Although the market has started to behave better, there is still one missing element: VOLUME. Typcially, volume confirms price, and when markets sell-off or rally on light volume, the moves are less trustworthy than a high volume action.
In the U.S. equity markets, volume has not kept pace with price, suggesting that recent strength may be more likely a technical rebound than a new bull run.
Our friend Mike Panzner looks at the recent volume trends in four markets:
Four of a Kind?
click for larger charts
Courtesy of Michael Panzner, Colins Stewart Securities
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Here’s a look at the recent index gains, and the differences in July and August 5 day movign average of volumes.
| Index (low) | Return | Volume Decrease |
Volume Differences (August v July) |
| DJIA (7/18) | +4.9% | -31.3% | 202.4 mil vs. 294.6 mil |
| S&P500 (7/18) | +4.7% | -21.7% | 1.19B vs. 1.52B |
| Nasdaq (7/18) | +5.2% | -17.2% | 1.11B vs. 1.34B |
| Russell 2000 (7/21) | +5.3% | -27.5% | 461 mil vs. 635.8 mil |
NOTE: The value for volume is the difference between the 5-day moving average on the initial date and the 5-day moving average yesterday, through 8/16/06.
I wonder how the volume this year compares to typical July/August differentials? It seems like August is always light. Bob Pisani would know!
You’re absolutely right Barry. Volume has been pathetic.
I attribute this to the totally APATHETIC individual investor…who took his licks in ’02, and hasn’t come back (yet). Of course some of them left equities for the “safety” of real estate and bonds. Both are expensive right now. If I’m right on the economy, and IF equities follow through, and OIL BREAKS DOWN, I think the massive amount of cash is short term CD’s etc, and (deflated) real estate proceeds will come back to large cap growth stocks.
Yes volume will be a huge tell that this is more than a recovery to the top of a trading range…it will change perception.
I think we’re seeing the beginning of the Energy > Tech swap. I recognize this sounds really dumb to many here.
you are right, you do sound dumb. a swap from energy into tech implies rotation not mountains of new money pouring into the stock market from “unsold” houses….huh? ss, you do not make sense here.
ss,
No, I agree with you that the next bull market could be driven by a swap from energy to tech, and small-caps to big cap tech. I think where we disagree most is on the timing.
But tech needs a driver, and the only thing that I can think of that could cause a major spending spree on tech is WiMax. The last tech bull was caused by the buildout of broadband to the home and office, and now everyone is a broadband junkie but we’re tethered to desks, what do we want now? To cut the cords.
I think portable broadband is the next big thing in tech. The internet everywhere, all the time, with acceptable speed. Google Maps in your car, hooked into GPS. Thousands of internet radio stations, TV webcasts and YouTube on your cellphone…
Sprint is already making the move. Let’s see how long it takes for Verizon and AT&T to follow.
Hmmmm….Philly Fed prices paid index dips to 45.3 from 50.3
Nah…couldn’t be
You gotta look at more than the headline numbers. The bond market hasn’t liked the Philly Fed survey, at least not initially.
Cost Increases and Higher Prices Reported
Respondents reported increased costs for inputs again this month. Although the prices paid index remains at a relatively high level, it decreased five points. Forty-eight percent of the firms reported higher input prices, compared with 53 percent last month.
Twenty-five percent of the firms reported higher prices for final manufactured goods; 8 percent reported decreases. The prices received index, at 17.1, was unchanged this month.
Business Outlook Survey
Craig, depends on which part of the yield curve you’re talking about. Short term yields don’t seem to like it, but prices went up on the long end.
The philly Fed number is a diffusion index. The 45.3 is still a monster number for the index. The falloff simply tells you that the price rises last month were slightly less than the previous month.
Bynoceros,
I’m looking at the 10 year. It’s gone from 4.857% at noon to 4.877% at 1pm.
Hank,
The 10 year isn’t stuck. The yield is up over 50% from the low in 2003.
Gotta run. My egg timer needs turning over. ;-)
I wonder if the Cult of the Bear still expects 6800 or thereabouts or if there have been any revisions. Anybody think we will really tank in October/November or that Nenner will be right and we will go down most of the rest of the year?
