Fund Blawg

With the major indices down another 2% or more today, a major decline may be in the making. The chart of the S&P 500 shows that it made a new closing low today.

A decisive close below the January and March 2008 lows will signal a fresh round of new selling. There are two key takeaways from this chart: the rally off the March lows has been erased and the volume for the last six weeks (all down) has been higher than the volume on the rally. This is a sign of professional institutional selling. What do I mean by institutional selling? I define institutions as the players who trade in large blocks and have the ability to move stocks up or down.

Take a look at the chart of the mortage lender Freddie Mac, down 23% today.

The stock has traded 200 million shares this week, way above average volume. A sign that institutions believe worse is to come and that they just want out of the stock.

As I mentioned in my article "Major Test for the XLF ETF", the fate of the financial sector would in large part determine whether the market had bottomed. Why? Read my entry on the financial sector exposure of the S&P 500 index. Look at the chart for the XLF financial sector ETF through April 16th:

There a several things to note from the chart:

1. There is a significant amount of buying interest (demand) at the $24 price level
2. When XLF fell below $24 the week of March 17th (red arrow), there was enormous buying interest:
1. XLF began the week at $22.11 which was also the low for the week
2. XLF finished the week at $26.32, a 19% increase from the open of $22.11
   
3.  As long as the $24 and $22 levels hold, XLF and the market will probably go up from here
1. The area between $24 and $22 are objective price (demand) levels created by the market; if prices fall below these levels then demand has dried up
2. If demand dries up, means price must move lower to attract new demand
   

Today, March 12th, was a textbook example of how institutions sell market rallies. Yesterday, the market rallied as measured by the Dow Jones Industrial Average rose about 3.5%. This lead many experts to wonder if the bottom had been seen.

Today institutional investors stood by while the market rallied into late morning, they then stepped in a sold into the rally. The chart below shows the Dow and the S&P 500 from 9:30 am to 4:00 PM EST. The Dow which had been up as much as 147 points, finished down 46 points for the day.