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Chart A: Report on Institutional Investor discussions:
Discussions with Institutional Investors centered around "the declining volume", inflowing liquidity and Hedge Fund money.
* Some of the Institutional investors were concerned about the dropping volume as the market rallied. This first chart below, show's the SPY and its volume with a 14 day Exponential moving average.
As you can see on the chart, the SPY started trending up in March, and its 14 day EMA shows that the volume has been down trending since. A problem or not? ... see Chart B ...
Chart B: Report on Institutional Investor discussions:
In this chart, we plotted the 14 day EMA volume in Red against the SPY ... The chart goes back to 2007. Notice that during this bear market, there were 6 occasions where the volume's 14 EMA moved down and then broke a resistance line to the upside. On all 6 occasions, the SPY went lower afterwards ... just check the vertical chart lines to see what the SPY did after those occasions.
Now look at the current May to July down trend in volume and the blue resistance line. The resistance line is much longer than the others, and the 14 day EMA has been moving toward the resistance line during the past 3 days. The danger in a long trade, is that you do NOT want to be long when the descending volume crosses over the resistance line if we are in a bear market. The question that the Institutions could not answer was if they thought that we were still actually in a bear market or not, and that it was too early for them to form a different conclusion. See the next chart ...
Chart C: Report on Institutional Investor discussions:
The market has been rising on dropping volume, so what is going on? The conclusion derived from Institutions is that, in their thinking, a Hedge Fund squeeze is going on. Here are their basic thoughts on that:
A large number of the big Hedge Funds are fundamentalist. In their analysis of the economy and fundamentals, their conclusion has been that we were likely to have a negative or low positive GDP number in the 4th. quarter. With that posture, they stayed on the sidelines with multi-millions of dollars to invest. And then, they got in trouble. Hedge Funds started to worry about where they stood relative to their 2009 returns and the market's movement. Most were substantially behind the market and that posed the problem. If they didn't do something to reach parity with the market, they would risk losing their funding sources so they started to panic and jump on board the "buy wagon".
If this was the case, you would expect the Hedge fund change in buying behavior to cause a rise in our Inflowing Liquidity. We posted that chart below, and yes ... it does show rising liquidity levels. As the liquidity has been rising, Institutional investors allowed the buying to make a major impact and drive the market up by not "selling into that buying". By decreasing selling with little increase in buying, the Institutional behavior is allowing Hedge fund purchases to have a larger impact on the market for this this stage of the game.
Okay, so if that is what is going on, then what are the factors to be aware of in being long the market?
1. As long as Liquidity is inflowing, Institutional investors are likely to hold back on selling and let the market rise.
2. If Liquidity start to run out of steam, then Institutions will start to sell into it.
3. If we get a 14 day EMA volume move above our resistance line, then that would be a red flag that the market's move is trouble, especially if tied into Institutions moving toward distribution.
So, here is what we will do on the Special chart section every day ...
1. We will post the Inflowing Liquidity chart so that can be easily monitored.
2. We will post a SPY volume trending chart that will show a change to increased volume when it occurs.
3. We will post the Institutional Accumulation/Distribution chart.
From the data we are seeing, the conclusion is that the market will continue to rise until Liquidity drops, and/or market Volume increases with decreasing Institutional accumulation or increasing distribution. We can't tell you when that will occur, but we can tell you when it is starting to happen ... and that is what we will do.
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发表于 2009-7-28 08:50 AM
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