the NYSE Composite Index so far this year remaining above its May-June 2010 lows. With fewer NYSE-listed issues effectively supporting the market, this year's already greater measure of selling, then, is well-poised to turn into an avalanche. Although it is too early to say whether this began today, its apparent inevitability appears more or less certain.

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JD said...


First of all, I really respect your analysis and learned more than you can imagine from you especially various tools to measure market health and breadth.

However, I think you use the market as something to prove to the world how smart you are rather than something to make money from.

I would like to maintain that OCT 4 was the best buying opportunity of 2011, similar to August 2010 and March 2009. This is a powerful move in the face of bad news.

We've had numerous capitulation days, and lots of sideways churn for 2 months basically transferring shares from weak hands to strong hands.

I agree participation is thinning and it is troubling that typical high beta stocks are not making new highs signifying a lack of leadership. However, latter stages of bull markets are marked by less and less participation.

However, after 2 major crashes in the last 10 years and 2 significant declines in the last 2 years, I believe the retail public is out of the market and I don't see another crash or bear market emerging until they are pulled back in the market.

Thanks for everything you do.


TC said...

Depending on one's investment imperative, a conclusion that I use the market for something other than making money is fair. I understand. In my defense I will say there are many investment styles from which to choose. To my knowledge none are perfect and, generally speaking, all have their moments in the sun, as well as the dog house.

Now, if you're someone who has been investing in a 401k for twenty years and have been eaten alive over the past decade, then the longer-term oriented perspective I am presenting here by way of persistently confirming a well-founded fear that, there is unresolved risk investors in the stock market are exposing themselves to -- this being substantiated via my application of the Elliott Wave Principle -- offers perspective which I remain abundantly confident will prove invaluable. Having no reason to irrationally pound the table defending my outlook, the technical evidence I regularly present here does all the pounding that is needed. That the evolution of price action generally has defied my every near-term expectation in such a way that my "patience pays" mantra is being put to its most severe test is no cause to fret, really.

Indeed, the very reason I began this blog is on account of the full blown panic I presently suspect might be imminent. Seeing technical circumstance develop as it has over the past decade or more, then since March '09 bottom (a bottom well in range of index levels at which I had recognized late-November 2008 that, the worst of the market's risk to that moment probably had passed), and now since July 2011, I am only the more convinced I am on the right track. The market, indeed, faces a heightened risk of crashing. (continued...)

TC said...

So to address assumptions you are making per the market's current state, I will suggest that, were strong hands anywhere in sight in the stock market, then gold -- an asset with zero earnings power -- would not have gone parabolic in August. Likewise, U.S. Treasuries -- an asset whose issuer finds its revenue base collapsing -- would not be meeting a market still hungry for more U.S. government debt. Thus, it is my contention that, the weakest of weak hands are dominating the stock market.

This includes the retail investor -- more specifically retirement investors. That employers have scaled back their 401k matches and employees have scaled back their contributions, this as a result of both generally being buried in debt over the past 20 years, explains fading retail participation in the stock market. Nevertheless, retail's past stock purchases remain at work, with fingers crossed hoping paper losses suffered over the past 10+ years might be erased. Were even 10% of retail holdings in stocks purchased in retirement plans prior to '08 offered up for sale in the face of the market's strength since March '09 bottom, then it's likely the market's advance would have been far more muted. Truth is weak hands holding, rather than selling into strength, are slated to become the last to abandon hope, much as is typical. These are destined to be that greater supply of shares offered up to strong hands at discount prices, such as has been a well-established, standard practice for as long as there has been a stock market.

Per the market's two significant declines over the past two calendar years, the more recent was far more technically damaging. Thus, increasing underlying weakness making for the market's outright collapse is believed in place. Likewise seeing demonstrated during this month's extraordinary advance an undue measure of fearlessness in the face of this increasing weakness, we further find in place a consensus disposition that, again, is rather typical just prior to collapse. (continued...)

TC said...

Finally, rather than any capitulation, the evidence suggests the market's increasingly volatile gyrations since July have been centered on a decided need to raise capital among some vested interests. Consider the S&P 500's volume during August's swoon, as well as that for all issues making up the NYSE Composite. We see the S&P 500 rivaled its volume registered in May 2010, whereas NYSE volume fell well short of May 2010 activity.

There is a case to make for supposing that, May 2010's decline -- an event I still contend was precipitated by introduction in the U.S. Senate of an amendment to the Dodd-Frank FinReg bill seeking to reinstate the Glass-Steagall standard on the U.S. banking system -- was more an execution of a justified "risk off" trade committed out of macro necessity precipitated by the prospect of profound, fundamental changes to the investment landscape Glass-Steagall would impose. Furthermore, the Fed's QE2 shot of hyperinflationary happiness only mildly succeeded in abating fear surrounding the future of the nation's regulatory architecture. In fact, I would argue the market's turnaround following QE2's formal announcement last August amounted to little more than a "technical adjustment" to risk exposure, rather than anything demonstrating an increase in animal spirits whose effect furthered commitment to the "risk on" trade.

Contrarily, the market's August 2011 decline appears less a "risk off" trade than the consequence of a combination of factors involving, first, the need to raise capital on account of leveraged trades in credit and currency markets blowing out as the euro-zone's condition progressively worsened, second, the persistent evaporation of buying interest as July 2011 peak was reached (revealing a diminished capacity to add risk), and finally, the presence of a "deer in the headlights" disposition (revealed by a notably muted volume of bank and financial shares exchanged over the interim since April 2010, as these two sectors were experiencing notable -- indeed, market leading -- softness). In fact, were there any representative demonstration of stock prices "falling of their own weight" suitable for inclusion in an urban dictionary of investment phrases describing this phenomenon, the case of banks and financials over the duration since April 2010, and most emphatically since August 2011, amply qualifies. (continued...)

TC said...

As I have been saying, the market is at grave risk of blowing out like never before. Truth is 2008 provided fair warning that, even those (like myself) who at the time were anticipating the market's decline in fact underestimated the risk. I would contend this disposition presently remains only all the more intact, and this probably on account of a regulatory response following 2008's near death experience whose general effect is promoting a most irrational complacency toward the potency of lenders of last resort when, contrarily, history is likely to judge its true impact as having only hastened the financial system's collapse.

Glad to have you as a reader, JD.