Lipstick Fail ~ The Risk Averse Alert

Friday, January 27, 2012

Lipstick Fail

Respecting technicals, there's both immediate strength and extended weakness presently coexisting in a trajectory leading to the market's impending collapse whose effect is projected to sink major indexes to levels last seen in the 1987-1994 period, this beginning even as soon as days from now.

Per present strength, 2012's buoyant start seems likely to persist, at least to the effect of sustaining major indexes at current levels. If the magic show should deliver deep from its hyperinflated bag of tricks to an audience demanding an encore, there still will be no stopping what's to come. Mere frustration endured for months has coincided with clue upon clue further shedding light on possible paths forward. Yet no frustration presently possible risks madness, as evidence suggests all paths lead lower.

As for circumstance portending collapse, who can deny a growing wealth of real world vulnerabilities whose negative effect on confidence finds decided, technical substantiation, the likes of which these past couple years is unmatched in confirming the market's growing, underlying weakness? Bullish sentiment, now well-restored in spite of this, is but icing on the cake.

(And the rush to IPO Facebook, a candle. Or is it a stick of dynamite?)


Momentum (bottom panel) might be diverging from late-October peak, yet it still remains positive, and if there is one trend whose development since March '09 bottom has been a mainstay of the market's counter-trend rally over the duration, positive momentum maintained in a manner more or less in keeping with the so-called "technical trade" facilitated via hyperinflationary injections of liquidity is it. Countless times these past few years momentum faded and diverged. Yet as long as it remained positive, the market maintained its buoyancy. The memory is not lost. More importantly, though, neither is the reality, no matter how mystifying its present manifestation otherwise might be.

Not to be lost in this thought is what wicked danger has been exposed these past three years anytime momentum turned negative. Therein lies more subtle evidence indicating underlying confidence remains razor thin. This is in spite of the market's massive recovery over the interim. Indeed, the extent to which the market's recovery since March '09 has been largely technically driven is revealed by momentum dynamics described here.


Digging a little deeper, there's both underlying strength and weakness to assign the market's near-term state as measured by the daily differential of NYSE new 52-week highs and lows.

A higher differential coinciding with higher NYSE Composite highs (green line) suggests underlying strength.

A higher differential coinciding with lower NYSE Composite highs (red line) reveals a widening divide between the haves and have nots. A fitting image describing this circumstance would be applying more lipstick to a pig, only to discover it to be less beautiful.


Just as was detailed yesterday via the NYSE Bullish Percent Index, the present moment likewise contends with an extended period of persistently increasing underlying weakness, as revealed above via the NYSE's new 52-week high-low differential. This weakness again has registered even as the market has done remarkably well to maintain its levitation. But further evidence this provides of a market driven by a technical trade. Critically, there is no sign whatsoever of this developing into stampede. Quite the contrary.

Fast Money
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