The Herd Leaves the Market to the 'Bots

The WSJ noted two odd phenomena in this market: small investors have largely bailed out, and (perhaps as a consequence) individual stocks in the S&P 500 have been tracking the index itself to a degree not seen since the 1987 crash (see chart, courtesy WSJ). There is a good discussion over at TradersNarrative. 

The average correlation is 44% (since 1980), but is now 81%, higher than in the crash of 2008 (79%) and approaching the all-time high in 1987 (83%). The conclusion from the correlation: fear drives investors to treat the market as a homogenous entity. Adding in the exodus of retail traders, this time the implication is the market has been left for the index 'bots. 

For traders, two things to watch:

1. Breadth indicators may no longer be useful .. this perhaps explains why this market has been floating on diminishing volume: the sellers are leaving faster than the buyers. 
2. Leading indicators may now be coincident .. this explains why new highs/lows and the A/D line no longer give early warning, but all topped together with the market in April. 

Carl Futia notes how the exodus of retail means rampant bearishness, which is a bullish sign. Perhaps, if they participate and not abandon the market. When they take short positions, it often allows the market to drive higher on squeezes. When they simply leave, the market is vulnerable. 

The STU commented on this tonight as well: the high correlation is an extreme example of herding behavior. Despite our vaunted individualism, Man is a herd animal. EWI has been on an All-The-Same-Market argument since the Greenspan Bubble got recognized in 2004. From 2004-2008 all markets went up as the USD went down. After the 2008 crash that linkage broke, but since the Hope Rally we have seen an all-one-market return. 

My take is the floor can drop out of this market rapidly, as we saw with the Flash Crash, as it is floating on arbitrage and program trading, not real conviction. The STU thinks we have about ended the second countertrend rally:

• the first was after the Flash Crash, and got us back to Sp1175
• the second has been over the past few weeks and run up from Sp1010 to 1081 today

The second retrace has gone 62% of the fall from Sp1131 to 1010, and could be considered complete, since in their count this is a wave ii, and wave 2s normally go 50-62%. 

Mother Market will pick the path that frustrates bull and bear alike. My speculation is that we continue to rise back towards the Sp1150 level into August, with Aug4 a key date; then the floor drops. This rise will embolden the bulls and scatter the bearish herd into a loss of conviction. The wave count would shift to a large irregular flat. Put simple, we would still be in the first retracement after the flash crash:

• wave A went from 1041 to 1131 (90 pts)
• wave B fell back down to 1010 - a lower low than where A started 
• wave C is what we are in, and C=A at Sp1100 and C=1.6x A at 1155

If we get much past Sp1086, this alt count gains in likelihood; if we break the 78% retrace of STU's nested 1-2 i-ii at 1106, that count should be abandoned. Although the STU has not posited an alt count, this one should be considered. 

Neely considers us in a corrective wave since the April high, breaking as a triangle B wave (the Jan drop is an X wave and the rise from Feb5 to Apr26 is wave A). A C wave would follow but it need not break the April high. Hence Neely's count might lead to a similar result, albeit a bit slower in time. 

Comments

[Account Deleted]

Dow Jones analysis after closing bell
http://niftychartsandpatterns.blogspot.com/2010/07/dow-jones-analysis-after-closing-bell_13.html

[Roger D.]

The Futures(markets are linked to the fate of the Euro. As the Euro finishes minute wave 2 the futures follow it's wave c up. Look for both to go down in tandem once the corrective wave up finishes.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/b4904f4a-cde8-4a34-bff8-1673e0ed23d5

[Roger D.]

The SPX Cash topped or topping now in big wave 2.

http://www.screencast.com/users/parisgnome/folders/Default/media/a3db951e-4d6b-490a-a705-beaf3d7c965c

[Roger D.]

The Euro

http://www.screencast.com/users/parisgnome/folders/Default/media/78c2d535-daf8-468e-b7b1-9f466878f524

[Roger D.]

