Where Are The Markets Going? All Indicators Show Down

Institutions, Options, Technical Analysis (Charting), and Fundamentals All Say The Markets Are Going To Go Down Near Term.

According to Reuters, institutions have sold off 180M+ shares of SPY over the last three months.

Option open interest heavily favors a downward movement in the near term. The SPY is currently at approx. $91.31. June 20 SPY puts show open interest of (from TD Ameritrade):

90 put = 181K
85 put = 129K
80 put = 187K
75 put = 153K
70 put = 127K
65 put = 194K
Total = 971K

The June 20 SPY calls show open interest of:
95 call = 114K
100 call = 124K
105 call = 15K
110 call = 15K
115 call = 13K
120 call = 7K
Total = 288K

That's a better than 3 to 1 ratio bias to the downside.

Clearly movement to the downside is expected. Some investors clearly expect huge movement to the downside. If you look only at the June 20 $90 calls and puts, the open interest is almost equal. By going far from the at the money point, you can see the real flavor of the near term market sentiment.

Technical Analysis (Charting) shows that a tentative double top has been put in. We now seem to be in a retracement leg from that chart formation. Plus the SPY moved up approx. 40% from its low in March to its high in May. The markets are due to retrace. The first point of strong support in the SPY chart is at approx. $83. It seems likely the SPY will reach that point in the near future.

Fundamentally this market is overbought. One could possibly argue that the very bottom was oversold. However, the SPY rose about 40% from its very bottom to its latest high. The markets are overdue for a pullback. Europe is doing badly. Japan is doing badly. The Fed downgraded their forecast for this year and next. The charge off rates in the credit card businesses are getting higher. The unemployment rate is getting higher. The commercial real estate market is beginning to implode. The residential real estate market prices are still falling. This ultimately means that the banks (and the home owners) are going to face still greater losses over the next two years.

GM is almost into bankruptcy. Chrysler already is. Many of the parts manufacturers are very close if not in bankruptcy. Many of the smaller banks are in serious trouble- approximately 30 have already gone under this year (one every five days). Even the large banks still have troubles. Citi (C) has lots of real estate loans on its books that are guaranteed by the government. It doesn't want to sell these in PPIP because it would then have to show a loss for them. Hence overvalued loans are staying on the books at bogus valuations.

The mess is not getting cleaned up. Citi is not the only bank doing this. Eventually all of this has to get cleaned up. There is talk of the US losing its AAA credit rating. The government and the Fed are monetizing debt (printing money). They are keeping the interest rates low for now. However, their current actions will surely lead to inflation in the future. We are starting to see this with oil and other commodities. The idea that we are out of the woods is patently absurd.

Yes, all of the money the government is throwing at the economic problems should be having a beneficial effect. It does seem to at least be slowing the rate of decline. However, this market is due for a correction downward in the near term. The best support point I could find was at about $83 on the SPY.

Perhaps the GM bankruptcy will be the trigger for the retracement?? Whatever the cause, it does seem almost inevitable that it is coming. Goldman Sachs (GS) (apparently GS accounts for about 20% of the daily trading volume) et al may be fooling some people into believing that the upswing will continue indefinitely. However, institutions have sold off the SPY to the tune of 180M shares over the last three months (Reuters). Does that sound like all of funds, etc. are behind this rally??? It doesn't to me.

Disclosure: I don't own GS or SPY.

Comments

[User 305589:]

In general (though not always) the options sellers are the smart guys. Retail folks usually are the dumb marginal buyers (except me and the readers of SA, of course, as we all are convinced that we can and will outperform the markets) and retail investors rarely sell options they usually just buy.
So then, it would seem that the smart folks have sold a boatload of puts - but fewer calls - as demand for puts obviously outstripped demand for calls by 3:1. From that angle, it seems that SPY will settle anywhere in the 90-95 range by expiration as that would inflict a maximum amount of pain for the options holders, and the maximum pay-out for the sellers (writers) of these contracts.
Imho the task of this bear market (sucker's) rally is to suck as many people in as possible and for that target to achieve, it has still a long way to march. An absence of any meaninful correction for another 2 or 3 months and a Dow reaching 10.000 and a S&P at 1000-1100 wouldn't surprise me at all. There are way too many sceptics still out there (people like me) who may be well invested but refuse to buy any more and to chase anything. As a private investor, I 'only' have to keep my own emotions and my own greed and fear in check. As an institutional, especially an underinvested one, you face much more pressure to jump into this market. And a Dow at 10.000 could and likely will exert a ton of pressure in this regard.
As for me, I will continue to scale out of long positions into any further rise while keeping only those stocks and bonds, which I regard as still way undervalued and/or a very attractive long term hold even in a bad economic environment. And the environment won't improve significantly for quite some time to come, don't kid yourself.

