Liquidity Drought ~ The Risk Averse Alert

Monday, March 11, 2013

Liquidity Drought

Wouldn't you know it. On yet another dead volume day we read "HFT and liquidity are not all they are cracked up to be." Now, an environment evidently marked by shrinking liquidity must be bad news for a market backstopped by bankrupt derivatives junkies whose leverage somehow must increase. For the time being these might be grateful no one of consequence has yet been forced to raise capital wherever this might be had. Trouble is "the cost of Capital Intermediation has increased significantly over the 35 years of financial market deregulation in the United States" and this surely must be impinging on confidence. Throw in rampant HFT abuse of so-called "whales" and we have all the ingredients for a liquidity drought occurring precisely at the wrong moment.

Heck, this could become a problem as soon as tomorrow...


Negative technical divergences presently registering via RSI and MACD suggest the market is in a vulnerable state similar to early-April 2012. FYI: today's S&P 500 volume was the second lowest of the year.

Technical similarly to this same prior period from the perspective of the Volatility Index likewise suggests the market, near-term, is vulnerable, and longer-term, not likely to find sentiment quite so sanguine...


Where's this going? I mean, how much cheaper can options premiums get? These are pertinent questions at a moment when the stock market's liquidity rather plainly is evaporating.

Capital these days largely must be going into leveraged trades whose viability certainly is no more secure than was the case in 2008. How can there be more security, seeing risk concentrated in still fewer hands? I'll bet Greenspan gets it. All he ever talked about was risk mitigation. This ain't it. Little wonder, then, the political arena over the past week has been buzzing about breaking up "too big to fail" titans of tyranny euphemistically called "banks." What are the odds everyone and the Attorney General have their eyes on a fire burning somewhere right now?

Judging by the market's technical state, smoke is being detected. Maybe today this appears to be coming from but a small, smoldering pile of straw. Yet for the mountain of deadwood surrounding it, who knows when a stiff wind might blow and ignite a firestorm? Could be tomorrow...

Word on the Street
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© 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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