The Tycoon Report

Institutions Dumping Stock! Markets Are Declining!

Tuesday, November 3, 2009 | Chris Rowe

Hi folks, happy Tuesday! 

Been feeling a little under the weather lately, but I'm back in the saddle and it's GREAT to be back.  So, let's dive headfirst into this week's article!

As most already know, I typically keep my general commentary reserved for members of The Trend Rider (my options trading service). But today I'll share a less-detailed version of what I've been telling members of TTR, which is that the odds strongly favor a continued stock market sell-off -- BIG TIME.

The market is already selling off heavily, but you may not be able to see it if you're not following the "internal market." (Click on this link to read more about what drives the internal market.)

To most stock market "civilians," it will appear that the Dow Jones Industrial Average (Symbol: INDU), with all the volatility over the last five trading sessions, has only lost about 100 points. 

Big deal, right? 

But if you're in-the-know, then you understand that the amount of market value the major indices have lost isn't what's important here. 

What's important are the KEY PRICE POINTS (i.e., support levels) that so many stocks have broken through!

Stocks on Sale, but Who's Buying?

Last week, 11% of all stocks (net) on the New York Stock Exchange broke through support levels, putting them on sell signals. 

I'll make the importance of this event very simple. 

All you have to understand is that, if a stock declines and breaks through a key level, the stock is much more likely to continue lower (because the big buyers who were supporting the price of the stock are no longer there, or the sellers had more stock for sale than buyers had to buy). 

Let's say XYZ stock is trading at $50.50 and the key support level is at $50. If XYZ stock closes at $49.25 (75 cents below the support level), then it is MUCH more likely to continue lower than to regain enough demand to reverse and continue its uptrend. 

Even though the stock only declined by $1.25 (or 2.4%), the whole picture changed dramatically!

So what I'm telling you today is this: After being very overbought (where typically most of the money that institutions had with which to buy stock, has already been used for buying stocks -- and the demand side has used all its "ammo," or is "fully invested"), the market has now reversed lower. 

Importance? 

As they take profits, when everyone is "fully invested," there isn't much money to step in and buy more.

(New) Buyers Beware

The selling has begun and we know that 11% (net) of NYSE stocks broke through those key support levels just like the "XYZ stock" example above.  The market only moved slightly lower, sure, but the real picture is stocks are poised to drop.

Then there is the fundamental picture that my partner Ron Ianieri explained in his Tycoon Report article on Oct. 26.   You can read that article here. (But finish this one first!)

As I reminded TTR members yesterday...

Out of the 46 Sector Hunter Broad Sectors, only seven were showing institutional buying.  The others showed institutions starting to dump the stocks within those other 39 sectors. 

When we see a high-probability situation, we trade it.  It doesn't matter what the outcome is.  It doesn't matter if we are "wrong" or "right" about the actual outcome.  Nobody can know for sure what the future holds.  But what we CAN determine is when we are looking at a high-probability scenario. 

If we play high-probability scenarios every single time, we are going to be "successful" most of the time, and "unsuccessful" some of the time.  Furthermore, if you are NOT playing the high-probability scenarios, you don't belong in the market.

Never use the last outcome in today's decision-making process. 

(Don't say: "Well, we were 'wrong' in July about continued downside, so even though odds strongly favor a decline again, I won't listen this time.")

Consistency is Key

Start thinking about the OUTCOME as being either successful or unsuccessful -- not a way to see whether you were "right" or "wrong."  That thinking doesn't apply to the market. 

In other words, no matter what the market actually does, we are RIGHT to be bearish right now. 

It's just like a person who drives drunk, thinking they won't hurt anyone, not being "right" just because they somehow made it home without an accident.  The person is WRONG for driving drunk. 

If you get bullish or stay bullish in this market, you are the investing under the influence -- and sure, maybe you will be successful on the trade, just like the drunk driver who made it home.  That wouldn't make you right.  It will make you wrong and lucky.  Anything can happen. 

Play the high-probability situations every single time, and you'll make money in the market -- BIG TIME.  The key, after you make up your mind to play those odds every time, is about managing your money correctly.

YOU DON'T WANT TO OVER-LEVERAGE YOURSELF. 

Trade this market like it's going to go lower by exiting positions that are bullish and entering bearish positions.  Hedge bullish positions that you, for whatever reason, can't sell.  Reduce the size of bullish positions that you can't bring yourself to exit. 

