The evidence is heavily weighted toward market distribution and has been for quite some time. My realmoney.com colleague and friend Ken Shreve has been talking about the institutional distribution signals since July. I would actually go back a bit further to when the distribution started – following the March tsunami in Japan.
That is where we saw the first big signs of institutional selling. Oh, we had some decent price moves following that low but there was no conviction. All paths lead to the institutions, who make up 80% of the market action. I look for strong volume on the up days as the best way to measure institutional participation. Turnover has been absent – therefore buying levels are missing. support is tenuous.
Who is doing all the selling? Maybe that’s the wrong question – who isn’t selling? Bear markets are not fun but are a fact of life. What goes up eventually comes down (and goes back up, etc). We will ride the trend until it doesn’t work. Is it ok to sell here? Anytime it is ok to sell. As option traders we cannot hold onto trades for very long. Calls and puts are wasting assets – we need to move quickly.
As Jim Cramer mentioned on his Mad Money show the other day it is so much more fun being bullish. Yet, we must accept and embrace the conditions that are in front of us. Some bulls have dug themselves a hole as they have been buying all the way down, some very deep. That is just not the best activity here. Warren Buffett once said in order to get out of a hole you need to stop digging first.
I don’t care what is being flaunted out there about ‘great buying opportunities’ here or ‘cheap valuations’ there. When the selling exercise commences you stand back and let it finish. There are strategies and tactics to navigate through choppy waters – I suggest you use them. Now is not the time for complacency, it is a time for action. This excerpt from my early Friday realmoney.com post:
This is a time to be defensive – buy some put protection, sell some longs if you can, sell calls and take in the nice premium if you want to hold. Now is the right moment to be active and not sit around to get run over.
The chart up above tells the story. The most accomplished bear market serves to trap those with hope into the market only to spin them around and make ‘em so sick they can barely move. I’ve been there – and if you have been around markets for awhile so have you. Legends are made by making a correct timing call. After all, you get many chances to get it right once.
That’s all good and well for the ego but does it make money for you? That’s all I care about. I measure success strictly by the bottom line. Am I making money for clients (or at least not losing them money…cash is a decision and a position)? Are we positioned correctly, flexible and ready to move our feet when the winds change? Can we accept losses and turn it around? Our beliefs are embedded in our minds and make it very difficult to shift gears.
With a market that moves at hyper speed, from up to down and back again we must let go of our beliefs and just move with the market. Is my focus on the charts and what is happening today and likely to occur in the future or am I lamenting my losing positions in the market?
A bear market can be the most humbling experience yet as we continue to fight it the fatigue sets in. Jim ‘Rev Shark’ DePorre of Shark Investing says it right – ‘A bear market will wear you out, not scare you out’. We have just finished the worst quarter in quite some time driven by some of the worst policy decisions in history (globally). What to expect in the 4th quarter? You won’t get that from me, rather we’ll play the market in front of us.
Bob Lang is the founder of options trading newsletter Explosive Options