The Story Of The Boiled Frog

Alright settle down children – it’s story telling time! I’m sure you all are familiar with the aphorism of the boiled frog. Anyone? Well, they say that if you put a frog into a pot of boiling water, it will leap out right away to escape the danger.

But, if you put a frog in a kettle that is filled with water that is cool and pleasant, and then you gradually heat the kettle until it starts boiling, then the frog will not become aware of the threat until it is too late and slowly boil to death.

Moral of the story. The frog’s survival instincts are geared towards detecting sudden changes but it ignores slow gradual changes at its detriment. And guess what – human beings are not too different although I must concede that I haven’t tried boiling anyone yet. But let me assure you that I have seen allegedly sophisticated market participants ignore blatant signs of danger many times over.

The NYSE Summation Index is a breadth indicator derived from the McClellan Oscillator, which is a breadth indicator based on Net Advances (advancing issues less declining issues). I hope you are familiar with the basic concept of market breadth, otherwise Google is your friend. No, there’s no floss for that one.

Clearly the NYSI has been dropping steadily all year despite very little response on the price side. One possible assumption here is that large institutional players are engaging in what’s called ‘distribution’. The process of distribution is much like pouring water on a campfire. Pour too slowly and the fire may burn itself out before the water is gone. Pour too quickly and the water may extinguish the fire. But pour at an optimal rate and it may be possible to use all the water while the fire continues to burn.

This is a chart showing you the percentage of SPX stocks trading above their 200-day SMA. I actually looked at this one because my SPX200R/SPX50R ratio wasn’t showing much of a change. And this is why:

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Now given all the above – let me ask you this? What’s the difference between you and the average frog? Longer legs? 😉

Cheers,