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Wiley Complacency


Live by the rocket, die by the rocket. Watch out where you point that thing.

Did I hear you say that there must be a catch
Will you walk away from a fool and his money
If you want it, here it is come and get it
But you better hurry cause it's going fast

--Come and Get It, Badfinger

Remember in the Wile E. Coyote cartoons when "Wiley" is shown standing at the edge of a cliff with an Acme Super Atomic Rocket strapped to his back? Then, the fuse is lit and the unbalanced weight of the rocket unexpectedly causes Wiley to tip forward followed by the rockets ignition, a white vapor trail straight down and a distant "THUD" – all in an instant.

It was hysterically funny when Wiley experienced deceleration phenomena at the point of interface with a canyon floor.

Right now Hoofy seems to be doing a pretty good imitation of Wiley with his hoofs pedaling in midair and a high octane cheap capital rocket strapped to his back and a complacent smug on his face. Don't look down Hoofy.

A wise trader once told me crashes don't come from too much bullishness, they come from too much complacency. Some observations of extreme complacency: recently I read that after the sharp three-day, 50 point S&P sell-off into June 7th (during which there was an atrocious advance/decline figure of 1 to 3.1), that a sentiment survey called "The Daily Sentiment Indicator" had reported that 88% of traders were still bullish. I am told by those in the know that in twenty-five years (which is the history of this sentiment survey) that no such reading had ever before occurred. In other words, prior declines of such amplitude drummed up some fear and accordingly, The Daily Sentiment Indicator showed a drop. Not this time around.

(A) Despite the largest break since the March low (on ugly internals) which "overbalanced" the magnitude of all prior pullbacks since the run-up from March, (B) despite a convincing break of a short-term trendline (B) a sentiment survey show 88% bullishness – the first time in 25 years such a decline failed to summon up any sign of fear.

This is important as twenty-five years spans a lotta extreme sentiment in the market and sentiment is the one measure that never changes as human nature never changes. The sentiment tea leaves may be come more difficult to discern, but psychology dominates the market, especially during climax runs both up and down.

Toe-to-toe with the above Sentiment Survey, Weldon Financial reports latest figures show "total net foreign purchase of U.S. Treasury's of $0.376 billion. Yes, that is less than four hundred million or less than a half billion dollars. Out of 97.4 billion dollars in net domestic securities purchased, U.S. Treasury paper constituted only four tenths of 1% of the total. There is NO fear"

The complacency is not surprising. After all, the market has been shrugging off all concerns:

  • $70 oil and $4 gasoline.
  • The sub-prime mortgage meltdown
  • The worst housing market in mainstream America in at least sixteen years
  • A greenback with gout
  • A quagmire in Iraq
  • A gone-awry Afghanistan
  • An impetuous Putin
  • An irascible Iran running towards nukes
  • A new round of unrest in the Gaza strip
  • And, most recently and perhaps the straw on this Camel of Complacency's back – a spike in interest rates.

I am told the recent four-week 60 basis point rise in ten year yields is equivalent to a one-thousand point decline in the DJIA.

I know the litany – a bull market climbs a wall of worry. The market discounts – it knows all of the above and still in its omnipotent wisdom chooses to go higher, etc, etc.

So, the level of bullishness even in the face of ugly internals is not surprising. How can it be that traders continue to wrap themselves in robes of Teflon momentum shrugging off all the slings and arrows in their way? Simple. They can because it has paid to do so. It has paid to ignore any and all concerns.

It has paid to have no fear of flying. But, walls of worry don't grow to the sky. Brick by brick the bad habits that pass for reasonable risk taking get mortared at the clay feet of Emperor Complacency's riskless robes.

Over the next days and weeks I will continue to flush out the time, price, pattern and symmetry that I began to look at in a "Pivotal Set-Up Worth Watching." A fuse has been lit. Any sign that price is tipping may be an indication that the weight of this market rocket has changed its trajectory. Such is the dilemma when you play with explosives. Live by the rocket, die by the rocket. Watch out where you point that thing.
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No positions in stocks mentioned.

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