Complacency Knows No Insolvency ~ The Risk Averse Alert

Tuesday, March 20, 2012

Complacency Knows No Insolvency

With the stock market's continued buoyancy principally being a function of a technical trade inspired by hyperinflationary efforts to forestall the trans-Atlantic banking system's collapse, and with appearances of the banking system's solvency remaining ever more tenuous, the time-buying exercise of the past few years having been more or less a matter of creating momentum among the market's laggards finds today's darlings banks themselves.


Shedding a lot of light on just how much a strictly technical trade is underlying the bid on banks is the simple fact that, nothing at all has been solved by legislative efforts pretending the banking system remains solvent, a reality further confirmed by never-ending regulatory endeavors pretending "liquidity" will buy time necessary for balance to be restored between finance and physical economy. The disconnect with fundamental reality an aggressive bid on banks reveals no doubt presents a psychological undercurrent whose present, apparent complacency is fitting a moment likely leading to the market's anticipated collapse.

The real question with the Bank Index is whether following imminent challenge of its March '09 bottom, another similar disconnect will develop (by way of more hyperinflationary happiness, of course) and send $BKX screaming back up again, and thus fittingly presage the market's further collapse sinking major indexes to levels last seen in the 1987-1994 period. This prospect is in keeping with a view that, forming since March '09 bottom is the middle wave (i.e. wave B) of an a-b-c corrective wave down from October 2007 top. The manner in which $BKX has traded since March '09 suggests a great deal of volatility (first downward, then back up) could develop as wave B completes over weeks and months ahead.

company chart (BAC)

Chief Dog among the laggards is the recently diagnosed "tired" BAC, rejuvenated in the fog of a Fed stress test passing grade. Good enough for a technical trade feeding on fantasy backstopped with promises of liquidity for as far as the eye can see. Yet hitting on overhead resistance, both in price and relative strength, BAC concurs with its peers on the risk ahead.

Fast Money
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