But, high-probability situations present themselves several times per year.  Don't feel like this is "the one" where you have to dump an obscene amount of money into the trade. 

Just be disciplined here.

Statistics show that many individual investors missed this bull rally.  People are frustrated.  As a result, they may be easily over-excited to make money on the downside (or to make the mistake of buying on this decline). 

This means temptation to put bigger money in the market (to play this downside move) than you are accustomed to committing to the market. 

Don't do it.

The key is money management.  At The Trend Rider, we typically use "stock-replacement" strategies.  We put less money into the position and we can make as much money as the stock investors with much less risk.

Where We Are, Where We're Going

Let's look at a chart of the NYSE as of Friday's close (scroll down). 

The first thing you want to look at are the two red arrows on the lower right side.  You can see they are pointing to the volume traded on Friday and Wednesday (both were big down days).

The volume bars are red when the market is down and green when the market is up.  In other words, you can see there is high volume when the market is declining.  That means institutions are selling. (Hopefully not to you!) 

Furthermore, the selling is broad-based, like I mentioned (11% difference).  This means that, instead of money exiting one stock and then moving into another one, money is exiting one stock and sitting in cash! 

So, it's not as easy to see when looking at the popular indices like the S&P 500 (Symbol: SPX), Dow, Nasdaq (Symbol: NASD), NYSE etc.  You will see it show up in these major indices soon.  And it will probably seem like most of your stocks moved lower by a larger percentage than the indices. 

Back to the chart...

All the other (black) arrows point to high-volume situations. 

(Volume equals validity.  The moves that are backed with heavy volume are the meaningful moves to pay close attention to because those moves are forced, and caused by ACTION, as opposed to movement caused by INACTION ... such as an advance on light volume due to sellers just not selling on that day, as opposed to so much buying that it pushed prices higher).

The volume section is divided into two parts (circled in blue and red).  The first pulse higher from the March lows to July lows shows the volume was heaviest during market advances (bigger volume bars are green). 

But during and after the July correction through today, you can see the relationship gradually changes where heavy volume is found more frequently on DOWN days (larger volume bars are red). 

In the red circle (volume section) you can see one very big green spike in volume.  But that was at a market top with a Key Reversal Day where the market moved up and then reversed lower intraday, with a closing price only slightly above the open.  

So, it was a distribution day.  

These are not tea leaves that predict a future move.  These are the footprints left by institutions that have taken action. These actions are almost always followed by more similar action. 



Anyway, we have to play high-probability situations. 

As I told members of TTR: I am going to play it aggressively by getting bearish.  If you are afraid to do that with your other (non-TTR) money, that's fine, but at the very least don't do the OPPOSITE (by staying bullish).  

Look at the Moving Average Convergence/Divergence (MACD) sell signal (purple circle).  That was followed by a negative divergence (a precursor to a reversal of the uptrend). 

Look at the fact that the market broke the major uptrend that started in March.  In other words, there currently IS NO UPTREND LINE. 

Again: There IS NO uptrend line intact right now. 

To make a new uptrend line, we have to bounce off of (create) a low (wherever that may be) in the future, and we have to THEN move above the October high -- for it to be an official uptrend line. 

So, why be bullish in a market without an uptrend line?

Look at the bottom of the chart.  The Relative Strength Index (RSI) is at a level last seen in the July correction (blue lines).  So, at the very least, you can expect more of a sell-off before a bounce (black circle). 

What's Coming Next?

It's far more likely that we'll see a larger sell-off.  We have to assume that, when we see action like this,  there is news on the horizon we haven't seen come out yet. 

The way to either increase your current wealth, or to become wealthy in the market, is to just stay disciplined. 

That's it.  That's the rule.  It doesn't get simpler than that statement.  Period.  Stay disciplined. 

That means playing the high-probability outcomes over and over and over again. That's it. 

Don't feel bad if you take a stance and your trade is unsuccessful.  (That's why we have limited downside, when using options instead of stocks.)  The only reason to feel bad is if you take the stance that goes against all odds, and then lose money. 

Odds strongly favor more downside.  Market advancements are gifts that the market is handing you right now -- not the other way around.  Don't believe the hype. 



“Profit from the Trend”

Chris Rowe
Chief Investment Officer
The Trend Rider