The 50% move in the S&P 500 has exhibited many of the characteristics of a secular bear market rally:

  • It has been on declining volume.
  • It has been very low quality in terms of asset gains.
  • There is very little real leadership outside of technology names.
  • And perhaps most importantly, the move has been very swift.

You’re probably asking yourself how a 6 month 50% move in the S&P 500 can be described as “swift”.  Well, you have to study the underlying characteristics of the actual rally.  Nearly all of this move occurred in two different multi-week spans.  The first of course, was followed by the March 9th bottom.  The short-term moving average in the chart below shows just how extreme the move was. Between March 9th and April 1st the market soared 27%.   Between April 1st and July 8th the market was up less than 5%.  But then, just before Q2 earnings the market once again shot higher by almost 15%.  If you weren’t invested in the market during these 6 (out of 20) weeks you barely covered your transaction costs!  Most importantly, readers of TPC were tipped off about both moves in advance (see here and here….)


Also alarming in this big move has been the volume.  There has been waning participation since the day the rally started.  The chart above shows the extreme decline in participation.

MarketWatch reports that recent volume is setting record lows.   Tony Cherniawski, chief investment officer at the Practical Investor LLC, a financial advisory firm says:

“In a normal breakout you get rising volume. In this case, we had rising volume for a while; then it really dropped off last week,” said Cherniawski, who ascribes the recent rise in equities to “a huge short-covering rally.”

Scott Marcouiller, senior equity-market strategist at Wells Fargo says:

“It’s simply a case of a tired stock market.”

Tired might not be far off.  With no volume confirmation, negative seasonal trends, no catalysts on the horizon and sentiment at bullish extremes the market just might be ripe for a big pull-back.  I continue to think the risks in this market are extremely elevated…..


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Tony Cherniawski postulated yesterday that the market would test the July lows by next week on the way to test the March lows.


    Do you believe that part of his thesis? Could the July low be broken without significant bad news? How bad would the news need to be to send the market to a retest of the March lows? Over the past several days, there have been an increasing number of predictions that the there will be a 20% to 30% correction. At the same time, there have been an increasing number of people who are predicting that the S&P 500 will hit 1,200 before long.

    from the MarketWatch article:

    A sharp decline in trading volume on the S&P 500 Index signals a looming test of last month’s lows, with the broad market indicator then destined to fall under its March low, according to one U.S. stock-market technician.

    The decline in volume started on Friday and suggests the S&P 500 (SPX) will make a new low beneath its July 8 bottom of 869.32, probably next week — on the way to a test during September or October of its March 6 intraday low of 666.79, said Tony Cherniawski, chief investment officer at the Practical Investor LLC, a financial advisory firm.

  2. Rob

    I continue to think that because there are so many hot and weak hands* in the market right now that things can shift very rapidly and violently.

    *(i.e. momentum players who will sell just as fast as they bought because they’re playing the short term trend, not a long term bullish thesis)

    Once the sentiment reaches an extreme, as it seems to be now, there aren’t enough new buyers coming in and the momentum stagnates and before you know it the hot hands are driving it down. It seems hard to believe given the upside strength that the market has shown, but that’s what history shows and it’s why so many (like Hussman) won’t buy in with the waning volume and other weak internals.

    Of course in the short run you look stupid for not being in and the perma-bulls start their blustering and taunting, which we’ve seen already.

  3. My third comment in a night. A record for me.

    Hey Onlooker, you are right on. Did you see the exit door slamming Thursday afternoon July 2 with what was downright miniscule volume?

    I mean, it shut down the NYSE computer.

    And then the following week. For chrissakes, if the 8 billion shares dumped was not a sign of lack of commitment, I do not know what is.

    Just wait for the inside hand to pull the dump handle on this one. I mean, those vaunted new shiny stock buys will fall like a heavy rock off a steep cliff.

    But only so far as the unseen hand determines is “reasonable” and not enough to spark any “panic”, just a “needed correction”.