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The cash flow, for one thing, doesn't seem to add up. According to AMG Data, for the week ended 9/28/2005, there's a net cash OUTFLOW of $894 million from the domestic equity funds, excluding the ETFs. This is the largest amount of net loss, excluding ETF, that I've seen this year. Another cash flow issue is the Money Market Fund net cash flow. According to Merrill Lynch "Mutual Fund Flows" study, a majority of investors' liquidity is in money market funds. The study says that declining assets in stock and bond mutual funds cause increasing flows to money market funds. What I'd like to show you, though, is the volatility of money market fund's net cash flows. You can see on Chart 1 below the narrowing range (blue arrows) of the increase and the decrease of money market fund from the beginning of June through the beginning of August - August 3 to be specific. This indicates majority of the liquidity stayed in the equity market during that two-month period, which supported a solid market uptrend. The NASDAQ gained more than 8% during that two-month period (see Chart 2). After Aug. 3, the liquidity started flowing back to money market funds, and the swing between the inflows and the outflows become much wider. That means larger scale of pull-back from the equity market. This increased volatility destabilized the market, and sent the market on its downward course. In addition, the length of time between the inflow and the outflow also increased. This is evident in the widening of the curve (blue horizontal arrows). This means money stayed out of the equity market and on the sideline longer. Last week, money market funds experienced a net cash outflow of $12.052 billion, and the market rebounded. Many believed this was one of those end-of-quarter phenomena as money managers dressed up their portfolios. Same thing happened at the end of the third quarter last year.
Chart 3 below shows end of 3rd quarter activities in the NASDAQ market, and Chart 4 shows same time last year's action. Both of them show trend reversing action in the final sessions of September. The noticeable difference is that the NASDAQ was in an uptrend in August and September last year. Still, after the first week of October 2004, the NASDAQ dropped more than 70 points (not shown on charts here). This year, the NASDAQ's in a downtrend during August & September. What's likely to happen after the first week of October this year? What happened last year is likely to repeat this year. And, perhaps that's what the option traders had in mind as they added more short positions (Put options) in the final sessions of the quarter.
Table below shows a 13.70% increase in the Total Put/Call option ratio over the final three trading days of September. The final 3 days of September last year, the total put/call ratio declined from 0.91 to 0.86.
Having analyzed all that prior to entering the unknown month of October, what's known in September, in particular my Market Strength Index, can not be totally ignored. This market strength index crossed above 0 and moved into the positive territory at the end of the trading day on Sep. 27. QQQQ long position was immediately added to my portfolio on the very next day, Sep. 28, which turned out to be the exact bottom prior to the rebound. Another 0.9% to 1% move up , or up to $39.82, can be expected before any retreat commences in October.
QQQQ displays a double bottom formation on this 16-day 60-minuite intraday chart (Chart 6). This provides the target price of approx. $39.82, which would come up short of the Sep. 13 high of 39.91 - A Lower High. It's quite probable for the price to retreat after hitting the target price on a double bottom formation. And, if it breaks down below the Sep. 22 low of 38.24 from there, then the lower low and the lower high would confirm the resumption of the downtrend. This is one reason I'm keeping my bearish bias. But it doesn't hurt much to respect and to trade into the technical strengths of the market for the time being.
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