It’s about 1:30 – the Q’s are just up behind 39 and the $compx is just near 2170 – without VOLUME this could be a short term hold with options friday coming.
your page is excellent – thanks for all the info you provide
paul
I guess, I’ll go short at this point if it arrives
Right now, I see the S&P’s E/P on operating earnings around 6.5%, and treasuries around 5%. Well and good, a 30% move (equities up, bonds down, or both) equalizes those. So? Stock E/Ps and Treasury yields do not always mean-revert to equivalence. I agree that rates plug into valuation equation, but there we part ways.
At the end of 1990, the same numbers were 7% E/P versus 8% for Treasuries. Shorting equities against bonds would have killed you in 1991. End ’94 looks the same, and you lose. In the 2000s, though, your method works like a charm — it keeps you out of the market in 2000-2, gets you back in for 2003-present.
Are you sure your confidence is not based on a plausible timing hypothesis because it happens to have worked for five years? If PIMCO is right about housing and consumption, the E numerator is going to shrink, while your treasury coupons just keep paying out.
I think folks get tripped up on volume. Granted, higher volume is definitely a sign of something. But lighter volume could have many reasons. Vacations and holidays. Something news worthy on TV or YouTube.
One thing for sure, even those like myself who think that we’ve been in a typical summer trading range must be a little surprised by an August rally. Since we were up near the top of the trading range, I fully expected another trip down to retest the lows in another typical October-like pattern. Wouldn’t that be something if folks who have hung up the Gone Fishin’ Until October signs came back to a market at new highs instead?
I’ve never trusted volume all that much because it hasn’t always been reliable for me, but I do pay heed to MACD and Stochastic divergences.
On the SPX and Dow dailies we have bearish MACD divergences, but the stochastics are confirmatory (and very overbought now). You can pick your favorite indicator but between the two I’ve always been more partial to MACD when they disagree.
That cracking sound you hear in the distance is the flimsy support for Crude prices. This is a very crowded trade…heavily levered. When this corrects, it will lift yet another headwind to consumers, and the commodity “push” inflation argument will be that much more questionable….this is NOT priced in the market yet…but we’re getting a whiff of it in the OIH > QQQQ swap.
The internals have been deteriorating since this little rally started. Just about time to sell ’em boys.
I think folks get tripped up on volume. Granted, higher volume is definitely a sign of something. But lighter volume could have many reasons. Vacations and holidays. Something news worthy on TV or YouTube.
One thing for sure, even those like myself who think that we’ve been in a typical summer trading range must be a little surprised by an August rally. Since we were up near the top of the trading range, I fully expected another trip down to retest the lows in another typical October-like pattern. Wouldn’t that be something if folks who have hung up the Gone Fishin’ Until October signs came back to a market at new highs instead?
that resistance @ 1300 on the S&P today was a bitch… wow.
Altria could give the indicies a shot in the arm…or a punch in the gut tomorrow. 4:30 pm today we get a DOJ announcement — should be market moving.
DOJ announcement is likely a response to a District Court ruling that the NSA Wiretapping program is unconstitutional. Probably address the ruling, announces an appeal, and requests stay of injunction.
We’ll see soon enough.
“And don’t we all wish we jumped with both feet into that 1979-1980 market, a buying opportunity of a lifetime.”
LOL.
Better late than early, baby. The SPX topped in Nov 1980 and spent the next 21 months in an excruciatingly slow 30% drip/drip/drip down to the August 1982 bottom.
By the bottom, investors were worn out, thoroughly bearish after nearly 10 years of watching a trading-range market, not to mention 21 months of recent downside misery.
Sentiment was beyond bearish, it was nonexistent. No one cared. “The Death of Equities”. Recall?
Compare that to today. The SPX dropped a whopping 8% in six weeks after making a 4-year high while speculative buying was frenzied. And so far, that has been the extent of the decline.
I have no idea whether stocks will rise from here. Maybe the 2002-2006 bull run will get a second wind. Maybe it won’t. But it certainty won’t be because the sentiment landscape is anything like 1982.