May 27 06:30 AM

[David White:]

I should have mentioned that the volume of both the SPY and the DIA has been declining for the last month and one half. This tends to increase the likelihood that the markets are due for a near term down trend (i.e. the uptrend has run out of steam). The volume is roughly one half of what it was two months ago (or less).

On the counter side, some might argue that we are seeing a cup with a handle formation emerge. We will have to wait to see what actually happens. As the article states there are many other reasons to believe a down movement is imminent. Plus a cup with a handle formation would mean there will be a huge upward movement in the near future. I do not find the current economic state supports this idea. Ditto the rest of the data. The near term double top seems much more plausible.

May 27 08:21 AM

[prudentinve...:]

Great analysis and advice, and I fully agree with all you said. As an independent investor, I've done my buying spree, averaged in at around 750. I've taken some profits already at an average of around 890. Right now, I am about 50% in stocks, and awaiting the next big move up that will try to scare the bystanders into jumping in, and hope to take more profits if we go to 950-1050. I still see very poor long term fundamentals, and so expect a big move down before we return to long-term trendline, which I still see as 750 +/- 20% plus inflation.


On May 27 06:30 AM User 305589 wrote:



> " Imho the task of this bear market (sucker's) rally is to suck as
> many people in as possible and for that target to achieve, it has
> still a long way to march. An absence of any meaninful correction
> for another 2 or 3 months and a Dow reaching 10.000 and a S&P
> at 1000-1100 wouldn't surprise me at all. There are way too many
> sceptics still out there (people like me) who may be well invested
> but refuse to buy any more and to chase anything. As a private investor,
> I 'only' have to keep my own emotions and my own greed and fear in
> check. As an institutional, especially an underinvested one, you
> face much more pressure to jump into this market. And a Dow at 10.000
> could and likely will exert a ton of pressure in this regard.
> As for me, I will continue to scale out of long positions into any
> further rise while keeping only those stocks and bonds, which I regard
> as still way undervalued and/or a very attractive long term hold
> even in a bad economic environment. And the environment won't improve
> significantly for quite some time to come, don't kid yourself.

May 27 08:44 AM

[enigmaman:]

I lack the tech and fundamental capacity to respond in kind, however I look at those problems Obama, Congress and the Fed said needed to be immediatley addressed for fear of a total economic meltdown, they were, bank illiquidity, banks getting toxic assets off their books, not allowing GM & Chrysler to go into bankruptcy and finally curtailing home foreclosures by any means required. Only the banking liquidity problem has seemed to have been resolved through massiive infusions of cash, so it seems that everything esle we were told had to be resolved has not been and it looks like what they said they could not let happen will happen the second half of this year. So it appears the worst is yet to come

May 27 09:34 AM

[thiazole:]

These negative articles predicting the end of this rally seem to be contrarian indicators lately, and there are a slew of them today... I wonder if the Dow will hit 9000 this week?

May 27 09:54 AM

[Larry House:]

Sometimes the market just refuses to give investors the "obvious" outcome. All indicators point to a retracement. My gut says the market should go down, but I am sticking with the market because it just may not retrace as expected.

May 27 10:26 AM

[thiazole:]

Perhaps we've been retracing for a while. If you look at the Nasdaq and place the first week of January as the beginning of the retracement (ie, the November and March crashes are analogous), the right hand chart is almost a perfect mirror image to the left hand. Of course, it implies that the market is about to blitzkrieg upward any day now...


On May 27 10:26 AM Larry House wrote:

> Sometimes the market just refuses to give investors the "obvious"
> outcome. All indicators point to a retracement. My gut says the market
> should go down, but I am sticking with the market because it just
> may not retrace as expected.

May 27 11:27 AM

[Mad Hedge F...:]

Bravo! Today is the 60th anniversary of the launch of the Intelligent Investor, by Benjamin Graham, the Bible for all fundamental analysts. So it behooves us to recognize that multiples for the S&P 500 have just leapt from 13.1 to 15.5 times in a mere two months, the sharpest and most rapid multiple expansion in history. Did I say multiple expansion? Have the fundamentals really gotten that good, that fast? I think not. If anything, we are enjoying the calm between two back to back hurricanes. You only have three days left to sell in May and go away.

May 27 12:15 PM

[carey_jim:]

It seems to me that it is people like you who will bring the market down trying to exit, all at once, with a profit.

Said in another way, if you can make 30% in a few months, be happy and take your profit. Why be greedy? Get out before the next giant wave of panic selling begins.

If you are someone who recently bought into the market because you couldn't resist any longer, then you are NOT in the group my first sentence was talking about. But it still applies to those who are.


