In the Eye of a Financial Hurricane ~ The Risk Averse Alert

Tuesday, March 27, 2012

In the Eye of a Financial Hurricane

It is safe to say that, following the market's 2008 collapse, with its suddenness and its depth, there was ample reason to suspect a turn of affairs had come to pass, separating the market's past from future prospects in a manner more likely keeping in check any recovery from 2008's depths. Although this position has proven incorrect by a sharp, relative strength reversal — which recovery has been maintained as the market's levitation unexpectedly has persisted — no change in the forecast for foul weather is made necessary, as no indication other than being trapped in the eye of a hurricane is coming from a bountiful harvest of both fundamental and technical data.

If there is one thing 2008 made clear, an "all clear" was not sounded to the riskiest of risk assets. More than all other forms of financial claims, these require mechanics impacting risk all the way up the capital structure function like a well-oiled machine. Well, in case you hadn't noticed the machine still is sputtering badly. We remain in the eye of a hurricane, indeed.

NASDAQ weekly

Risk's disjointed, fragile condition probably goes some way toward explaining why NASDAQ's cumulative advance-decline line more or less remains trapped in a long-running death spiral. Like so many other measures revealing a cognizant consensus perception per the sputtering financial machine choking on hyperinflationary bailout, the revulsion of the riskiest of tangible financial claims is right in your face and it is impossible to deny the message. NASDAQ is in disfavor — it has been for a long time — and this is a problem.

Yet speaking for today's complacency in the face of this sputtering financial machine is the fact that, NASDAQ's many laggards apparently are held for the prospect their years of flailing will be followed by a return to health (or become a momentum darling at any moment). The effect of this is seen reducing selling pressure on the exchange and allowing a handful of leaders to prop up the bunch.

Of course, this will work until it doesn't. It just so happens we are well set up to usher in the moment when it won't. Per anticipated swings upcoming, first down, then back up, their dimensions are uncertain. So, their depiction above is but one possibility among several.

Let me conclude submitting, too, technical conditions now are subtly different than in the 2004-2006 period. Challenges presented during moments of weakness following March '09 bottom have been readily evident (see circled RSI), whereas in the prior period moments of weakness brought no great challenge to NASDAQ's advance off its 2002 bottom. Then, relative strength quickly returned to the positive (above 50). At the same time, too, recoveries in the prior period never lifted relative strength to the degree we have seen since March '09. There was more balance then between the buy- and sell-side. At present, however, we have a greater reflection of complacency allowing a relative handful of NASDAQ-listed issues to lead the way further along a one-way street, lifting relative strength to heights beyond those reached in the 2004-2006 period. Thus, there is reason to doubt present capacity to maintain the market's levitation in a manner similar to that leading into NASDAQ's 2007 top. Indeed, as circumstance has it, all the more is reason to fear we are at the trailing edge of the eye of a hurricane whose greatest damage is still to come.

Fast Money
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