Goldman Sachs

http://www.screencast.com/users/parisgnome/folders/Default/media/cd764c47-39a2-425f-aefc-28e10c2895c4

[DG]

The SPX Cash topped or topping now in big wave 2.

Will you hurry up and go bankrupt already. If you are actually trading these wave counts, it's inevitable and the sooner it happens, the sooner you might actually reflect on why it is your counts are so consistently wrong.

[OracleLurker]

Clearly the small investors are not market timers. When the market rallies following periods of sustained fund outflows the public only grows more disgusted with the investing racket and less interested in getting back in - CNBC ratings have actually declined as the market has rallied off the March '09 lows due to this dynamic.

http://wallstcheatsheet.com/breaking-news/cnbc-turn-on-tune-out-drop-out/?p=6345/

Most of the small investors getting out won't be returning until we are several years into a secular bull market - I fail to see how they could play a part in a push to 1300 this year.

Of course the near term is another story altogether - and the s&p should be able to reach 1120 at a minimum - I just hope that we can get a pullback tomorrow/weds.

[Michael]

What appears to be missing from this article and market correlation is how much money is currently indexed to the S&P 500 as a percentage of the total assets under management in the equity mutual fund universe.

Prechter and his "boys" can make all sorts of references to "levels not seen since 1987"... but it is absolutely meaningless unless viewed in a relative context.

[Roger D.]

The SPX Cash topped or topping now in big wave 2.

Will you hurry up and go bankrupt already. If you are actually trading these wave counts, it's inevitable and the sooner it happens, the sooner you might actually reflect on why it is your counts are so consistently wrong.

I've been retired foe 7 years when i was 50. Sold my mcmansion for 1M+, DG your screwed!

Happy in paradise,

Roger D.

BTW 5 down in alot of indexes. I'm right.

[Roger D.]

What appears to be missing from this article and market correlation is how much money is currently indexed to the S&P 500 as a percentage of the total assets under management in the equity mutual fund universe.

Prechter and his "boys" can make all sorts of references to "levels not seen since 1987"... but it is absolutely meaningless unless viewed in a relative context.

Huh..3.5 pct of total assets is still not adequate cash on hand to meet the need for redemtions if the market moves lower. That's the real problem. Prechter uses as a sentiment gauge,but if the market tops inline with the high sentiment reading, mutual fund managers have no choice but to raise cash(sell stocks).

[Roger D.]

Liquid cash stands at 3.6 vs 3.5 pct in April. Net redemptions have risen since the market top.

http://www.ici.org/research/stats/trends/trends_05_10

[nspolar]

Asia struggling this evening, in particular the Shanghai. US futs off a tad. Dollar appears to be heading back up, oil down, gold hanging around.

Shown is repeat of a chart shown earlier, which predicted a Shanghai top on April 12th/13th, and the beginning of a 'C' down. It is perhaps just a bit less than confirmed that the iii'rd down in the Shanghai has begun.

Last go the Shanghai led the US indices by a good two weeks. Will it be the same again?

The ii if complete was a bearish ii, downward sloping. Movement down should accelerate. The grind should be long. The channel tight. All w/r to the Shanghai.

By the way I have not read Neely's Ewave book 15 times, but more than once. A near exact replica of this chart can imo be found in his book. If you are interested, find it.

http://img411.imageshack.us/img411/7313/100712djchinaa.png

Look to Asia for clues maybe, especially China. The flu may be worse there than here, or even Europe. The bubble was a pretty good bubble in China. And many seem to think they are so smart, like Japan was years prior. Well looks to me like they have quite a slog ahead, post some big low further down the road. But surely they will make it.

This is where I am at in the Dow.

http://img411.imageshack.us/img411/7567/100712dowmajors.png

http://img411.imageshack.us/img411/2962/100712dowminors.png

Not a player of the Bradley. But I think that big turn in early August may have some significance this year. We may have just completed an 'a' of ii of iii, and have a 'b' and 'c' left. Timing would head towards the Bradley turn AND a couple weeks past an apparent new turn down in the Shanghai.

