A Growing European Fear, and What Institutions Are Doing ...
Institutional Investors haven't panicked yet, but there is a "growing European fear" that may spill over.
In the past, we have discussed why Institutional Investors have a controlling influence in the stock market. It all makes sense when you realize that well over 50% of the daily trading volume comes from Institutional activity.
It is one of the reasons that we follow what they do so closely.
One thing we pay particular attention to every day, is the amount of Institutional Buying and Selling. Today, we will take a close look at the Institutional Selling activity going back to last March.
Obviously, Institutional Selling would have to track inversely to the stock market. The more Institutions sell, the more the market should drop. When they sell less, they take the pressure off of the stock market so it has a chance to go sideways and consolidate. If Institutions sell less AND buy more at the same time, then that has a bullish effect on the market.
So today, we observe the Institutional Selling Activity and how the New York Stock Exchange has moved relative to this activity in the chart below.
If you look at the times that Institutional Selling has trended up, you can see a direct correlation of the market moving down.
So, what are Institutions doing now?
Well, if you look at the chart, you will see untypical behavior. Since January 20th, Institutional Selling Activity has trended sideways. Last Thursday's Selling level was essentially at the same level as it was on January 14th, and 15th.
What does that tell you? It says that Institutions are in a "holding pattern" as they wait for the passing of the stimulus package. However, it may not be a quick and clean reaction. Why? Because there are over 1,000 pages in the package and few have had time to read the whole package and understand how much money is going for what. See the next chart ...
As judgment on our bail out package nears, there appears to be an international fear brewing.
Moody's Investor Service triggered some fear this morning when they announced, "The recession in emerging Europe will be more severe than elsewhere due to large imbalances, and will put the financial strength ratings of local banks and their western parents under pressure." ... and that, "The combination of higher provisions for bad debt, the rise in banks' borrowing costs and falling currencies will weigh down banks' profitability and help erode their capital base."
Those comments sent the Euro lower along with bank stocks. Fear is now rising about how much trouble the Eastern European banking system may be in. This is causing a flight to safety in the U.S. Dollar. At the same time, it suggests deepening European economic problems that could put a damper on the fragile improvements our stimulus package is expected to foster.
A 2 year chart of the Euro/Dollar is below. Notice how it deteriorated since last August. This morning, it was falling and is now $3 away from its recent low. A break below the $123.27 low would be have a very bad prognosis for Europe, its banking system, and its economy.