3C Distribution Confirmed by BofAML

If you've looked at long term 3C charts, have you ever wondered how we can have charts like this that show a trend of multi-year distribution, yet the market can still rise?

 Dow-30 with distribution in to 2011 and worse from then to present as price moves higher.

Russell 2000 accumulation at the 2009 lows and distribution in to 2011 and worse ever since.

NASDAQ 100 with several years of sharp distribution, larger negative 3C divergences than seen at any other time over the last century that we have data for.

SPX 500 with distribution in to 2011 and much worse through present.

Really it was easy to understand how the market could move higher despite horrible unemployment and an economy that never recovered, the F_E_D and their multiple Quantitative Easing programs backstopped the market and threw money in to it, but that's ending, however it did move a market to ridiculous levels that are far from justified considering the economic situation, it was far better in 2005, yet we are far higher.

3C is meant to show us what smart money is doing beneath price action, the above 3C charts tell us they have been selling for a good portion of this time since 2009 lows. We've even seen huge hedge funds come out and admit (which can be verified by their SEC releases quarterly and yearly) that they have been "selling everything not nailed down for the last 16 months" as one put it.

How are these signals possible and if they are truly this bad, what does that mean when it's time to pay the piper? As you may have seen before, the 3C signals for the Dow now are worse than they were in 1929 just before the crash...

 If 3C was this bad and caused this much damage in 1929...

What does the current Dow 3C signal tell us about what's coming?

Today we have a release from Bank of America Merrill Lynch that explains a lot, both long term and shorter term...

Source: BofAML

From the BofAML chart above, we can see that "Smart Money" (Institutional Money) were net buyers until about 2011, then Smart Money became "Net Sellers", we've talked numerous times about how large these positions are and how long they take to put together or distribute.

Don't forget our 2 years of Home Builder accumulation as the Dot.com bubble burst, how did they know to accumulate home builders and that housing would lead the next 5-year bull market years in advance with some of these accumulated positions making 2500%?

Not only were institutional clients net sellers, Hedge funds were net sellers since approximately January of 2011.

Institutional money became extreme net sellers around 2013, when 3C really got bad. Who were the buyers smart money was selling to, the green line that increases, Dumb Money or retail.

More importantly right now, look at the Institutional money distribution trend and who they are selling to, retail!

To put a finer point on it, remember the bear flag of May 14-19th and what we expected at that time and how we thought price would get there?

We were expecting the large multi-month range/top to see an upside head fake move before it could reverse to the downside as the range was too defined and too large not to have a head fake move which are seen about 80% of the time in every time frame and every asset just before a downside move.

It turns out we were right, well before price ever crossed above resistance, we had expected this as this is one of our most common concepts seen.

If you recall one way we thought it might get there, it was based on a bear flag in the SPX and what we thought would be a head fake move below the bear flag to trap shorts and then a move back above it to force them to cover, s short squeeze would provide the momentum to break above the range in a head fake move.

From left to right, resistance at the top of the multi-month range, the bear flag we suspected would be head faked with a Crazy Ivan creating a bear trap rather than break down as technical traders expected and that bear trap forcing a short squeeze.

We know it worked as it happened almost exactly as we predicted before hand, as for the short squeeze...

Here's our Most Shorted Index (red) vs the SPX, note how the short squeeze lifted the market, but the last few days the squeeze has ended and all off what we have been calling, "The Bear Flag/Bear Trap Sling Shot Short Squeeze Momentum".

Today I put a post together laying our expectations out, what happened next and where we are now, in essence breaking down what happened above and why that's important in this post, Market Update then additionally more information was added in this post, SQQQ Trade Position Update / Market Update and Finally Leading Indicators verified what we expected to happen above the range...Broad Market Update.

However we can just look at a chart like this to understand the trend of last week which is when the market was above the range.

This SPY 30 min chart shows VERY heavy 3C distribution as the market moved above the range and that's how we confirm this to be a head fake move rather than a real breakout and why we want to short the move at the right time in the right assets.

What is interesting is BofAML's more recent Institutional activity charts...

The entire reason we expect a head fake move is the breakout will cause RETAIL to buy, creating demand that the large institutional traders need to sell or short in to, this is the reason we expected a break out above the range before any significant downside reversal.

The 3C charts are clear that the move above the range was met with strong distribution from smart money, here's another...

The IWM distribution in to the short squeeze.

REMEMBER WHY WE EXPECT TO SEE HEAD FAKE MOVES AND WHY THEY ARE ESSENTIAL TO INSTITUTIONAL MONEY BEFORE A REVERSAL, (THERE ARE 2 LINKS ON THE MEMBER'S SITE, "UNDERSTANDING THE HEAD FAKE MOVE" THAT EXPLAIN SEVERAL REASONS WHY WE SEE THEM SO CONSISTENTLY BEFORE REVERSALS.

KEEP IN MIND WHY WE EXPECTED A HEAD FAKE MOVE AS OUTLINED ABOVE...

Now, BofAML's charts for Institutional Money's net Buys for LAST WEEK, when we were above the range and when 3C showed consistent smart money distribution...

The first chart shows Institutional money were net sellers (that includes short selling) for all of last week with only 1 sector seeing any net buying, the defensive Utilities, EVERY OTHER SECTOR SAW INSTITUTIONAL NET SELLING/SHORT SELLING LAST WEEK AS WE WERE/ARE IN THE HEAD FAKE AREA.

However, there's a reason for the breakout/head fake, it gets retail to buy so guess who the net buyers were last week?

The second chart shows what RETAIL did last week, they were net buyers of almost every sector except a couple (materials, staples and healthcare). THIS IS EXACTLY WHY WE EXPECTED A HEAD FAKE MOVE ABOVE THE RANGE, RETAIL WILL BUY THE BREAKOUT AND PROVIDE THE DEMAND THAT INSTITUTIONAL MONEY NEEDS TO SELL/SELL SHORT, THERE IT IS IN HARD NUMBERS , NOT JUST 3C, ALTHOUGH 3C TOLD US WAY AHEAD OF TIME.

From Bank of America/ML...

"BofAML notes, institutional clients are net sellers of US equities since Mid-April (and are cumulative net sellers year-to-date)"

Last week - as stocks soared, it was institutional clients who were piling out of stocks... and retail/private clients piling in...

And that's the concepts we used along with objective 3C data to forecast this move and what it would be used for and why it's important to us.