Third Straight Distribution Day for the S&P 500 as Volume Remains Below Average

CASH IS KING

Today’s market was a mix of selling and lack of bids forcing stock prices lower.  A self-imposed deadline for Washington, DC’s financial reform held back institutions from stepping up to the plate.  Volume was, once again below average but did pick up.  The NASDAQ flashed its first distribution since the June 15th follow-through day, but the index broke lower from its 200dma in very bearish action.  Although the silver lining we did see a few leaders hold up relatively well in light volume.  So far it hasn’t been enough for the market to find traction and we still remain in a very rocky market.

The market is always forward looking, pricing in what is to come.  Often times it is precisely why when companies fail to meet guidance for future earnings the stocks get hit hard.  Over the past two months we have seen the market take a big hit from the April highs.  The media has blamed Europe, Corporate Earnings, and Financial Regulation as reasons for the market decline.  Perhaps the market was simply pricing in a greater risk of the United States to curb its own spending threatening our AAA credit rating.  For whatever the reasons, we remain weak and our government is hell bent on spending our way out of this.  Not too mention our Federal Reserve bank has exploded our monetary base at light speed.  Our best course of action is to remain in cash and wait for the market to flash accumulation and have its leaders breaking out.

In past liquidity driven markets the run up from the lows has lasted anywhere between 12 months to 4 years.  So far, we are in our 15th month which is still relatively young.  The largest difference between now and then is how fast the Federal Reserve has expanded our money supply.  We have never seen the Federal Reserve expand the monetary base by 150% in less than a year EVER.  Normally, it takes the central bank more than 10 years to even double the money supply.  Our market is flush with newly printed money and if this cash finds its way into the stock market it will surely push stocks higher.

Pessimism is beginning to reach very bearish levels.  The II survey results show that only 41% of newsletter writers are bullish while 32% are bearish.  AAII surveyed showed Bulls dropped to 34% while bears were stuck at 32%.  This is quite a development as market participants are beginning to doubt whether or not we can have this market move higher.  To demonstrate, the put/call ratio touched 2.12 with Index Puts being bought hand over fist.  The ratio ended the day at 1.18, but the high is something to take note of.  The Equity put/call ended the day at .80 an elevated level as traders aren’t as confident in the market’s ability to rise.

Again, we need to see real accumulation where volume is large and leaders are able to hold breakouts.  Until then, CASH IS KING!