Market in Distribution Continues

We started a new month this past week, but it was like déjà vu all over again.  The Groundhog declared an early Spring on Tuesday, a change in weather.  But regarding markets, you could have fooled me.  It was the same action we have seen for weeks on end, and it doesn’t seem to be letting up.  The vicious selling last week was magnified on Friday after a jobs report that seemed indicate the Fed may be trapped.  I’m not so sure about that, but the market speaks louder than my opinion. The stock market is under severe distribution, and it doesn’t appear to be ending any time soon.

In a bear market there is no stock that goes untouched.  It may take some time eventually the selling hits everything in sight.  Some of the most favored names over the past few years, like the FANG stocks (Facebook, Amazon, Netflix and Google) have been hammered since the start of 2016.  No surprise really, strong stocks become a source of funds.  Bear markets are like dark clouds that spread completely but very slowly.

Institutional selling is distribution, and is quite apparent when we look at metrics, sentiment and indicators.  Since peaking in 2014, breadth (daily accumulation vs distribution) has been on the decline.  Did that start the bear market?  No, but it certainly contributed.  The evidence has been cumulative, and the indicators have been lining up – bullish percent index has been falling since early 2015 (negative divergence), put/call ratios have been elevated, market volatility has been steadily rising since 2014 (all VIX futures contracts are above 22 now).

http://www.tradingvolatility.net/p/datasourceurldocs.html VIX Term Structure – Tradingvolatility.net

Institutions move stock prices — they move them BIG!  So, it makes sense to follow the big money and how it is flowing.  Some of the best tools around, such as the Chalkin Money Flow, on balance volume, McClellan Oscillators and momentum indicators tell us EXACTLY what is happening with institutional flow.

Is it not a coincidence these bearish indicators coincided with the removal of QE by the Fed (last new buying occurred Oct 2014).  The Fed has been extremely accommodative since instilling their massive bond buying program and near-zero interest rate policy just after the Great Recession.  It shored up confidence, balance sheets and wealth.  Further, their policy made it easier for corporations to expand and create jobs.  We have seen evidence of this fact over the years with tremendous job growth.  Last week’s figures showed a low unemployment rate and continued job growth.

Yet, at some point the Fed has to take their foot off the pedal or risk some discomfort.  This is happening now, and we see/feel the effects daily.  A market in distribution.  The good thing is we see this now and can take action by selling/trimming our holdings, buying protection via puts and waiting patiently for this to finish.  Trying to guess and time a bottom is futile and useless (a broken clock is right twice a day), the market will tell us when it’s over.