The Bear Market Dark Cloud Analogy

02/09/2016 6:00 am EST

Focus: STRATEGIES

Bob Lang

Founder and Chief Analyst, Explosive Options

Since institutions move stock prices—and move them big—it makes sense to follow the flow of the big money, so Bob Lang of ExplosiveOptions.net shares several important tools that he feels can tell the trader exactly what is happening with institutional flow.

We started a new month last week and it was like déjà vu. Even though the groundhog declared that a change in the weather is coming, the markets didn’t get the memo. We were hoping for a calmer market, but instead we experienced the same action we have seen for weeks now. So the question becomes how to protect your portfolio while market distribution continues. We’ll get to that, but first let’s take a step back to make sure we understand what’s happening.

The year’s vicious selling was magnified on Friday after the jobs report seemed to indicate that the Fed may be trapped. I’m not so sure about that, but the markets speak louder than my opinion. In any case, the stock market is under severe distribution and it doesn’t appear to be ending any time soon.

In a bear market, no stock goes untouched. Eventually, the selling hits everything in sight. Some of the most favored names over the past few years, like the FANG stocks (Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOG)), have been hammered since the start of 2016. No surprise really, because strong stocks become a source of funds once portfolios are depleted. Bear markets are like dark clouds that spread completely but very slowly.

Distribution is caused by institutional selling, which is quite apparent when we look at metrics, sentiment, and indicators. Since peaking in 2014, breadth (daily accumulation vs distribution) has been on the decline. Did that spark the bear market? No, but it certainly contributed. The evidence has been cumulative. The bullish % index has been falling since early 2015 (negative divergence), put/call ratios have been elevated, and market volatility has been steadily rising since 2014 (all VIX futures contracts are above 22 now).

Because institutions move stock prices—and move them big—it makes sense to follow the flow of the big money. Some great tools can tell us exactly what is happening with institutional flow, such as the Chaikin Money Flow, McClellan Oscillators, and momentum indicators. To read the entire article click here…

By Bob Lang of ExplosiveOptions.net

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