Where, oh where, are the institutions?

The market has been steadily advancing which is not an unusual occurrence. What makes it different this time around is that it’s doing so without much help from the institutions.  Not only do I keep bringing up this subject in my daily *Blue Plate Specials*, but so do CNBC anchors and contributors.  Bob Pisani has been gnawing on this bone for quite some time, scratching his head while noting the massive amount of dough sitting on the sidelines.   

Today,  Jon Najarian noted the same thing when he said that although trading volume has been light, options volume has been exploding especially in the farther out months.  His conclusion is that institutions are hedging their long positions.

What I’m wondering is do they actually have ANY long positions to hedge?  I say this based on observation of several internal market indicators that I’ve been using every trading day for the past 10+ years.  According to these indicators, the major players walked away, or rather, they ran away, from the gaming table around the middle of last November and they haven’t been seen since. 

Besides the fact that trading volume has been inordinately light, there are two other commonly used indicators that also highlight their lack of participation.  If you have a good charting program, you can use these indicators to draw your own conclusions.

Indications of institutional absence
VWAP: The Volume-Weighted Average Price is a fancy term which shows the degree of bullishness or bearishness in an equity.  VWAPs can be either positive or negative.  Positive values show that folks are willing to pay a premium for a stock; negative values show the opposite.  The higher the absolute value, the more the institutional involvement.

My charting program includes a niftly feature called Hot Lists.  There’s a Hot List that shows the top 100 stocks with the highest positive VWAPs and another which lists the bottom 100 ranked according to descending absolute value.  In the past, extremely bullish VWAPs would be +175 and up on the positive side and less than -10 on the negative side.  Many times, under these conditions, the negative VWAP list might only be partially populated.

Moderately bullish values used to range between +75 to +150, but now all of the VWAP values are much, much lower.  Rallies in the +200 range are now in the +70 range–that’s a HUGE disparity!

Tick: Another and more subtle indicator that’s showing lack of institutional participation is the Tick.  This is a dynamic indicator that normally ranges between -1000 and +1000.  An abnormally high or low Tick value (above +2200 or below -2000) typically indicates that a market reversal is imminent which is its most powerful use.  

It can also be used as a measure of market sentiment.  For example, during strong rallies, high Tick values are the norm (ranging between +1000 and +2000) but lately the Tick has been occupying much lower levels. 

Why are the institutions shying away?
This is the $64K question.  The credit crisis caused a massive hemorrhaging from hedge funds and it’s only been very recently that more money is flowing into them rather than out.   If that’s the case, then we should expect to see volume pick up.  But what if there are other factors at work?

Here are a few reasons that I’ve come up with that might explain the institutions’ conspicuous  lack of participation:

1.  They don’t want to make any major commitments until after the government finishes its meddling in the financial arena. 

2.  Mortgage foreclosures due to ARM defaults are expected to peak late this summer and will surpass the number of foreclosures resulting from subprime mortgages.  Assuming this to be the case, rising foreclosures will add to the unemployment figures. 

This point is a strong argument against further market upside but I think that this scenario (which has been kicked around everywhere in the financial media for well  over a year) is already priced into the market.  I mean, look at the tear the homebuilders have been on lately!

3. Fear of more foreign defaults and the potential ripple effect.  I can’t debate this conjecture since I’m not a global economist (or even a domestic one).  But is this fear factor scary enough to keep the big boys away from their game? 

The real answer is probably none of the above but whatever it is, I’d sure like to be let in on the secret.

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