Yesterday the markets opened up strongly and it appeared that the bulls were in charge, but they suddenly reversed course. As we stated earlier this reversal in the markets was caused mainly by the strength in the dollar. Any crap today seems to trade higher the moment the dollar drops and vice versa. This type of action is usually indicative of a short term top as it indicative of too many people chasing a sure thing; the sure thing being to be long equities and short the dollar.
If we dig a bit deeper we find that while the markets were rallying in the morning, volume was actually about 15-16% lighter than the previous day and once the markets started to sell off, volume actually picked up. This is rather bearish as in the past the opposite would have occurred; volume would have been high on the way up and lower on the way down.
This spike in volume indicates that the smart money is selling into strength and waiting for better prices before deploying new money into this market. Total volume traded was much higher than on Friday so we have yet another day of distribution.
One other thing to consider is that the financials led the market higher after it bottomed in March and they are the ones that are pulling back the fastest now. If you look at stocks such as JPM and AIG, it appears they have already topped and are on the brink of breaking down.
Going forward caution is warranted and traders should think twice before opening long positions now. Wait for a decent pull back before opening any new long positions. At the minimum the indices should correct 10% from their highs.
Disclosure: we have no position in the mentioned stocks