Charts and Commentary

By: Marty Chenard | Thu, Feb 15, 2007
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Today will be a more extensive update with a total of 5 charts. We will revisit the bubble that just expanded in China, and then compare the broad market action relative what Institutional Investors are doing. (After a dip on February 5th. the Shanghai 180 Index proceeded to rise 20.97% in just 9 days.)

This is an important update, so let's start today's analysis ...

Institutional Investors vs. the Average Investor ...

The S&P 500 is regarded as a good measurement of the economy by many investors. The reason, is that it represents some of the best stocks with the widest representation across many different sectors.

At the other end of the spectrum, are the Institutional and "core holding stocks" that are in their portfolios. As a group, this can be expressed as an Index as seen below.

What is important on this first chart, is the relationship of what Institutional Investors are doing, compared to what the average investor is doing in the markets.

Note the nearly exact correlation of the S&P 500 and what the Institutions did from July of last year to December.

At no time, did the Institutions do anything but support the markets rise from July to December. This was important for a strong market rally, because over 50% of the market's volume comes from Institutional Investors.

Now, look at both the S&P 500 and the Institutional Index from mid December to yesterday. There is clearly a divergence. While the S&P 500 has been moving up, the Institutional Index went sideways.

There is saying that Institutional investors have stopped supporting the market's rally and the market is now being propelled up without the help of Institutions. See chart 2 ...

The above were line charts, and now we will look at the bar charts for both indexes.

What do you see now? The S&P 500 is showing an up Channel in movement, while the Institutional index is in a clear trading range. This is a departure from Institutional behavior that started last July.

Both of these charts are showing lack of support from Institutions in this aging rally.

While this won't stop the rally immediately, there will come a point where the average investor will not be able to keep the rally moving on his own ... he will simply run out of steam. If Institutional investors decided to start taking profits next week, this rally would end very quickly.

What if Institutions "change their mind" and start buying aggressively? Obviously, in that case, they would send the market up in an exuberant move.

Will Institutions start buying again anytime soon? I don't have the answer to that. But, as one Institutional investor said ... It is hard to get excited now, after 67% of the companies reported "forward guidance" with lower expectations. This is the highest negative guidance number in 8 quarters of reporting.

So ... obviously we have a disparity in the markets. The question is, "when and how will it be resolved?"

We are now going to shift to China's stock market.

On Monday, we reported that the Shanghai 180 Index had an 11.5% average weekly rise over a six and a half week period.

It had a pull back on February 5th., landed exactly on a support line, and moved back up from that point.

Here is how it moved:

The low on February 5th. was 5056. This morning, the Shanghai 180 was up to 6116.

If you do the math, it went up 1060 points or 20.97% in 9 days. It is now at a new high on its parabolic up move as seen in the chart below. When do you remember any of our indexes going up 20.97% in a year, much less doing it in 9 days? How long do you think this bubble will last?

That was the Shanghai 180 Index ... what about the Shanghai Composite Index?

Here is how it moved:

It hit its low on February 6th. at 2541. This morning, the Shanghai Composite was up to 2993.

If you do the math, it went up 452 points or 17.79% in 8 days. It will have a new closing high today.

This week, I had several emails about the Institutional divergence and the Shanghai stock market with comments that essentially boiled down to this: So what? Big Deal ... don't you know that this is a Goldilocks economy? The exuberant attitude, and apathy about situations that should be of concern may well be a contrarian's warning sign.

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Marty Chenard

Author: Marty Chenard

Marty Chenard
StockTiming.com
Asheville, NC 28805
Tel: 828-296-1200

Marty Chenard is an Advanced Stock Market Technical Analyst that has developed his own proprietary analytical tools and stock market models. As a result, he was out of the market two weeks before the 1987 Crash in the most recent Bear Market he faxed his Members in March 2000 telling them all to SELL. He is an advanced technical analyst and not an investment advisor, nor a securities broker.

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