If this path is the case, then post an early August turn we will see many days of red, imho. When the trend is down, it is down, and I believe this trend if assumed down has used up too many up days, too early. The reverse would then occur, call it alteration if you so desire.

Below about 9500 in the DOW support starts to dissipate rapidly.

We see how she goes this evening. But I think this cycle is about out of juice.

ns

[Molecool]

"Leading indicators may now be coincident .. this explains why new highs/lows and the A/D line no longer give early warning, but all topped together with the market in April. "

Sorry but I must disagree - I have been playing the A/D like a fiddle - please check out my latest post,

[OracleLurker]

fighting a market that is moving up relentlessly coming off a deeply oversold condition is generally a bad idea.

[JT]

"Huh..3.5 pct of total assets is still not adequate cash on hand to meet the need for redemtions if the market moves lower. That's the real problem. Prechter uses as a sentiment gauge,but if the market tops inline with the high sentiment reading, mutual fund managers have no choice but to raise cash(sell stocks)."

Roger, just about every single one of your posts acts as if the market hasn't changed since the Crash of 1987. Do you always view the world in such a "static" vacuum?

Please feel free to go ahead and DEFINE just what is the 3.5% cash balance of TOTAL ASSETS?

Do you even have the slightest clue as to how many more liquid cash-like products are out there since '87?

Your analysis is once again highly BIASED by your lack of objectivity and the Bearish Beer Goggles that you continue to wear.

[Trader 123]

Nasdaq up nearly 20 pre-market and the S&P is up nearly 11 points. So much for Roger's prediction of yet another "Crash" this week.

If he'd actually trade his predictions with real money, he'd be wiped out by now.

LOL!

[Account Deleted]

Dow Jones futures chart before opening bell
http://niftychartsandpatterns.blogspot.com/2010/07/dow-jones-futures-with-negative.html

[Trader 123]

1094 SPX.
An 8% move off the lows.

How much "underwater" are your shorts, Roger?
Even more important, where is your stop-loss?

[Roger D.]

Sometimes you have to say WTF and go short,this is one of those times.

http://www.screencast.com/users/parisgnome/folders/Default/media/353af1e6-4f22-417d-bbb0-29404b3e041c

[Whitebear]

Go back to the archives in April and see how the board was filled with bullish comments. Those bashing Roger now is exactly those that did not see the flash crash and the subsequent correction. I don't want to list out the names but you will see exactly the same person sprouting exactly the same "Don't fight the tape", "A/D line" comments.

[Trader 123]

Whitebear,

If you are a TRADER you do not fight the "tape" or you wind-up getting crushed. Meanwhile, we have a guy posting on this board that cries "Wolf" just about every single week . . . but never once posts where his stop-loss would be and leaves us with this very telling remark about his trading methodology:

"Sometimes you have to say WTF and go short,this is one of those times." - Roger

[Aramis-]

Why August 4th ?

http://en.wikipedia.org/wiki/August_4#Events

[Mamma Boom Boom]

Some may enjoy this simple explanation:

http://www.youtube.com/watch?v=z-oIMJMGd1Q

[Aramis-]

Love it, Mammi

[Mamma Boom Boom]

If we don't begin to correct, very soon (like in the next hour or so), we may be about to enter the 'melt-up' stage.

[Roger D.]

This move up this morning is tied to the Euro. The Euro will reverse and when it does you can bet that this move up in stocks will reverse sharply down.

These bank trading programs have tracked the Euro/USD since the March lows. Wave "E"'s can be a real bitch when they expire. This market will crash.

[JT]

"These bank trading programs have tracked the Euro/USD since the March lows. Wave "E"'s can be a real bitch when they expire. This market will crash." - Roger

Bank trading programs?
You have no idea what you are talking about.
Have you even sat on the equity derivative desk of an investment bank?

My guess is that you have not.
That is why you continue to make these ridiculous claims that are not based in fact.

