Securities Research Services

Thursday, July 26, 2007

Distribution Evident

There are a couple of important cross currents at work in the market here that need to be watched carefully. First, we are nearing the end of the month, where funds tend to put extra cash to work. Fear levels are still high, but the trend is reversing and oversold levels are being alleviated and fear is dissipating.

Meanwhile, the technical damage incurred after the large amount of distribution this week has not been repaired. This is best seen by comparing the SPY with its counterpart SDS. Remember, the SPY is an ETF that moves up when the S&P 500 moves up. The SDS, on the other hand, moves up when the S&P 500 moves down. Let's take a look.

Notice how money flow (pink) has diverged sharply lower even as the SPY has attempted to break out over the past few weeks.



Contrast this with the SDS where you can see that money flow has actually diverged sharply higher as the price refused to break down.



Due to these developments, we would be very cautious about buying stocks at these levels. The end of the month buying may indeed only serve to alleviate further the fear and oversold technical conditions that are keeping the market afloat. With this type of distribution taking place, the potential for the next shoe to drop late next week is high.

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