There is an unsettling resemblance between the chart pattern for April 29, 2011 and March 16, 2012. It indicates that the market is headed lower.
As you can see on April 29, 2011, the Dow reached its high for the year to the accompaniment of heavy aggregate volume and extremely large blocks which were Insiders distributing and selling short to the unsuspecting hapless public.
The block activity on April 29, 2012 in Figure 2 is a subset of the overall mass of data we collected, organized and evaluated. Once again these are extremely large blocks in a number of issues which mark the terminal phase of the rally. The subsequent decline of 2000 points in the Dow came as no surprise. Whenever you witness transactions this large you can make two assumptions:
First - it is a market heavyweight establishing a very important merchandising stance; and
Second - extraordinary price consequences must follow.
We see the same development taking place now albeit to a lesser extent. On March 16, 2012 once again at the market high, there were very large blocks traded (not included). We suspect, the market may have reached its high for the year on March 16th. We are not etching that prediction in stone. In fact we caution clients to avoid an irrational attachment to a plan. Nevertheless, we suspect that in all probability it is the most likely scenario given the facts (for the moment). Of course this precludes quantitative easing on the part of the Federal Reserve.
Obviously the Dow is an index and It can be traded through the DIA or the broader market as a whole can be traded through the BGU (Daily Large Cap Bull 3X Shares) or the BGZ (Daily Large Cap Bear 3X shares) but the real opportunities will be in shorting (at least for now) individual issues.
I am not making specific recommendations on individual issues because the necessary disclosures could be deemed a disservice to my clients, as well as, any trade recommended could be well over before this article is published. That could change in the future but not ideal at the moment.
With regard to Indices averages:
People sometimes make the fatal mistake of equating the movement of individual stocks with the Dow average. In addition, they tend to respond to price over volume. The Dow is often advanced off of its lows while many stocks in the broader market do not advance. This is because they have already been extensively distributed before the Dow advance. Therefore, they have had their run and are going absolutely nowhere in the course of the Dow advance. In this way the Dow will be used as an inducement to get investors to buy these stocks at their highs as well as other issues.
One way to determine whether insiders are using the Dow as a screen to cover their merchandising operations is to compare the Dow with the broader market. This is accomplished using or as measured by the advance decline line. When the advance decline line is not in unison with the Dow, investors should consider the possibility that the Dow is being used to evoke a response and what is the nature of the desired response. The object lesson here is to concentrate your attention on the individual stocks which arouse curiosity as a result of block activity and ignore the Dow as a predictor of what any individual issue is going to do.
At this point, the method for calculating the Dow and the Dow Divisor is a suitable topic for consideration. As previously stated many people equate their own portfolio performance to the movement of the Dow. The market manipulators know that by advancing the Dow they induce investors to buy into the market because investors, as a whole, naively believe that all stocks will participate in the advance. In this way they keep investors in exactly the wrong phase of the merchandising cycle. It is important therefore to know how the index is structured and how the insiders manipulate the index.
(For more detail on the Dow Divisor: Google Dow Divisor or go to 1728.org/dowjone2.htm.)
The Dow average is not calculated simply by adding the prices of the thirty issues together to make the point total of the Dow. After the total number of points is added together there is a number called the Dow Divisor which is divided into the total number of Dow points in order to derive what we know as the computed Dow average.
When the Index was first constructed back in the 1930s the Dow Divisor was a number greater than 1. Through the replacement of Dow components and stock splits in the individual Dow issues, the divisor has been whittled away over time. The impact the shrinkage of the Divisor is having on the index is even more apparent when one considers that a 4 point move in IBM (NYSE:IBM) is equivalent to a 40 point move in the Dow average. This is analogous to a car accelerator or braking system that is over-sensitive to the touch.
The result is that it is much easier for the insiders to manipulate the index because it is now a much more sensitive tool to create large price swings in the index without doing very much at all. Obviously, it is a purposeful manipulation of prices to cause investors to respond to changes in the index.
As of this writing the Dow Divisor is set at 0.132129493. By contrast in the early 1990s the Dow Divisor was set at .7. If the point total of the Dow components was 1600 today, the computed Dow would be 12,109.33; whereas, in 1990 if the point total of the Dow components was 1600, the computed Dow would be at 2,285.71. It seems to me that our currency is not the only thing being inflated.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.