This looks like distribution to me: ramp the heavily-leveraged futures at night for a fraction of the cost of the cash market, then sell your inventory when the market opens. In this vein, there are two interesting fundamental factors at work right now:
1) There have been huge inflows of cash into the U.S. from foreign investors who are fleeing the European system, and some of that money is finding its way into stocks. This is bullish as long as it continues, and it seems to be primarily what has driven the current rally.
2) There are large outflows from domestic mutual funds. This is bearish as long as it continues.
I have an interesting speculation that perhaps the U.S. fund managers are ramping the futures each night and, effectively, distributing to the Europeans. Who knows. But it's a strange pattern nonetheless. One would think that, at some point, most of the money that's going to flee Europe will have done so already and the well will start to run dry. When that will happen is far beyond my ability to anticipate: it may have happened already (data in this regard lags the market), or it may be at some future date.
My friend Lee Adler at the Wall Street Examiner does a great job tracking market liquidity, and most of my data in this regard is garnered from his Professional Report subscription service. Here are two charts from his service, which illustrate the situation.
The first (on right) shows deposits into U.S. trading accounts -- based on supporting data, these are presumably coming from Europe. As Lee states in his report: "This remains a bullish influence for U.S. markets; a.k.a.- the last Ponzi game." The data is from the week ending January 4, so it lags by a couple weeks.
The second chart (right) shows domestic mutual fund outflows. The most recent data here is also from the week ending 1/4/11. Weekly outflows have reached the highest levels since August. Lee states, "This continues a bearish signal on the charts... a continuation of heavy outflows could eventually take a toll on stock prices."
So as of the week of January 4, the market was in a bit of a battle of liquidity inflows and outflows. Whichever source wins that battle heading forward is going to determine future market direction. I believe the European inflows simply can't last forever; and that seems to be the only thing keeping the U.S. markets afloat right now. As I stated earlier, since this data lags, a victor to this battle may have emerged already. This is why I generally use stock price charts first, and data second -- because the price charts are real-time, and should theoretically contain everything the market "knows."
The short-term wave pattern could now be viewed as complete, meaning the top may be in -- however there has been nothing to confirm any sort of trend change yet. What I would really like to see is a full daily candle beneath the lower trendline to confirm a top, but the market is still a ways from that.
The first chart I'd like to share is good old classical technical analysis; after that we'll look at the wave structures. The chart below highlights three factors which suggest a turn may be at hand, all noted on the chart.
So there is continued evidence for a top, as there has been for roughly a week... but the market is still hovering. Some might take that as a bullish sign. Personally, unless the SPX breaks through 1300-1310 and holds it, I'm not going to get overly excited. But I've been wrong before; and the money flowing in from Europe is certainly an x-factor that bears watching at this stage.
The next chart is the second chart from yesterday, which shows a potentially-complete five wave structure to a top. If this count is correct, the top is now in. It's also possible that wave five of 5 is still unfolding, with yesterday's low being four of 5.
The next chart is an alternate short-term count. This count has a few things going for it, such as it effectively explains the bizarre structure of the recent rally (which looks like a series of a-b-c's). I'm keeping this count as the alternate for the time being, but market action could shift this count into the preferred role.
NOTE: CHART ANNOTATION ERROR -- THERE IS NO INVALIDATION FOR THIS COUNT. That's what I get for doing too many things at once some nights. :)
In conclusion, unless the market breaks the key levels of 1300-1310 on the upside, and holds that break, I continue to believe that a top is close at hand, and that the market has given no real signals to become long-term bullish. At the same time, it's not yet given any concrete price signals to be short-term bearish either. There continues to be a great deal of evidence for the bear case, as outlined today and over the last week or two, but the bears need to start taking back some key levels to validate that evidence. The first level for bears to capture would be 1285 -- and then 1277 and 1270 below that. If the first count is correct, then perhaps this is the week the bears finally get 'er done. I believe the influx of European cash which has been supporting this market is (clearly) a finite source, and likely to be tracing out some type of bell curve. When that liquidity clears the apex and hits the slope, the market is going to run out of juice. Trade safe.