CHART OF THE DAY: DECLINING VOLUME ON UP DAYS
One glaring characteristic of the recent rally is the lack of volume. The down days leading up to the recent rally were characterized by substantial volume and what appeared as though conviction selling. On the upside, however, we note the waning volume and lack of conviction. Despite this news, IBD is upgrading their outlook to bullish again as today’s bullish breakout confirms the breakout day from last Thursday. They note:
All the major indexes notched a follow-through day, a technical confirmation of a rally that began
lastweek. A follow-through involves a big gain in one or more indexes in higher volume from the previous session.Monday’s follow-through ended a correction of abouttwoweeks. But keep in mind that some follow-
throughs fail. A confirmed uptrend is not a green light to buy anything that moves.
But does any of this matter? I remain in the camp that the market could remain firm through the official end of earnings season (the end of this week), but then will likely be thrown around at the mercy of the dollar (which I believe has limited downside as the Euro breaches $1.50).
Nothing matters more at this juncture in the market than Ben and his printing press. We’re likely in the middle of the greatest “don’t fight the Fed” market of all time. Of course, the bagholders from this Fed experiment are likely to be plentiful. Playing along with the Fed could prove to be equally disastrous. For now, it’s best to keep investment durations short and risk management tight. To say that I lack conviction is an understatement….
I agree with you TPC that the markets should remain firm through this week for the most part with some wobbling (slight down days and big up days) and flat days. Then, when the VIX is low, I will buy calls. I also agree with you about the dollar, the dollar has limited downside now. Other central banks aren’t going to put up with their currencies appreciating (the Euro is already near its all time high of like 1.63 or something). And I also agree totally that this Fed experiment will probably be like some awful radiation experiment where it causes everyone to get cancer. Also, just because I think we go down soon, I don’t think we keep moving down for a long time. I suspect we get around a 10% or a little more down side and then we go back up no doubt. Next year will be interesting as the second mortgage crisis and commercial real estate crisis is right on their way and fantasy accounting can only hide the truth for so long.
TPC Reply:
November 9th, 2009 at 9:19 PM
I am beginning to think things could get messy next year….
I don’t understand the conclusion that the confirmation of the breakout is on higher volume. Higher than Friday? The volume was lower today than on the breakout day (last Thursday). What does that really mean? The volume both Thursday and today (the two up 2% days) was lower than on almost every down day since July.
Is this bullish or a short covering rally?
TPC Reply:
November 9th, 2009 at 9:18 PM
Rob,
They are saying the volume today was higher than Friday’s and therefore confirms the breakout. They seem to hedge themselves a bit though. A lack of conviction in their opinion as well….
Pretty sure you need more volume to confirm any breakouts. But you also don’t really have a breakout until we get out of the double top formation that’s setting up quite nicely. A break of 1100 with volume would indicate we’re heading higher to the next Fib retracement level. I’d be surprised if we broke the rising trendline from March as it now makes great resistance near the double top range.
Who would buy after a 5 day 6% rally? The market has yet to decline in November. Talk about short term irrational exuberance. Expect some downside in the next few days.
with as much uncertainty it continues to suprise me that the vix continues its downtrend. is tis saying that longs have not been built u enough to warrent some protection into year end?
Volume has never mattered in this rally. It’s been shrinking since March yet we rise. That used to be one of the bear’s arguments in the summer. Bears from that period are pretty much dead. One of these days the market will turn around and sure enough you’ll see the classic low volume up days, etc. before the fall but it’s not a reliable pattern. Even a broken clock is right twice a day…
The Fear of Bad Economic Data Is Gone???
Is a major reasoning shift / thesis shift behind the rally occurring? Will this mean another leg to the rally?
Since the March lows people have been saying: “This market is getting ahead of itself…” / “The fundamentals don’t support this…” / etc.
Everyone has been waiting for bad economic data to say: “See, I told you the market was ahead of itself”, to be followed by a collapse of the rally.
Well, the major piece of economic data everyone’s been waiting on came Friday – and the employment numbers weren’t good.
There’s been some media/analyst sugarcoating – the standard talk about “a lagging indicator”, and talk about temporary workers being up – but not overboard: there are many stories on the grim jobs picture. I think a 10.2 print is bad enough no one is going to talk up the report too much.
