An added take on the NYSE Composite's relative strength (top panel)—currently registering a negative divergence versus its mid-September 2012 peak, as noted yesterday—is its harmony with the technical character typically accompanying formation of an Elliott third wave (in this case wave (c) off mid-November 2012 bottom). Indeed, from the get-go following the market's lift off its mid-November 2012 bottom $NYA's RSI has been persistently pinned to the positive side of its range (i.e. above 50). This reveals that "dynamic" quality an Elliott third wave typically displays.
The question now is how much more dynamism can be squeezed from a demand-challenged asset class? Being positively convinced there simply is no significant contingent of strong hands persuaded by logic claiming motivation to secure returns superior to those had holding cash will drive capital into equities in 2013, nevertheless remaining a possibility is continued exploitation of a broken price discovery mechanism occurring simply because it can.Yet the danger in this lies in the over-excitement of animal spirits whose consequence in all probability likewise will drive capital into "things" (particularly energy), thus impinging on expenses. This, then, would have the effect of further squeezing margins and all the more hastening contraction of overall economic activity.
Truth is for trapped weak hands time is of the essence. To wit, specifically, buying time in a Japan-like limbo is key to many a hopelessly insolvent enterprise remaining a going concern. Likewise, a chain is only as strong as its weakest link. Thus, marginalization of any critical element joining a highly correlated banking system is to be avoided at all costs, and this for as far as the eye can see.
In other words, forget about return on capital. We are nowhere near a "transition," as Dalio claims. Not to argue with his theoretical premise supposing capital held in cash defies the better promise of capitalism. Yet the fact of the matter is capitalism is dead. Greenspan killed it. Likewise, if Capo Confetti were not such a fitting moniker, I would be calling Bernanke Dr. Frankenstein. Truth is this madman is trying to reanimate a corpse.
Bottom line, don't be surprised if a "rising wedge" unfolds off mid-November 2012 bottom to form wave (c), thus buying time in limbo until, say, May. As such, an a-b-c wave higher forming wave 1 of (c) currently could be nearing its completion here. Although this is not how I labeled the wave count above, seeing how a preponderance of technical measures are indicating the market "overbought," it thus seems reasonable strictly on the technical front, as well, to think the market is not about to run away to the upside.
* * * * *© 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.
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