On May 27 09:54 AM thiazole wrote:

> These negative articles predicting the end of this rally seem to
> be contrarian indicators lately, and there are a slew of them today...
> I wonder if the Dow will hit 9000 this week?

May 27 01:07 PM

[thiazole:]

Nope, I first started buying stocks during the first 2002 crash and rode that to enormous gains (and yes, there was another crash in 2002 where is was briefly under water). I liquidated almost everything I owned in early 2007. I did some trading in and out in the fall of 2008, but started plopping all my chips down starting in the middle of January until late February.

The S&P is down 42% from its highs - there is no irrational exuberance going on here. The bears are deluded to think that. There is no way I'm selling when the market is this low. One way or the other, it will get back to at least within 20% of the previous highs. Why would I sell now?

Besides, I have much more money on the sideline that will go in if the bears are right and the market crashes again, but the last thing I'll do is panic sell. In no way do I bring the market down except in the popping of bubbles.


On May 27 01:07 PM carey_jim wrote:

> It seems to me that it is people like you who will bring the market
> down trying to exit, all at once, with a profit.
>
> Said in another way, if you can make 30% in a few months, be happy
> and take your profit. Why be greedy? Get out before the next giant
> wave of panic selling begins.
>
> If you are someone who recently bought into the market because you
> couldn't resist any longer, then you are NOT in the group my first
> sentence was talking about. But it still applies to those who are.
>

May 27 01:54 PM

[AndrewBaker:]

It's all happening so much more slowly than I thought it would, but it is happening: soundbites, disinformation and outright lies that have pushed the markey far to high since March are nearly out of steam. Maybe low volume will enable some prgrammed buying to push it yet higher before the great correction, but great correction there will be. As Mad Hedge Fund Trader says above, there's only three days left to sell in May and go away, and one of them has only 90 min trading time left.

May 27 02:37 PM

[joes:]

There has been great progress made on the economic front over the past few months, much of evidently missing us expert investors at SA evidently;^).

Bad banks are known, 600-700 out of 10,000 nationally, Chrysler is in bankruptcy and is projected to be out as early as next week. Canada and the US will own 70% of GM, and sell the units off one by one, a great sign of progress as the GM business was clearly broken.

I've started buying from cash reserves, (no I'm not one of the guys that times the market and got out and in and out and in and made 600% and other BS you tend to see here.) Bought Siemens and CREE, they seem like 3-5 year investment grade stocks.

Isn

May 27 02:43 PM

[thiazole:]

This reminds me of Y2K.

On May 27 02:37 PM AndrewBaker wrote:

> It's all happening so much more slowly than I thought it would, but
> it is happening: soundbites, disinformation and outright lies that
> have pushed the markey far to high since March are nearly out of
> steam. Maybe low volume will enable some prgrammed buying to push
> it yet higher before the great correction, but great correction there
> will be. As Mad Hedge Fund Trader says above, there's only three
> days left to sell in May and go away, and one of them has only 90
> min trading time left.

May 27 02:49 PM

[David White:]

I should also mention that many companies are rasing capital through new share offerings, especially the bank stocks. This action leads to share dilution, which normally makes stocks go downward. At the very least these new share offerings, which are supposedly about 5 times more than a few years ago, present a definite headwind to the markets going upward.

May 27 04:57 PM

[Nathaniel C:]

"Prophesy as much as you like, buy always hedge."
Oliver Wendell Holmes, 1861

May 27 05:29 PM

[Nathaniel C:]

"Prophesy as much as you like, but always hedge."--
Oliver Wendell Holmes, 1861

May 27 05:31 PM

[David White:]

Ockham Reasearch just put out an article. They said Barron's estimate for the S&P500 PE as of May 25, 2009 is 123x. Ockham's own estimate is 46x. This is another indicator that the market emotion is clearly responsible for a lot of the recent run up in stocks. Admittedly the market will recover. However, the recovery is supposed to be a very slow process. We may see unemployment at 9% and above through 2010 (I think the Fed said this). Does that sound like the PE's are likely to grow quickly enough to justify at PE in the 50 to 100+ range??? It doesn't to me. This is just another piece of convincing evidence that the markets are likely in for a substantial retracement soon.

May 31 01:40 AM

[David White:]

Prieur du Plessis wrote an article over the weekend. In it he cited the Lowry's Selling Pressure Index and Buying power Index.

Mar. 9, 2009 Selling Pressure Index = 884
May 31, 2009 Selling Pressure Index = 868

Mar. 9, 2009 Buying Power Index = 120
May 31, 2009 Buying Power Index = 156

It would seem the same amount of negativism is in the market now as there was when it was just bottoming in March. This would seem to portend a market decline in the near term, especially since we have been on a three month up trend.

Jun 01 07:26 PM