Here's what we know: We have closed within 1-2pts of 1863 eight times since January 1st. $SPX is down 1.45pts on the week & 8.94pts on the months and is up a whopping 0.8% for the year. The Cyclicals Index, one of the strongest indexes out there having climbed nearly 100% since 2012 & up close to 550% since the March 2009 lows, got slammed very hard Friday, dropping 1.54%. It's not something you often see happen to this staid index. And the Transportation Index, which put in new highs this past Tuesday & again this past Wednesday, got slammed Friday dropping 1.63%. If you follow the transports, you will often see this kind of , but this is uncharacteristic for the Cyclicals. Any further uncharacteristic selling in the Cyclicals will weigh on the other majors. Part of the reason the Cyclicals sold off so hard on Friday was because of F so maybe buyers will rush in to scoop up Ford at what is perceived as a bargain basement price. Maybe not.
We also know that, based on the the two markets of 2003-2207 and 2009 to present, the market has dropped 50% of the time in May as the "Sell in May and go away" strategy comes into play. Yes, there's a 50% chance that May will end in the green but those are high risk odds. Normally traders want to see a risk:reward ratio of at least 3:1 before entering a trade, risk $1.00 to gain $3.00 so 50/50 just doesn't cut it, IMHO.
We also know that while equities and indexes are struggling that the bond market is up 10% for the year. Flight to safety, flight to quality? Hmmm.
Here's what we don't know: Is the current market situation a major distribution phase, are the large players keeping the market propped up so they can exit huge positions that include millions of shares of individual stocks. When the large players exit, they have to do so slowly because if they dumped millions of excess shares into the market all at once, the market would not be able to absorb all those excess shares and the market would drop like a rock. And why would the large players being exiting now? Could it be fear over taper, interest rate increases in 2015? Could it have anything to do with the massive amount of margin debt that has grown to bubble levels?
All I can say now is that cash is a position and until there is clarity I do not see any reason to put my cash at risk.
ES 4 hour chart: http://gyazo.com/fba3c81b88c1cf1186e36323b1c8202d
Be careful & GL in the week ahead.
But reading your comment, i have nothing to add frankly. Year started badly, its a mid-election year, and large cap popular stocks getting haircuts heavily
it's true that I would love to get in on a trending market but it's clear that's not happening now. No idea when that might change as this consolidation has gone on longer than I first suspected. Do note that in the first paragraph I did say that this is a great environment for traders and basically all others need not apply. One thing that is very important in my analysis is the color of this month's candle. If it's red by even the slightest amount, then what we're dealing with here starts to look more and more like the 1999/2000 & 2007 tops. There's an old saying on Wall Street that goes something like, if you can't take it up, then you take it down so I continue to watch for signs that we are indeed headed down. Please keep me posted on what those weekly algos are doing.
Problem with the idea that MM's are exiting is that there is no real evidence of this, yet. Three phases to every bull market, the accumulation phase, the markup phase, and the distribution phase. Bull markets don't last forever and this one is pretty long in the tooth so it could end any time. Read an article at the first of the year, wish I could remember where, that explained how bull markets end with a lot of thrashing about, big drops followed by big rallies but markets go nowhere until they finally start to drop. Maybe the market will give us a better idea of what it really intends to do by the end of this week, or famous last words.
If the COMP and RUT do not resume their leadership position then we could be seeing a market top forming this year. At that point I would expect the DJIA and SPX to significantly outperform other indices,..., a classic end of bull market pattern. If COMP and RUT resume their leadership position I would position for another 2 years of this bull. Either way, we are getting late in the game.
Ultimately, I believe we are probably in a secular bull market that will need a significant correction (~20%) before starting that relentless march to potentially double current levels through the end of this decade, and into next. Caution is definitely in the air.
Here is some stuff about POMO and why it is so important and why its taper and withdrawal is also so important. QE began in March of 2009 not coincidently right at the market bottom. This was not an advertised program at the time and it took a couple of months for someone to figure what was going on and then to out the Fed, at which time the Fed called it quantitative easing or QE. How much of an impact has QE had on the markets? There are a lot of numbers out there and lots of arguments both ways with some saying that if you add the points gained on POMO days this will account for as much as 70% of all the points gained since 2009. That's huge so taper certainly can't be ignored and the large players, knowing all this and figuring that the bull can't be sustained without the Fed's free money program, may be locking in profits now just to be safe. Just theory at this point.