4-3-2016 comments

Watch lists are updated. The short side is not working, so the short list is for reference. I have begun adding back into my long picks classical buy points generated off of chart pattern pivots. However, I have modified my volume requirements for buying at a pivot. O'Neil guidance is that volume should be 40-50% above average volume on the breakout day. My requirement is 100% above average volume for a standard breakout. I have done this because an astute CANSLIM trader has shown me that this is working. The number of breakout trades will be little because of this high volume threshold.

I have also been thinking about something Pascal told me, that US broker accounts are up, probably because of offshore money coming to the US. So, I have been researching the issue and finally found a site that lists US brokerage firms and their history of Assets Under Management (AUM). I wanted to see if the growth of AUM was significant, and I guess it might be the 800-pound gorilla in the market.

I have been amazed by the resilience of the markets and have been looking for data to support the reason. What does traditional analysis say? One view is that we are in the head test regime of a large head and shoulders pattern (left shoulder formed in late 2014, the head in 2015, the right shoulder is still forming). The traditional analysis says the right shoulder could fail the head test (i.e., this is a bear market rally), and then plunge into a bear market. The problem is that when I try traditional analysis in the current market, I usually fail. The market has been more resilient than historical analysis suggests.

I stumbled on a report from Schwab showing a surprising growth in Assets Under Management (AUM) since 2010, so I delved in further.
I found a site that shows the history of AUM SEC filings for each broker. I took the five largest firms and summed their SEC reported AUM in a spreadsheet. The graph below shows the five-company total since 2010. I assume that if I added in the rest of the brokers, the result would look similar, at least in the trend.

What I am suspecting is that offshore money is fueling the growth of AUM and the market rally. Broker assets under management have been growing beyond anything that can be considered organic portfolio growth. Money is arriving from somewhere; I suspect it comes from China, and negative-rate Japan, and Europe. Some of it can be coming from the US financial land of free money. If the flight of offshore money continues, it will probably drive the US market up to new highs. Add to this that the FED is afraid to let the markets correct. Nothing in this statement means that I think everything is fine in the world. I just believe that the US is the tallest-safest midget right now.

My opinion now swayed by looking at the broker AUM data that the market will probably continue north.

The chart below shows AUM growth of the five largest firms since 2010 of 137%. Almost 5 trillion dollars have come into the market over the period from just five brokers. A trillion here and a trillion there, pretty soon we are talking real money… At least AUM growth swamps the FED balance sheet.

Eventually, central bank action will turn out badly, but perhaps not now.

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Realizing margin debt is now declining, I wonder what role it played in AUM growth -

Adam

[QUOTE=adam ali;31014]Realizing margin debt is now declining, I wonder what role it played in AUM growth -

Adam[/QUOTE]

Adam, margin debt is part of it. Here is the latest NYSE margin debt chart.

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This chart looks like what I expect margin debt to look like at a major market top. The NYSE debt is about half a trillion dollars, much less than the increase of the top five brokers since 2010. That was an apples-to-oranges comparison, but the best I have. I suspect much of the broker growth is in the bond market.

Another factor on the buy side of the market, there is more money chasing fewer shares. Companies have been buying their stock shares back, reducing the number of shares available.

We have a lot of conflicting information to sort through, and the stakes are high. The market has either topped or it hasn't.