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Institutions Stay on the Sidelines as Stocks Roar Higher

Hurricane Irene did not come as advertised helping boost stocks at the beginning of the day. A surprise jump in personal consumption helped fuel the early morning rally. The US savings rate dropped a bit to 5%, but the market liked what it saw and pushed higher. Even a disappointing negative reading out of the Dallas Fed could not stop the day’s rally. Institutions were not jumping for joy as volume remained below Friday’s pace and well below average volume. In new bull markets and even new uptrends within a bull market often show big price gains with volume. Certainly a negative for the market as we recover from August’s selling. Now up more than seven percent from the lows we continue to see nothing but a short covering rally.

Counter-trend rallies often occur during bear markets and they come with zero leadership and lacking big volume. It is quite possible we can continue to push back up to the 50 day moving average and even the 200 day moving average, but this rally will likely fail. We aren’t rooting against America, we are simply recognizing the market has undergone a shift and we are in the midst of a major correction. The stock market has and will continue to have uptrends and downtrends. What we are striving to do is to avoid the large drawdowns in the market and get aboard the big uptrends. Long-term success is dependent on avoiding those ugly drawdowns from market corrections (like we have been seeing). Avoid heavy losses even if it means missing counter trend rallies.

An interesting fact posted in our Chat Room today was the cash-to-assets ratio for mutual funds. Remember, mutual funds have to be at least 80% invested according to the majority of fund prospectuses. They NEED to be invested and when you are measuring yourself to a benchmark which holds little cash you will always stay invested. The ratio stands at 3.4% a RECORD LOW. If another wave of redemptions hit US Equity funds it will force fund managers to liquidate assets to meet those redemptions. Perhaps why we are seeing such light volume in this rally is due to the fact Fund Managers do not have available cash to put to work. Regardless, there could be other reasons, but we do know is institutions aren’t involved in this rally and will cause issues down the road.

We will get another rip roaring bull market down the road. The odds are stacking up against us at the moment and until we begin to see leadership emerge this market will continue to be lackluster at best. Avoid churning up your portfolio, stick to cash and wait for those high probability setups to occur.