Stock Market Erosion of Money

$INDU - Daily Candlesticks: "

via StockCharts.com
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The computers algorithms could really hypothetically trade us down to 0.

Without new money coming to market essentially they same money is getting recycled in the market over and over again. Now this "recycled money" drove the dow to 11,200 april highs. Problem is that the "recycled money" buying capacity diminished as stock prices rose on greater volatility and less and less volume. Which inherently makes your support levels weaker due to the fact that as the market went higher, positions in securities on a volume or number of shares of owned actually got smaller. Therefore there is less to "defend" at support levels.

We are clearly seeing this erosion take place in the market. As evidenced by the Chaikin Money Flow indicator on a current a one year chart.

Until new money is put to work in the market, this erosion will surely continue in the market.

What we can infer from this, is that, essentially with current levels of liquidity, there is only enough money at play to take the market from 6500 to 11,200. And that another possible major move down in the market is looming.

People will also begin to take money out of the market, out of 401ks , and mutual funds. This will also exacerbate the move down too.

Current stock market situation

So here's my insight on the current market situation(s).

-The Kass Scenario-

On July 6th, Mr. Kass a renowned perma bear, calls the market bottom. And says S&P should rally to 1100 within two weeks.
That is exactly what happened. What does this guy know that we don't?

Answer: Everything, he is a true industry insider.

Second, I checked with HARRY POTTER today and he is still in possession of his crystal ball, he has not let it out of his sight, and he has not anyone use it in the past millennium.

So that must mean that Mr. Kass is indeed a genius, right? No, not at all, it could just mean that he has a lot of clout on wall street and his buddies are helping him manipulate the market. Think about it, his market bottom call by itself caused some shorts to go cover. Don't ever underestimate the power of a headline.

Or third, maybe the guy is just observant. Perhaps he noticed that the new quarter for financial institutions was starting, and that by default buying in the market would start happening. Perhaps he noticed that this buying even it may not be strong or heavy buying, would be at least enough buying activity to make it harder for the shorts to knock the market down anymore and the shorts which have been enjoying an easy ride down, would start buying to cover on any signs of life in the market.

He is no genius.

-The Volume situation-

Low volume signals weakness in this recent move up. In my opinion this is just a small rally in a overall declining market. Look at most money flow indicators, Since August 6th of 2009 as the market went higher, most money flow indicators have had a steep decline. As a matter of fact the last time the DJIA was in the 10200 - 10400 price range around 6/3/2010, the Chaikin Money flow indicator was substantially higher than it is today. Please see the chart attached to this e-mail.

No to mention S&P 50 day moving proved to be heavy resistance today, as we closed just below it, and the DJIA ran into resistance at it's 200 day moving average today.

Technically things are looking very weak right now, shorting the market at the end of the day today based on technical could prove to be a nice move.

-I'm looking for selling on the news to resurface as a trend -

The expectations of great profits is already baked into stocks, Look at what AA did today, it traded mostly flat today, up a measly .12 cents. That's pretty weak price performance considering all the shorts that covered today on the decent quarterly.  And CSX sold off today on their good quarterly report.

For trades if this trend become more perdominate, I would be looking to short companies on the day of their earnings for a quick trade, as most companies announce earnings in afterhours I would short them at the end of the regular trading day right before the after hours earnings report comes out.

BP Slapped in the face, Obama Speech Tonight, Sell into todays strength

Exxon Mobil and Chevron CEO have both issued public statements, essentially saying that his gulf oil disaster was completely preventable and BP was negligent.

All I can say is wow!! I expected everyone in the oil industry to stay quiet, and not point the finger at one of their own.

BP CEO said today that no one has lost their job at BP because of the gulf oil disaster. Really what the heck? Perhaps BP CEO should be fired for gross negligence because no has been fired.

O'Bama has a speech tonight where he is expected to possibly announce that congress will push for a removal of the $74 million dollar liability cap. He may also announce that he doesn't just want the $74 million dollar liability cap increased, he may pursue having the liability cap removed completely.

If that occurs the cost of capital will increase tremendously for all oil companies.

To sum this up, for all you traders out there I would recommend selling some if not all positions into today's strength. The oil sector may drag the entire market down tomorrow, based on O'Bama's speech tonight. I wouldn't risk owning much ahead of his speech.

The end of the mutual fund, the beginning of a trader's only stock market??

Right now the stock market is a trading market. I expect it to remain that way for years, mutual funds will be forced to change their ways and become more nimble, otherwise investor confidence will erode as mutual funds will surely remain victims of a fast paced market. Mutual funds have charters which prohibit them from being nimble and control how quickly they can move money around in the market, and what kinds of securities they can invest in. These charters are outdated and have not evolved with the market. The slow and steady tortoise may not win this race in the long run. ONE of the major GAME changers are Leveraged ETF's. They are contributing immensely to market volatility. And I am sure there will be more and more of them to come in the future, unless Jim Cramer gets his way and they are banned.

For those of you that don't know HOW LEVERAGED ETF's work, they are essentially giant trading platforms. And these ETF's are aimed at DAILY returns, not monthy or yearly. These ETF's actively trade every single day. Increased trading leads to increased volatility. Take for instance the XLF, it is comprised of a basket of financial stocks, and those are the stocks fund managers actively trade all day long to achieve 3X returns. So that means we have the massive buying power of these ETFs just day trading the heck out of the basket of stocks it represents.

There is actually a strategy for sideways markets, that essentially amounts to shorting etf sisters ((FAS/FAZ or ERY/ERX) for example) and the net result is a profit. I suggest everyone look at this http://www.darwinsfinance.com/short-etf-inverse-leveraged-direxion-3x/ and keep it in mind for sideways markets and sectors. It appears to be a dead simple strategy and looks to be very compelling to try.

These days leveraged ETF's, high frequency trading, and program trading are dominating the markets. And could lead to the eventual demise of convential buy and hold investment products such as 401k, mutual funds, and the likes.

These are the days of actively managed funds. I'd feel safer in a actively managed day trading/short term trading fund, than the conventional products we are all used to and grew up with.

Just some food for thought, when is the last time any of you checked to see if a stock you have a position in is actively day traded by a 3X leveraged ETF?

Evolve with the markets, or succumb to them.

I hope this helps everyone understand what is happening to your stocks.

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