More Debt, Less Pain(?) is Proven Equity Gain ~ The Risk Averse Alert

Tuesday, September 04, 2012

More Debt, Less Pain(?) is Proven Equity Gain

The market so appears on the verge of collapsing. Its decidedly weak technical state simply defies reason explaining why it continues to hold up. Today's sharp reversal higher taking 5-minute RSI into "What!" territory — entirely imbalanced — further mystifies the senses. Something incredibly suspicious portending a largely unexpected development could be in the works here. The market's intra-day reversal on Tuesday, August 21st might very well mark a top from which a steep decline already has begun to commence (this notwithstanding there being no RSI and MACD divergences coinciding with that top — a development I have been thinking might come to pass once the market's ultimate peak in its advance since early June in fact was in).

When I read today's report of a Goldman equity strategist predicting a big stock selloff in ten days, my initial reaction was to think there goes probability the market might soon crater. Weakness I have been projecting seemed more likely to be delayed, possibly until October and maybe until after election day. Yet the manner in which CNBC played up this report, is another suspicious development. Aren't these kinds of projections normally the sort of thing receiving passing mention, if any at all? The legs this story was given, particularly considering the market's resiliency amidst a frightfully weak technical state, now rather has me suspecting it could prove extraordinarily "prescient" (quotes suggesting a "fix"), how ever mis-timed its projection might end up being — ultimately proven too late in its anticipation of when the worst of selling would hit. There's a case for suspecting the market could crash sometime over the next ten days, as well as supposing this Goldman strategist has been deployed to help ensure the less informed give up their shares precisely at the wrong moment.

As you know, over the past week I have been making an Elliott Wave Principle based technical case implying top to the market's rally off March '09 bottom remains some months away. That said, then, consider remarks following but a variation on the outlook detailed here over recent days. To wit, rather than an a-b-c-x-a-b-c complex Elliott wave form unfolding off March '09 bottom, a simple 5-3-5 "zig-zag" instead might be forming.

Before discussing this specifically there's something we need to start thinking about, and if I could put it in general terms it surrounds capacity to add more debt to the trans-Atlantic banking system without the need to inflict a commensurate measure of pain on sovereign governments in particular. This appears the direction the euro-zone debt crisis is about to take. The path of least resistance clearly is to inflate the euro-zone's debt burden, specifically with short-dated, sovereign debt securities. That's what Count Draghi-ula's plan appears to be according to early indications.

Of course, we should hear a lot of pissing and moaning from the Fuehrer's soldiers about this not being what "the market" wants. But need this fix no one openly is likely to ask! Thus, all pissing and moaning might be thought a harmonious development in keeping with today's Goldman report.

In case the common thread of "success" realized in the Greenspan era has faded from your memory, it was the power to add more debt to the banking system in an environment where the supply of "valuable," AAA-rated securities was expanding atop a physical economy ripe for the slicing and dicing that was fueling the stock market's unprecedented ascent over the interim of King Ponzi's reign. We could be looking at some derivation of this recipe for "success" over coming months if the ECB gets its way and Germany is forced to swallow the Brussels Reichsbank's bitter, ultimately hyperinflationary medicine.

Before developing this thought a bit more I would like to further remark on this "pissing and moaning" we might anticipate in response to the ECB's "whatever it takes to save the euro" action upcoming. Simply put, the louder the moaning and the more voluminous the pissing (i.e. the bigger the hit the market takes), the more likely the Son of Greenspan the ECB conceives will ultimately give birth to a rip roaring rally in the stock market once the gestation period's vomiting has ceased. So, although still expecting a difficult period over the near-term — this much is in keeping with the outlook developed here of late and further refined above — I am starting to think my long-established view calling for major indexes to return to levels last seen in the 1987-1994 period very well could prove premature. Be that as it may, opportunity to exit a long-held short position very much remains on the horizon in a climate likely finding the Fuehrer's battered and bloodied infantry crying for their British mothers and surrendering their claims to the general staff otherwise preparing for the army's better days.

This is a fairly big departure from the view I have held to date. Yet it remains entirely Elliott wave based. Taking into account all other matters both technical and fundamental, the ECB's prospective circumvention of Germany's resistance toward adding more unproductive debt sans any prohibitive penalty has me at least considering the possibility that, the Elliott wave forming off March '09 bottom is a simple a-b-c "zig-zag" whose "b" wave has been forming since late-2009 (or, maybe more preferably, since April 2010) and is nearing its completion, this following an approaching setback that could see somewhere in the vicinity of 20% clipped from major indexes, and this quite possibly largely within the next ten days. All manner of identified technical weakness developing these past few years still would "make sense," as the wave forming off March '09 bottom certainly could be thought the "b" wave of a larger a-b-c Elliott corrective wave forming since Y2k top. Typically, Elliott "b" waves are characterized as leaving one to conclude "something is not right." Technical weakness — from diminishing volume to lousy, persistently weakening internals — certainly fit the bill, particularly given how well the market has held up.

So, then, from 2000-2009 unfolded wave A, taking the form of a 3-3-5 "flat." In keeping with the Elliott Wave Principle's "alternation guideline" we rightly find wave B taking the form of a 5-3-5 "zig-zag," the likes of which whose "b" wave is seen nearing its completion. Indeed, this Elliott based view has been detailed here recently ("Substantiating a Revised Outlook"). Wave b of B is seen forming a complex Elliott corrective wave — either a "triple three" or an expanding "triangle" — and this with an upward bias (something quite typical in corrective waves that have formed over the past 30-40 years). Again, all manner of technical weakness accompanying formation of wave b of B is entirely harmonious with the character of "b" waves, as detailed in the Elliott Wave Principle.

So now the question is, how high might wave c of B take major indexes? Could new all-time highs be on the horizon? Might even NASDAQ challenge its Y2k top? Given the scenario detailed here these clearly are possibilities. Of course, time will tell.

Again, during the market's upcoming, anticipated swoon I'm going to be bailing out of my long-held index ETF short positions. Since March '09 bottom this is the first time I could make the case for a sustained market advance, this no matter if developing off that bottom is an a-b-c-x-a-b-c complex Elliott wave form, or a simple a-b-c. I'm starting to side with the latter possibility, thanks to the ECB.

Finally, none of this changes the longer-term outlook. Wave C upcoming sometime in the foreseeable future still targets major indexes to levels last seen in the 1987-1994 period. My best guess is this will happen sometime before (or around) 2021. Thus, that view of mine recently expressed in "A Head-and-Shoulders Fail Still Is Warning" remains entirely relevant.

(By the way, check out the last two paragraphs in the above linked story on the Goldman equity strategist calling for a steep selloff. It screams rising market ahead.)

Fast Money
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