Follow  the  Institutions

"You can't go by how you feel in the market. The only  thing that works well is to let the market indexes tell you when it's time to enter and exit. Never fight the market - it's bigger than you are."

By Mr. William J. O'Neil (Founder of Investor's Business Daily)

I have consistently expressed my views that it's the big institutions like the pension funds, mutual funds, hedge funds and professional money managers that account for the bulk of the daily trading volume in the stock market.  They account for over 75% of the total volume traded every day.  Lot of this is done with the aid of computers that are programmed with algorithmic trading modules.  We as retail traders and investors have to learn to interpret stock charts to evaluate the foot prints left by them in the market.  

There is a lot of noise in the media on a daily basis.  Lately we keep hearing of the inverted yield curve n how it's a precursor to the recession that will follow.  Some in media spout out that the transport sector and retail sector have to be uptrending for this market to continue on the bullish trend.  There is also scary tactics used to rile up the retail investors that the small cap index $RUT is not showing the bullish strength to confirm the present bullish trend.  It's best to look at the data and let our decisions be data driven instead.

Looking over the market data and the performance of the 3 major indexes and the 9 sectors of the market, here are the results of the performance since the lows attained on Dec 24th 2018:

Indexes:

1. $DJI      ... + 25%
2. $SPY    ... + 29%  
3. $QQQ   ... + 35%  

Sectors:

1. $XLK   ... + 41% (Technology)
2. $XLY   ... + 35% (Consumer Discretionary)
3. $XLI    ... + 30% (Industrials)
4. $XLF   ... + 27% (Financials)
5. $XLB   ... + 24% (Materials)
6. $XLP   ... + 23% (Staples)
7. $XLE   ... + 20% (Energy)
8. $XLU   ... +18% (Utilities)
9. $XLV   ... +15% (Health Care)

Historical  Perspective

The 3 indexes that I monitor - $DJI, $SPY and the $QQ are highly correlated.  Leading index is the Growth Stock index $QQQ.  We had a bull market from 1994 to 1999 during which time the small cap index $RUT was lagging the $SPY and the $NASDAQ.  Transport sector did only +69% while the  $SPY gained +215% and the  $NASDAQ  gained a whopping +423% within those 6 years.  $QQQ a Growth stock index that I monitor pretty much mirrored the performance of the $NASDAQ.

As retail traders and investors, we have to look at the market in an unbiased and an open mind.  It's best to look at the data that the stock charts and indexes provide us on a daily basis.  It reflects exactly what the institutions are doing.  Currently we have only 5 distribution daays between the $SPY and the $NADAQ.  For the last 2 weeks, the 20 day sma(simple moving average) has crossed over the 50 day sma in a distinct bullish move sloping upwards.  All the 3 indexes have cleared the long term resistance and the sideways consolidation of 17 months we had with the $DJI.  Longer the market continues to move up away from the long term resistance, greater the likelihood of the market to continue to making higher highs.  We have 10% of the $SPY companies reporting earnings this coming week.  This will be the week to see what stocks are breaking out.  That will give us the confirmation of where the institutions are deploying their capital.     

Where  are  we  Headed

Lately when I talk to people while I am walking in the neighbourhood or when I am making a presentation to investors groups, there is a hesitation on the part of the investors to be involved in the market.  I hear all kinds of reasons from them not to be in the market when the market is at an all time high.  I shall leave you with the following quote from Mr. William J. O'Neil:

"The hard - to - believe Great Paradox in the stock market is: What seems too high and risky to the majority usually goes higher eventually, and what seems low and cheap usually goes lower." 

Happy Trading!

Amin