Today's Action Bodes Poorly for Bulls

As I have stated many times recently, some truly savvy investors disagree on whether the market should be viewed with a bullish tilt towards the future or was the big run up since March just a cyclical bear market rally in a bigger secular bear market.  The debate rages on.   It is hard to recall a similar period where the differences of opinion were this extreme.

This morning, Bloomberg ran an article that outlines a perfect example of this dichotomy.  Paul Tudor Jones, the billionaire hedge-fund manager who outperformed peers last year claims that there will be no economic recovery.  Jones told clients in an Aug. 3 letter that the stock market's climb was a "bear-market rally." Weak growth in household income was among the reasons to be dubious about the rebound's chances of survival.  In the same article, Goldman Sachs Abbey Joseph Cohen stated, "We think the recession is ending right now."  Only to be countered by a hedge fund top manager who states, "If we have a recovery at all, it isn't sustainable."

So here we are at a crossroads of sorts.  The market has had a 50% rally off the lows in March - only fully realized by investors who had not sold prior to that point.  This means those folks are still way down on their portfolios since the market top in October 2007.  Which direction does the market go from here is the only pertinent question?

The market staged its largest, high volume drop today in a couple of months. Is this a prelude to more market consolidation?  I have been very concerned that the market is overdue for a correction - but I have been early with my assessment.  In addition to the distribution day we had today, here are a couple of more reasons for more cautious view.

Trim Tabs Investment Research reported that selling by corporate insiders in August surged to $6.1 billion, the highest amount since May 2008. The ratio of insider selling to insider buying hit 30.6, the highest level since Trim Tabs began tracking the data in 2004.  This represents a clear signal that the best-informed market participants are sending a message that the party on Wall Street is going to end soon.

Another reason to believe that there may be more downside risks for the market is that short interest on NYSE stocks plummeted in July and margin debt on all US listed stocks spiked.  "When corporate insiders are bailing, the shorts are covering and investors are borrowing to buy, it generally pays to be a seller rather than a buyer of stock," said Charles Biderman, CEO of Trim Tabs.  He further states that, "Investors who think the U.S. economy is recovering are going to get a big shock this fall.  Companies and corporate insiders are signaling that the economy is in much worse shape than conventional wisdom believes."

Another piece of evidence: The biggest market performers by far have been the very stocks that were by far the most sold short a few months ago; the major banks and financial firms; Citicorp (NYSE: C), Bank of America (NYSE: BAC), AIG (NYSE: AIG) , Fannie (NYSE:  FNM) and Freddie Mac (NYSE: FRE), etc. When the cheapest most oversold stocks lead the rallies it is usually a sign of a blow off top.  And according to Bespoke Investment Group the average short interest in other major indexes is at the lowest level since the market top in October, 2007.  Right at the top of the market.

In my podcast last Friday I stated that 51.6% of advisors surveyed by Investors Intelligence are bullish, and only 19.8% are bearish the highest level since December 2007.  These facts serve as another very contrary indicator, with a great history of inverse accuracy.  Many of the technicians I know who follow the Elliot Wave Theory see the next wave as being down, as in possibly very deep and steep.

Just this morning the International Council of Shopping Centers chief economist reported that full month comparable sales probably declined 3.5% to 4% compared to August of last year. This is not a good indication that consumer spending is ready to pick up any time soon.

Looking at the charts we had a selloff that took the S&P 500 to 998 on over 1.6 billion shares traded on the NYSE.  That broke the uptrend that started on July 13^th that took the market from being negative on the year to positive on the year.  First support will come in at the 50 day moving average, which is approximately 954 - 960, which would coincide with a 50% retracement of the gains since July. 

If this turns out to be a bigger move down we could expect a retracement of 38 -50% of the bigger move since the March bottom.  That would target an S&P 500 price of 852 - 900.  Time will tell how far this market pulls back.  We are in the rough season as historically the month of September is the worst month of the year and October is renown for its famous crashes, last year's -16.8% return not to be forgotten.

There are still many investors with tremendous credibility who are very bullish today.  Many investors and advisors feel they missed the run up and will attempt to buy each and every dip that the market presents.  It is important to remember that it isn't what you make - but rather what you keep.  Large volume distribution days are like flashing warning signals.  To ignore them is to do so at your own peril.