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This U.S. Stock Market Is Not Dealing in Reality as It Moves Higher

NEW YORK (TheStreet) -- The U.S. stock market finished the second quarter of trading in mixed fashion. The DJIA was down 25.24 points to finish at 16826.60 while the S&P 500 was down fractionally at 1960.23. The Nasdaq closed higher by 10.25 at 4408.18 and the Russell 2000 was higher by 3.46 to finish at 1192.96.

The stock indexes are once again out of sync. The DJIA is now in oversold territory while the Nasdaq is in overbought territory. This is all according to my internal algorithm process.

Having the DJIA oversold and the Nasdaq overbought makes for a fantastic paired trade; short the Nasdaq while going long the DJIA. Keep an eye open for the rotation away from the tech-heavy Nasdaq and into the slow growth, inflation accelerating stocks.

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At the end of trading last Friday, American purchasing power (U.S. Dollar) was down for the second consecutive week after the Federal Reserve devalued at the June meeting. On Monday, the burning of the dollar continued.

The Select Sector Consumer Discretionary ETF (XLY) is down 0.1% for the year to date while the Select Sector Utilities ETF (XLU) is up 16.6% YTD.

Food was up 1.5% last week and up 23.5% YTD and cattle was up 3.6% last week and 25.9% YTD. That is called inflation accelerating but do not tell the Fed.

Gold was up for the fourth straight week last week and up over 10% YTD.

Folks, this stock market is not dealing in reality. The hedge funds are recklessly pushing the indexes to the extreme and sucking in the unaware small trader. This momentum buying in an illiquid market is causing an exponential amount of risk for the unsuspecting trader and investor.

Once again, I feel obligated to let everyone know that the S&P 500 Trust Series ETF (SPY) volume was extremely low on Monday at 70 million shares. In comparison, last year at this time, 7/1/2013, the SPY volume was 131.7 million shares. That is a major drop off in trading volume.

So when I speak and write about an illiquid market, that is exactly what I am talking about. If the hedge funds decide in unison to sell, there will be no bids under the market. We fall into the abyss.

On Monday, the dollar continued to go lower while the 10-year Treasury continued to move higher with yields falling. In addition, gold was up over 1%. To have the stock market continue to move higher under these circumstances in nor reality.

So, traders beware. I will continue to pound the table on a stock market that has so many pitfalls. Extreme caution continues to be the theme. If you must trade, be opportunistic and do not chase momentum. Stick with the oversold, overbought risk management process that we employ at July will be one full year of existence and approaching 400 trades has returned nearly a 95% success rate and all time stamped.

At the close of trading on Monday, I started a Twitter (TWTR) short and an Inteliquent (IQNT) long position.

At the time of publication the author was short TWTR and long IQNT.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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Chart of I:DJI
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