[vipul garg]

mamma , you are even today with one fantastic link and one wrong call on spx

[Scrap]

Great post Yelnick. Thanks.

[da bear]

I am still thinking that it is an 'e' wave up.
DOW 10,666 is still possible.
Robin Landry, who George Ure talks to, has a wave count that is showing a possibility of 10,600 to 10,700 on the DOW.
Then the big wave down would start.
I wonder if we would call that the 'F' wave. lol

da bear

P.S. Gold will also top out when stocks do. Could go to new highs, but it is still in a B of WAVE IV off the Fall 2008 lows. That is my best count for gold.

[Roger D.]

The euro and it's manipulated irregular top.

http://www.screencast.com/users/parisgnome/folders/Default/media/3e533bca-b867-4728-b21e-90584cea69c5

[da bear]

The last Elliott Wave Financial Forecast had an alternate count where DOW 10,592 was the 'c' of 2 high. Then the downtrend off that was unlabeled. However, the stock market rallied after the Forecast was issued. So this is probably 'e' up and should be labeled as such in the next Financial Forecast. Otherwise, they need to reread their own books and publications.

... sounds similar to the the 1930 market where the DOW made a corrective high in the Spring, sold off into the 4th of July and then rallied into Labor Day.

da bear

[Boy Who Cries Wolf But Doesn't Trade]

CRASH is IMMINENT!!!

[Mamma Boom Boom]

>mamma , you are even today with one fantastic link and one wrong call on spx
Posted by: vipul garg<

Does that put me ahead of Roger?

[Xui]

Look out below

[MT]

Watch for tomorrow. Reversal before the weekend. Last downleg into august/september.

[MHD]

Yelnick.... since wave 2 seldom goes past 62%, this is probably not wave 2 from a 1131 to 1010 point of view. One can look at this as a wave 2 from the top of 1220 to 1010 and get a retrace of 1140 for the max upside. Anything more than that....new highs here we come, is the higher probability. Seems insane, but the markets seem to be acting insane, thus not out of the realm of possible outcomes.

[Mamma Boom Boom]

One more run to 1101.

[Chico]

Roger, you should seriously consider trading a mechanical system. You clearly do not have the personality required to trade subjectively. You just see what you want to see.

[vipul garg]

if spx turns from here, there is one possibility that it can drop to 900 levels.

[vipul garg]

the two turn points possible in the bearish set up is 1095 or so, and 1135.

[Mamma Boom Boom]

It's not productive to be looking for bearish set ups. There's too much upside, left. Look for entry points!

[PTrainer]

Carl Futia's bullish Elliott Wave count - http://carlfutia.blogspot.com/2010/07/elliott.html

[Roger D.]

Mamma it would take some to beat me lol, but if your short stay short and if not,start nibbling right now.

Roger D.

[Mamma Boom Boom]

Roger, are you retired from the military?

[vipul garg]

its only productive be to on the right side of the market.

[MHD]

Black Cross= Bullish
Carl F. bullish chart= Bullish
Roger D. bearish= Bullish
Mama Boom Boom picture...everything up= Bullish
AA actually earned money=Bullish
Whole world drowning in debt= Bullish
Bob P. bearish= Bullish
Retail investor not investing at top= Bullish
Retail investor not investing at bottom= Bullish
1000 shares moves Dow up 100 points= Bullish
Thus the Bulls seem to have the upper hand here as the evidence points out!

[Trader 123]

Carl Futia's bullish Elliott Wave count
- http://carlfutia.blogspot.com/2010/07/elliott.html

Posted by: PTrainer | Tuesday, July 13, 2010 at 11:21 AM

Thanks!
:)

[Roger D.]

Mamma this is just a supercycle topping process, off this bottom 1010,everything is 3's which is counter to the main trend which is down. Just for insurance you want to hedge here. The likelyhood of a surprise move to the downside is just too great.

Roger D.

[Mamma Boom Boom]

Roger, let me try another question, "What day is it?"