"This week provided a reminder that the leveraged speculating community is not without serious issues. While a speculative stock market garners most of the attention, volatility appears to have returned in gold/metals, bonds and in the currencies. All happen to be key markets for the leveraged players. While there were some high-profile success stories, keep in mind that the average hedge fund posted losses during a treacherous 2011. According to Credit Suisse, more than two-thirds of all hedge funds are below their “high-water marks,” meaning that they have investor losses to recoup before they can return to earning their hefty incentive fees (typically 20% of fund returns). Almost a fifth of hedge funds have high-water marks of 20% or more. Literally thousands of funds are struggling for survival, a dynamic with potentially important market ramifications."Just imagine how this dynamic might accelerate liquidation at every point in the development of anticipated market weakness. Two-thirds of all hedge funds are below their high water marks? These soon could cultivate the cheap share sugar daddies I was mentioning the other day: future supply, sans one wicked beating meted a leveraged speculating community now all the more precariously poised with lenders of last resort all in, pushing on a string like there's no tomorrow.
—"Financial Sphere Weak Links" by Doug Noland (Credit Bubble Bulletin, 3/2/2012)
At the confluence of debt destruction and hyperinflationary breakdown has the journey reached in the past three years' travel down a swollen river of liquidity flowing from fantasy land where central banks can magically sidestep every nasty trap laid in a former dream state when Greenspan did his unforgettable risk mitigation dance. The trans-Atlantic banking system's presently precarious position is but confirmed by the market's underlying technical condition.
Notwithstanding elevated risk of an imminent throttling in light of diminishing NYSE upside participation sustaining the market's advance so far in 2012 (this in contrast with respective, early-October 2011 peaks), there is reason to suspect, too, the market's strictly technical trade might continue, at least for some days. Who knows how long lowly equities might remain caught in the draft of a liquidity deluge propping up distressed credit markets? What's clear is the draft is getting weaker.
A still-living consensus might be convinced there is a floor under the market, yet absent increasing financial stakes being ventured to the effect of broadening upside participation, the floor is sure to give out. Before it does, though, the market's underlying technical state appears to have time and space to weaken further still.
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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.
Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.
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