In spite of Thursday's gap open and strong gains in the market, there are still signs that institutions are not fully behind this move and that bigger money is hedging its bet.  If the worst is behind us and a new bull has begun (not my personal belief), then why is average daily volume still declining, why during this very strong week price wise, is the VIX up 10% through Thursday, and why is money still flowing into defensive sectors?   

This is not about markets being "overbought" or momentum slowing which is what many technicians are hanging their hat on here.  This is more about money flows.  As the late money pours in from the sidelines, it appears that this group is chasing the hot names and the smart money that got in early is more than happy to sell its shares to the late comers.  That is why, in the charts I discussed yesterday, that the Nasdaq and Russell 2000 are struggling against the Dow. 

First, let's have a look at a daily chart of the Nasdaq Composite Index from February through July 2009.  Notice how the 50 day moving average of daily volume has been flat as price has moved higher.  If institutions were in this market chasing stocks higher, volume would be increasing noticeably. 



Next, let's contrast this chart with the same time period in 2003, which marked the end of the decline related to the bursting of the tech bubble and started a new bull market.  Notice how volume increases markedly from April into July.

 

Next let's have a look at the VIX.  This indicator is a measurement of fear or angst in the market based on the volatility of options prices.  When the VIX rises, it is a sign that options are in demand to hedge against market risk.  Why, during this 'breakout' week for equities, is the VIX rising?



FInally, I would like to take a look at one of my favorite risk spreads, consumer discretionary vs. consumer staples.  Consumer discretionary stocks are based on consumer 'wants' and conseumer staples stocks are based on consumer 'needs'.  In the XLY:XLP spread below, when the black line is rising, consumer discretionary stocks are outperforming consumer staples stocks.  When the line is falling, the opposite is true.   Notice how the S&P 500 broke out over its June high while the XLY:XLP spread did not.  That is another sign that the appetite for risk may not be strong enough to push this market significantly higher from here.



With all of the evidence just presented, my intent is to simply wave caution flags on this latest move higher in the market.  If you are long, stay long, but tighten your stops.  I AM NOT ADVOCATING SHORTING THIS MARKET HERE.  Not yet anyway.   The trend is up and many times these risk aversion trades can take a while to work out as late money continues to flow into the market.  Based on the NYSE symmetry chart I presented a couple of days ago, we do need to keep our eyes open for at least a short term turning point early next week.  Keep your stops tight and your eyes open.