Followin' the Money

Because mainstream media uses the SP500 or Dow Jones Industrial average as their proxies for the US stock market, most investors don’t know about XII, the institutional index. The NYSE Institutional Index (XII) is a capitalization weighted index of 75 stocks most widely held equity investments among institutional equity portfolios. If you are managing money and making investment decisions based upon market movement I would posit watching this index is more valuable.

Since it is estimated that institutions manage between 80-90% of stock market assets it makes perfect sense to watch what they are doing and insure you are NOT going against their movements. Doing so for long periods can be disastrous to one’s portfolio.  Since they make up the majority of the market, they dictate its movement.

Below is a chart of the institutional index over the past 26 months. As you can see it has been in a very nice uptrend and, up until December, price has carved out a series of higher highs and higher lows which is the definition of an uptrend.  The good news right now is index is still bullishly configured but there are some reasons for concern. Firstly, our momentum indicators (in the top and bottom panes) are pointing down which reflects a slowing price.  Slowing price by itself is not the issues, it’s what happens after that matters.  If momentum continues to fall, eventually prices will follow along. For now what has happened is the slowing momentum has caused price to make no progress higher for the past 4+ months. You can see each time we attempted to breakout higher we stalled out around the same level.  From a market internals standpoint this tells us there aren’t enough buyers to overwhelm sellers and as such, price remains within a consolidated trading range (highlighted red area) until more buyers step in.

Consolidations should be looked at as a necessary breather to any trending market (up or down). Think of it as a runner who slows down to hydrate and refuel. Sometimes that is just what the runner needs as he builds up additional energy to continue on. Other times, the runner has spent all his energy and no matter how much hydration and refueling he gets, he is done. The market is at that stage right now. Prices will continue to chop around until buyers and sellers settle their current impasse. To continue the bullish trend, prices will need to break above the consolidation area  (828) and hold for me to be willing to add more exposure to the market. If, on the other hand, prices break below the consolidation area (805) and more importantly, below the lower blue trend support line and prior low (790) , this is warning that “big money” is selling and it would best to think long and hard if going against their actions is in your best interest.