Last week's program trading report was released by the NYSE today, revealing that the persistent decline in principal program trading remains in full effect. Program trades executed as principal, for member firms' own accounts, fell to 35.4% of total program volume. That keeps the 4-week moving average in a steady downtrend that has persisted over four months, clear evidence that institutional investors are reining in their participation as speculative investors pick up the slack. Once this 'handoff' is complete and speculators are fully reinvested, watch out below. The unprecedented program activity that began around May of '04 and lasted until November of '05 was one of the key reasons for the stock market remaining on firm footing. Now that this significant source of buying pressure is easing out of the market, that source of underlying support will no longer come to the rescue when the next decline gets underway. As was the case back in 2000, the little guy will be left holding the bag. Upside momentum generated by the buying pressure of the last couple of weeks will likely keep the market in a generally sideways trend for the intermediate-term. But February could turn into a spoiler month for the stock market. Remember that if the S&P500 is trading in YTD positive territory at the end of February, odds favor the market remaining in a general uptrend the rest of the year (see February Effect setup.) Because that scenario appears unlikely, it wouldn't be surprising to see the market give back its January gains during the month of February.
I'd like to present another sentiment indicator that is telling a similar story. Look at the longer-term chart of the CBOE equity put/call ratio and note that the 10-day moving average has recently fallen below the .55 level. This indicates that equity call volume has been running at nearly twice the level of equity put volume over the past couple of weeks. Over the past five years, this type of optimism has typically meant that the rally is in its final stages as weak hands pile in late in the game.
Also noteworthy is a trendline channel that can be seen on this chart of the S&P500. The upper boundary of that channel is currently being challenged, and while we could see it violated in the coming weeks, it remains questionable whether the market will have the ability to overcome that trendline convincingly. Lead indicators continue to suggest that smart money is selling, not buying into this rally, calling into question the longer-term sustainability of the recent buying pressure.
how accurate is it to the day?
