Friday, June 21, 2013

High Volume: Trouble for the Stock market?

“It's important to keep in mind that several days of institutional selling, whether it's in a stock or an index, can presage more of it down the line…Few investors knew what lay ahead for the market in the second half of 2008, but the Nasdaq composite fired some warning shots with five higher-volume declines from Aug. 19 to Sept. 4….The Nasdaq sank more than 40% over the next 11 weeks. By March 2009, it fell 50% from its April 2008 high of 2551.39.”

“Factory output in China weakened to a nine-month low in June while U.S. manufacturing closed out its worst quarter in the last four, suggesting the road to recovery for the world economy remained an uneven one…
…"A slowdown in the Chinese economy doesn't help the outlook for the U.S. particularly, but American growth isn't entirely dependent on what happens in China," said Philip Shaw, chief economist at Investec…
…U.S. growth picked up in the first three months of the year, boosted partly by a recovering housing market, though the pace is expected to drop off in the second quarter.”  Story at…

Be prepared for more shake, rattle and roll. Markets could be in for another bumpy week as investors adjust to higher yields and institutions shuffle portfolios ahead of the quarter's end.

Friday, the S&P 500 was up 0.27% to 1592 (rounded).
VIX was down about 8% to 18.90.

Volume was huge Friday; the NYSE saw twice the volume that has been the norm over the past month.  Couple that with the small movement on the S&P 500 (only about a quarter of one percent upward) and we have what I call a distribution day.  (This is a bit different than the definition of a distribution day that involves keeping a count of high volume days.) Today, a lot of people wanted to sell and even more wanted to buy.  I’m tempted to suggest that the buyers represent the dumb money buying at the wrong time.  The sellers…they’re the smart money.  Will that interpretation be correct?  I don’t know. 

I think I can say that since Markets rarely move in only one direction, I wouldn’t be surprised to see a bounce up to around 1620-1625. 

Friday, the overall NTSM analysis was again SELL at the close.  

Sentiment, Volume and VIX are all negative.  Add in the “panic-indicator” that flashed sell Thursday (on the huge down day) and NTSM analysis is firmly in the negative camp.

Internals were unimpressive today.  The number of stocks advancing today was only slightly ahead of the number of decliners; new-high/new-low data was abysmal with 34 new highs compared to 387 new lows.  I had to go back to 4 October of 2011 to find more new lows on a given trading day; there were 972 that day as the markets completed a correction low.  Bottom line: The new-high new-low data isn’t signaling a turn-around because, even on the up day today, it deteriorated.   

SENTIMENT remains extreme:  (The broken record report.) The 5-day moving average was 67%-bulls in the Guggenheim/Rydex funds I track as of Friday’s close.  That was down only 1% from Thursday.  On Thursday at the close, 65% of investors were betting that Friday would be up.  They were right, but that’s still a bit surprising given the monster down day Thursday.  This overly bullish stance of traders means that the correction has further to go.

I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  My reasoning may be found at…
The NTSM system sold at 1575 on 16 April.  (This is just another reminder that I should follow the NTSM analysis and not act emotionally – I am under-performing my own system by about 2%!)

I have no problems leaving 20% or 30% invested.  If the market is cut in half (worst case) I’d only lose 10%-15% of my investments.  It also hedges the bet if I am wrong since I will have some invested if the market goes up.  No system is perfect.