More Pros Moving Out

You probably remember the post 3C Distribution Confirmed by BofAML. I've put out quite a few maps of what we were looking for since mid-May and what came about since then, we were looking for a move above this range with strong distribution as it's just a high probability concept (more than 80% of the time) and with a range that's 3 months long in the most watched Index/ETF in the world, the probabilities go up exponentially.

In white is the bear flag we found in mid-May, shortly after I had thought this market would not move below the range with a range this large until there was a break above the range and there was solid distribution in to that break, in essence a head-fkae/short squeeze. The bear flag was instrumental in getting that kick-started via a Crazy Ivan shakeout which is what we had forecasted, the short squeeze took over in to 1900.

We saw the distribution we expected to see as this move is designed to create demand, force short squeezes which is also what we were able to confirm.

SPY 30 min not only shows YTD (and longer) distribution, but specifically above the range area, the same area BAC shows Institutional money net sellers and retail net buyers.
 Even this other Money-Flow indicator that I ran across which caught my attention because it looked so similar to our own charts...

More on this chart found here, Broad Market Update

So we have the broad concept which predicted the move and how it would happen weeks before, we have the distribution in 3C we were looking for, the confirmation of institutional new selling from B0fAML not only for the immediate time period, but on a much longer basis as seen in this chart and this post, 3C Distribution Confirmed by BofAML

Note the long term and especially short term trajectory of Institutional vs. Retail net sellers/buyers.

You may also recall last week, F_E_D Correlation , that if you extrapolate the SPX's correlation to the F_E_D's balance sheet expansion to the end of the taper, the SPX has already met that target well before the F_E_D got there, I suggested that this is the market front running the F_E_D as it usually does and the 25 to 30 SPX (points) premium above the balance sheet is also being confirmed in the ES CONTEXT model and is likely a result of not only the pricing in which would have been just slightly above the 3 month range, but a head fake move as well that is needed as Wall St. can't make money in a zero sum game with everyone on the same side of the boat.

Here's what the SPX's front running of the F_E_D looks like...

Using Rate of Change on the F_E_D's Balance Sheet expansion (blue) and ROC on the SPX , you can see the SPX front ran the F_E_D every time. However right now, both are essentially at the same place. It's my contention that the market will front-run the end of QE as it is the only thing that has pushed the market higher thanks in large part to about a $4trillion dollar balance sheet expansion with much of that ending up in the market in what I believe was a stealth bank bailout because we all remember how happy the public was with the GM and AIG bailouts, but POMO/QE, that's above the public's head.

I made the case here, F_E_D Correlation

And now we have Goldman confirming the exact same...

Goldman Sach's Dave Kostin:

"While many investors puzzle over the decline in 10-year US Treasury yields to 2.6% alongside the S&P 500 at an all-time high, recent data suggest they moved flows in the same direction. Mutual fund, futures, and ETF data show a shift away from stocks and towards bonds during the past month. Pension funds have also sold stocks and bought bonds in 1Q. Equity market performance supports a pro-risk stance offset by a muted return outlook given high current valuations."

and...

"Institutional investors have also reduced exposure to US equities. Net equity futures positions of Institutional and Levered Funds have declined to $68 bn at the end of May from $92 billion at the start of April "

 

Specifically, "recent data suggest they moved flows in the same direction. Mutual fund, futures, and ETF data show a shift away from stocks and towards bonds during the past month. Pension funds have also sold stocks and bought bonds in 1Q"

This is not only in May, but through Q1, which is what I suggested with this chart...

Treasuries (TLT) in blue are moving up with the SPX, that's not suppose to happen, it's a risk on event ion the SOPX which is really nothing more than a short squeeze and a "Flight to Safety" event in Treasuries.

As many puzzle over rising bonds, falling yields and a rising SPX, I don't think there's any disparity there. All of the above suggests professional distribution. As Kostin notes, Mutuals, Hedgies, Pension funds have all been net sellers, Distribution through all of MAy and all of Q1, Bank of America goes further back to year to date.

How can both Treasuries and the market rise at the same time? More specifically right now with the SPX at an all time high and VIX at lows not seen since 2007, all of the above whether 3C, someone else's money-flow indicator showing the same, BAC's trade data showing the same and now Goldman coming out with the same, would all confirm professional selling as well as our leading indicators which can be seen here (the most recent charts), Broad Market Update, simply...

The money coming out of risk assets (stocks) and when I say coming out, short selling prints as a sale no different than a sale so there's no distinguishing them, has to go somewhere, it's moving in to treasuries and sending yields to ridiculously low levels. Either the market thinks the F_E_D will hike rates a lot sooner than they have been letting on, or the professionals would rather take next to nothing for a yield and get the heck out of equities.

Again, I think the SPX's richness to CONTEXT and to the F_E_D's balance sheet expansion when extrapolated all the way out to the end of QE3, is about one thing, that would be this head fake move...

These moves have to be convincing, how else could that many pros sell that much inventory without crashing the market? However, the entire reason we predicted this move in Mid-May was because we see the concept of a head fake in every asset and every time frame at least 80+% of the time, with a range this clear and the SPY as the asset, the probabilities go beyond 90%, that's why we were looking at hitch-hiking longs in Mid-May as I posted (the original post from that period) last week.

As I said Friday, I'm looking for more of a stair step decline likely this week, I don't think shorts will be eager to jump in, that is until we cross in to and under the range, that's where I think it gets very dangerous on the downside.

Something like this, as soon as the Q's broke below this area in March, they promptly retraced the entire Feb. rally, the IWM did the same.

One thing to look for is high closing / daily candlestick volume. We already have the change in character in price's Rate of Change, a high volume daily candle in the averages will be the big red flag I'll be looking for.