Rather, what I’ve been reading is acceptance that economic data will be bad. I’ve even been reading about relief that economic data is bad – as that means continued loose monetary and fiscal policy.
Before: Rally reasoning based on recovery thesis.
Key features: General non-acceptance of bad economic data / data that conflicts with the recovery thesis. Therefore, the need to spin bad economic data as good or irrelevant. A sense of fear that truly bad economic data will cause a rally collapse.
Morphing into: Rally reasoning based on central bank liquidity thesis.
Key features: Acceptance of bad economic data. Unnecessary to spin bad economic data, as the rally will continue, bad data or not, as long as central banks keep their loose policies. Essentially, no rally collapse until withdrawal of liquidity.
—
I’m not saying the central bank liquidity thesis, or call it reflation thesis, is new. We all know Paulson, et. al. have been playing it for awhile. I’m just saying it has emerged as the popular thesis (it seems over the past week), as the economic data has become increasingly “un-spinnable”.
Can this thesis really take over? And can a market where the blinders are off, where everyone is in agreement that we tank once liquidity is withdrawn, wait until that time to tank?
TPC Reply:
November 10th, 2009 at 12:28 AM
I have maintained that the rally was mainly government induced from the beginning. In fact, it was the reason I went long for the first time in 09 on March 8th: http://pragcap.com/coming-this-week-the-m2m-rally
The dollar will not go down forever and stocks cant sustain this upward pace. We might not see a major sell-off this year, but this market is well ahead of the fundamentals and government intervention can only take us so far. At some point the private sector has to take the reins….If we dont see that occurring soon we are in for trouble.
I know you have been on top of this. I’m just saying that what’s in the papers seems to be shifting from:
What’s the main driver of this rally?
Real recovery
to
What’s the main driver of this rally?
Well, it’s not real recovery – that’s tepid. It’s mainly liquidity.
With this “new (to the public consciousness)” reasoning / and perhaps newly CONFIRMED reasoning b/c people weren’t sure what the jobs number was going to do, what specifically is going to break this rally?
I know you have given a few examples. Everything just seems so implausible now / shorters are truly fighting the Fed. What will pop the multiple asset bubbles from the liquidity bubble the Fed has created? Can popular sentiment that we see the bubbles do it? Oil sustained above $85? Or do we truly have to wait for their own schedule of liquidity withdrawal? I wish I had the answer.
In addition to the above volume observations here are a few more things I have noticed:
1) The S&P is touching the major down trend line from the 2007 highs. I think that until this is broken and successfully back tested this confirms that we are still in a primary down trend.
2) The S&P has broken (on massive volume) the uptrend line from the March lows and seems to be forming a rising wedge pattern. This pattern is rare but has bearish implications and the target is a full retracement of the up move.
3) The S&P is very close to the 50% retracement.
4) The Russell 2000 is not confirming this recent move higher and appears to have formed a double top.
5) There is MASSIVE overhead supply on the S&P.
Obviously shorting this market has been an exercise in pain but technicals will have to matter at some point. Otherwise the bill for pushing through this massive resistance will start getting quite large.
That chart on the S&P is Exhibit A for why technical analysis is total BS. Prior to yesterday, you have a near picture perfect head and shoulders formation, with only the right shoulder to fill out. Heavy volume on selling days and light volume on up days. Poor economic news. A no-brainer, right? What happened? Only 200 point upside and TA now confirming a bullish pattern. Unbelievable. Talk about navel gazing. Volume is a meaningless data point. Light volume just makes it easier for the proprietary trading desks to manipulate the market.
JTodd Reply:
November 10th, 2009 at 6:41 AM
I have no desire to convince anyone that TA is the tool they should use to invest, I am merely pointing out some observations.
There was no H&S pattern. Imagining a pattern forming and then not having it form is not an argument against TA. Even the H&S pattern from July did not confirm as it only dipped bellow the neckline before taking off. Volume is very important. It is a direct indication of participation.
TA is not about predicting the future it is about making the odds, building a thesis, and managing risk.
“Exhibit A for why technical analysis is total BS”
LOL. This is funny. Oh, yeah I forgot, Fundamentals would have kept you on the right side of the trade since March.
Technicals (and following them) is the only tool that would have kept you on the right side of this BS market.
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