By Nicholas Santiago on July 13th, 2010 1:16pm Eastern Time
What can we say about the market since the July low? It has been a straight move higher since July 3rd for the major stock market indexes. This rally has been broad based and many of the leading stocks have all lead the charge. On the surface this rally looks great, however, there are some negatives and we shall see what they are.
The first negative for this rally is that the volume has been extremely light. This is telling traders and investors that the public is not really involved and the institutional money is still cautious. As we have seen since the March 2009 market bottom most rallies take place on light volume and decline on extremely heavy volume. Please understand that light volume rallies can last a while and are not necessarily indicative of major decline on the horizon.
The second negative is that the move higher in the market has not even paused or consolidated from the July 1st pivot. Most rallies that are going to be sustainable will often pullback and not create that V-bottom pattern. Therefore. While the market can continue to climb it is likely the pullback will be fierce when it does occur.
The third negative factor that I see for this rally is that it is options expiration week. Often the institutional money will take the market the opposite direction of the small retail options trader. Think about how many small retail options traders bought puts on the market in early July thinking that the market was going to crash. After all every news business channel on the television was talking about the massive head and shoulders top pattern that was in place on the major indexes. There were very few people if anyone that was saying early July was a buy. Remember rarely will the small retail options trader ever exercise an option. They will usually close out the position before expiration, therefore, options expiration will usually have a lot of games played by the institutional money.
This market has had a huge rally since the early July lows. There certainly may be more left in the tank for the market's upswing, however, this week looks like a lot of games being played by the institutional money. Look at stocks in the agriculture space such as Monsanto Co (NYSE:MON), Potash Sask Corp (NYSE:POT), and the Market Vectors Agribusiness ETF (NYSE:MOO). This sector has been the laggard of 2010 and has just burst higher into this options expiration week. While this industry group was oversold the institutional money is certainly moving this sector up due to all the puts on these leading stocks. Stay cautious during this week of options expiration as the pro will usually have field day with the amateur.
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