We have turned bearish over the recent Stock Market rally which resulted in missing out on the final leg of the rally from 1400 to 1450 in the S&P 500. The recent highs depicted an increasingly bearish picture along with the continued European unrest, stepping aside is perhaps the most viable action as of the moment. The most important analysis simply stated that the forward returns could not justify the additional risk that is essential in attaining them. The primary condition hasn’t changed and the recent metrics advised most of the large money to seek safety along the sidelines.

Ideally, the markets would want to see a shift in open interest which gauges the total degree of involvement from possession of the stock market in selling stock index futures. The further the market increases, the more pressure is exerted for small traders in selling. This would result in locking gains while still in control of their stock positions. Therefore, they won’t incur any capital gains taxes or missing out on any dividend payments. The holding guide as it is presently seen looks a lot like it is ready to run off the small investors leaving them with the rest of the trouble to deal with.

In spite of the market’s rally, big time traders and commercial traders will both be pulling most of the money out of the market. Money flow in several big companies turned out negative in the recent months and commercial traders started leaving the market in serious contemplation following the first week of the previous quarter. In fact, commercial participation in the market is the lowest by far.

The decreasing participation resulted in the decline in market volume which will further lead to an end in the movement. Clearly the trend is going up and fortunately, the S&P 500 is setting up a chart pattern that may move to an ideal run. The most recent chart showed a consolidation at the top along with declining volume. Theoretically, this scenario is a possible setback for a pull back.

Paying attention to the essential and technical levels in the S&P 500 is very important to be able to fully utilise it as a benchmark in comparing several other holdings. A lot of people have been lulled into a false sense of confidence that the market will always come back above the standard. The rallies in the previous year’s which were regarded as lows intensely fuelled the economic stimulus, whether it will be true in the coming rallies, the choice in protecting ones self from the next 50 % decline is entirely up to a trader’s decision.

Last Updated: October 12th, 2012