Daily Gains Letter

Stock Market: Institutions Moving in Opposite Direction of Investors

By for Daily Gains Letter |

Institutions Telling Investors to Ease OffAs we move towards the end of July, trading in the stock market continues to be murky and filled with obstacles and uncertainties. The S&P 500 is holding on to a small gain this year, but there’s still a sense of nervousness among investors in the stock market.

While the small-cap stocks segment of the stock market continues to be apprehensive, and with a slightly bearish bias with the Russell 2000 being negative on the year so far, I’m also seeing some warning signs emerging from the broader stock market and blue chip stocks.

The S&P 500 continues to fall short on numerous occasions as it approaches 2,000. The Dow Jones Industrial Average has failed to hold above 17,000 on four occasions. The failure in both of these situations is a red flag, in my view, which could be foreshadowing a potential stock market adjustment. Look, we may only see a correction of five percent or so, but it’s coming.

This is a time to be prudent and take some money off the table, just as institutional investors have been. In an article I read on Yahoo!, institutions divested $7.97 billion in exchange-traded funds (ETFs) in the last week, while retail investors rushed in, buying up about $379 million of equity mutual funds. (Source: Lewitinn, L., “Why is the big money dumping stocks?” Yahoo! Finance web site, July 27, 2014.) This move indicates that the professional money is taking some cash off the table, given the five-year bull market run and current hesitancy in the stock market.

In fact, over the past year, retail investors have been rushing into the stock market to the tune of approximately $100 billion in mutual funds and ETFs. (Source: Wang, L., “Individuals Pile Into Stocks as Pros Say Bull Is Spent,” Yahoo! Finance web site, July 14, 2014.)

The movement of capital into the stock market is also reflected by the Money Flow Index (MFI)—a technical indicator used to approximate the flow of money into equities.

S&P 500 SPDRs Chart

Chart courtesy of www.StockCharts.com

As the above chart of the S&P 500 shows, the MFI (the green line at the top of the chart) is currently flat and indicates sideways trading. As the historical pattern demonstrates, an upward move in the MFI towards 80 on the chart could indicate an upward move in the stock market. We are not witnessing that at this point and suggest stocks could largely trade sideways for the time.

Now I’m not saying the five-year bull market is dead; it’s just pausing and looking for the next big catalyst to jumpstart stocks to the next record levels.

Given this, I’d take some profits. Also, you can write some covered call options to generate premium income in case the stock market stalls or add some put options on stocks, sectors, and/or key stock indices to protect against downside weakness.

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