Pyrrhic Confidence ~ The Risk Averse Alert

Friday, October 26, 2012

Pyrrhic Confidence

Tuesday's "Dips Ahoy" presented the following chart of the NYSE Composite Index whose markup deserves further comment...


The line connecting May 2011 and March 2012 peaks is interesting because it actually extends back to the NYSE Composite's October 2007 peak. So now the question is whether September's breakout above this line is significant.

Remember, at the time this breakout occurred the number of NYSE-listed issues hitting new 52-week highs surprisingly spiked to its highest since March '09 bottom. What should we make of this, then? Could confidence actually be on the mend?

Honestly, it is hard to imagine last year's throttling (Aug 2011) could have been so technically devastating were confidence following 2008's bloodbath on the path to being restored. Bad enough was the long-established fact that, a dearth of NYSE-listed issues had been leading the market higher following March '09 bottom. A record 83% or so NYSE-listed issues established new 52-week lows in 2008. One year subsequent to this and over the entire period thereafter, the number of NYSE-listed issues hitting new 52-week highs should have been significantly higher were lender of last resort actions to bail out the trans-Atlantic banking system likely to restore confidence. This was one technical disparity leading me to conclude confidence, indeed, was vanquished. All the more was this viewpoint bolstered right up to the market's March-April peak this year.

So, what do we make of September's surge of NYSE-listed issues hitting new 52-week highs? Surely, we can assume underlying this was announcement of the ECB's OMT program quickly followed by the Fed's QE3. Yet what of credit market dislocation these hyperinflationary measures are sure to precipitate? Is this possibly tomorrow's problem, not to be worried about presently? How soon might further business retrenchment ultimately triggered by central bank attempts to sustain an entirely unsustainable mountain of debt bring realization there will be no return to the Greenspan era status quo any time in our lifetimes? Could this already be a well-entrenched understanding explaining no substantial pickup in the volume of shares exchanged on the NYSE coinciding with the NYSE Composite's September "breakout?"

Obviously, these simply are rhetorical questions. Still, their implication does not necessarily discount possibility major indexes could advance beyond their September peaks. Indeed, the NYSE Composite Index could take out its May 1, 2011 high before all is said and done with its advance since early-October 2011.

Nevertheless, yesterday's discussion on possibility the market, right now, might be in the midst of turning over and imminently falling harder than thus far has been thought likely finds the NYSE Composite Index presenting another "canary in a coal mine." This is in addition to its already well-established, relative lag, the likes of which decidedly indicates money by no means has been pouring into the stock market (notwithstanding a generally decided love at least for the NYSE's wares).

Should the apparent line of former NYSE Composite resistance penetrated to the upside in September imminently fail support, then risk of a steeper decline becomes elevated. The significance of September's surprising uptick in the number of NYSE-listed issues hitting new 52-week highs then might prove Pyrrhic, while at the same time likely motivate repeated stabs at buying dips.

Even were this apparent line of support to give out, though, still living would be prospect a "rising wedge" is forming off October 2011 bottom, in which case support should develop once the NYSE Composite approaches its rising trend line off that bottom (right now at 7800-ish).

Right now, the market's decline from September peak appears unfinished, and NYSE Composite Index support identified here seems likely to give out. Beyond this probability any risk of disaster awaits assessment of the market's state following its likely, pending setback.

Word on the Street
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