S&P 2014-07-23

BarroMetrics Views: S&P 2014-07-23

The traditional technical tools I consider:

  • Vix
  • Range and Volume
  • Advance/Decline
  • Relationship between small caps (I use Russell 2000) and the S&P or DJIA

are all flashing warning signals that the US stock market is topping. BUT, and it is a huge BUT, the DJIA and S&P just keep grinding up. It’s not that there is huge demand, it is just that there is a lack of supply. It is this condition, plus the fact that the buying is concentrated in the larger indices, that is resulting in the divergences we are seeing in the indicators I mentioned.

In turn, this ‘grind’ is the result of the price distortion caused by QE. And, although the FED has indicated it will bring QE to anĀ  end, probably October 2014, there seems to be a belief that when ‘push comes to shove’ the FED will return – should it look as though the stock market will crash. So, it will need a catalyst to break this belief; or at least the belief that no matter what happens, all investors have to do is worry about is the FED’s actions.

Add this that:

  • the participantsĀ  in this ‘bull market’ have been the funds i.e. the has been a lack of public participation; and
  • that the majority of the funds are long,

we can expect to see a flash drop if they all exit at the same time.This is likely to happen if the reason for the decline is the catalyst that deflates the belief in the FED. For me, it’s time now to start thinking about how best to exit long positions.

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