Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Careful Anticipating the Anticipators

We began the week watching the NYSE High-Low Index, courtesy Investor's Intelligence, which at the time was at levels last seen in March of this year, from which a decent relief rally began. The problem is we're still watching this indicator and it still hasn't reversed up yet. In fact, it has moved lower and is now down at levels last seen at the September 1998 Long-Term Capital Management Low.

Chart courtesy Investor's Intelligence, Click to Enlarge

Certainly, a relief rally is on the way, but we have no way of knowing from what market level. That is why we wait for this indicator to reverse up telling us market risk is, at least temporarily, reduced.

Tom Dorsey of Dorsey Wright used to always tell me, "Don't anticipate the anticipators." There will be plenty of time to entertain "capital building" strategies once the indicators reverse up, signaling a change in the market's supply-demand relationship.


2. Cause Versus Symptom

Without question, the September 1998 low was a good time to be buying stocks... for a trade. Since September, 28, 1998, the S&P 500 has returned 19.5%, excluding dividends. Adding dividends makes the return of stocks over that nearly 10-year span almost competitive with Treasuries, albeit with significantly more risk.

Regardless, given the news this morning that the U.S. government is weighing takeover options for Fannie Mae (FNM) and Freddie Mac (FRE), it is tempting to think we may be finally have reached an important capitulation point in equity markets, especially with many technical indicators and sentiment indicators at negative extremes.

There is a key difference between LTCM and FNM and FRE, however. LTCM was, at that time, a potential cause of market dislocations. Fannie and Freddie, despite their massive size, are still merely symptoms of market dislocations that began a little more than a year ago. The real virus is two-fold: excessive debt combined with excessive leverage.

The process of deleveraging will be a long one. There will be periods of market rallies, but they will be followed by periods of severe market declines as the deleveraging process results in a slowing of the velocity of money and a re-pricing of financial assets.


3. A Nation of Mourning

If we consider the long-term  process described above in terms of the Kübler-Ross model of the five stages of grief, then we are probably transitioning from the Bargaining stage to the Depression stage:

1. Denial: "This can't be happening."

2. Anger: "Why me?!"

3. Bargaining: "Just let me get back to even.", "Can't we stretch it out a few more years?"

4. Depression: "What's the point?"

5. Acceptance: "It's going to be OK."

Of course, considering that even now people are standing in line for Apple (AAPL) iPhones even as the U.S. government is discussing the nationalization of Fannie and Freddie, a move that will further depress the housing market as mortgages and credit become even less available, perhaps many of us remain firmly attached to the denial stage.


4. Song of the Day

5. Weekly Deflationary Datapoint

How's this for deflation. According to the AP, the Environmental Protection Agency determined back in May that the "value of a statistical life" is $6.9 million. Hey, sounds pretty good, we're essentially all $6 million dollar men and women! the only problem is that figure represents a stunning drop of nearly $1 million from five years ago.

The AP explains that, "when drawing up regulations, government agencies put a value on human life and then weigh the costs versus the lifesaving benefits of a proposed rule. The less a life is worth to the government, the less the need for a regulation, such as tighter restrictions on pollution."