If the market chooses to go higher from here, so be it. But who in their right mind would buy the Dow, for example, today at 11,350 when the all-time high is just above at 11,750? Let’s see the Dow get above 11,750 and stay there and then we’ll talk.
If it gets above, buy it and put a stop around 11,300-11,400. You miss out on 3-4% upside but would catch whatever “New Bull Market” comes along. And if the Dow doesn’t get above it, you’ve missed nothing at all.
Simple risk/reward. Right now, it’s all risk, no reward.
The economy is now at full capacity. It can’t take on anymore in this cycle.
The key is when the long slide of industrial production begins essentially signaling a recession. Unlike the 90’s expansion which took FOREVER to reach full capacity or the 80’s which took awhile due to the nasty early 80’s downturn, this one shouldn’t last over 6 years due to the fast stimulus of debt and artificially low interest rates.
Thus the Market has hit its peek. The economic expansion has peeked. Nowhere to go but down. Doesn’t matter if industrial production begins its decline this month or in February of 2007. The decline it must be.
Usually the stock market “busts” right before this decline begins. So if it busts in October, that means a recession will begin late next spring or early summer. If it busts in February(weirdly, I have been have dreams that it does in 2007 for some reason, a prophecy lol?) Recession in Fall.
Looking for a rally is nice, but lets call the peeks: September 16: 11810………………………..down to 9212 by years end before a moderate rally pre-recession.
Uh, where exactly do we draw conclusions the economy is at full capacity? Please don’t tell me productivity numbers or manufacturing capacity.
What makes you think it is not? Not every business cycle is equal.
Tech? Big Caps?
Right, Dell, Mr. Softie, IBM. Home Depot……..zzzzzzzzzzzz
per Hank:
“Even with a slowing to 2.5% GDP growth (certainly not this quarter), those earnings will move higher, not lower. And even if the truth falls half-way inbetween (again, the yield on the 10-year T note appears to be stuck), that gives us at least 15% upside potential. Translating that into DJIA terms, we are playing for at least DJIA 13000.”
well Hank, I hope that when you referred to “us” and “we,” you were being casual about grammar rather than meaning that you are handling OPM or you are likely to be avoiding a lot of phone calls in a month or so. The current bounce is being fueled by expiration week, the willingness of so-called investors to ignore that a slowing economy is a bad thing, and a short squeeze. That will adjust itself as needed, but at least it gave me a chance to get rid of the cheap QQQQ calls that I bought as a hedge against Benanke Day last week.
I would expect a minor sell off next week and more range trading until after Labor Day. Have you thought about what Q3 earnings are going to look like? Do you understand that risk premiums of treasuries against both corporate bonds and equities are ridiculously low? Do you realize that in the asset cycle, commodities are the last to fall before the trip to the bottom is here in earnest (and $CRB is just about to break its upward trendline since 2003)?
It would be best to avoid confusing the activities of 8000 hedge funds with the structural issues that actually push things unless you are day trading. Money does go where it is treated best, but that includes factoring in risk. From that standpoint, it is insane to go long in equities other than for a quick red/black trade.
The answer is that the economy is NOT at full capacity. Cycles and differences in cycles have nothing to do with whether the economy is at full capacity.
The economy has not been at full capacity since 1999.
per B:
“The economy has not been at full capacity since 1999.”
okay, B, what is your point?
My point was that the poster who had previously posted “That is the beginning of “real” Fascism/National Socialism. Mostly done by market failure caused………by Zionist, environmental destruction and the like.” said the economy was at full capacity. It is not and has not been at full capacity. That was my only point.
erm, okey dokey, B, thanks for responding.
The volume is not there because people are still largely bearish. The ratio of buyers to short coverers is very low. The bullish percent index is still below 40. As these gains hold, and I think they will (short term at least), then the volume will come. There is some nice resistance at 2250 on the NASDAQ.
“Do you realize that in the asset cycle, commodities are the last to fall before the trip to the bottom is here in earnest (and $CRB is just about to break its upward trendline since 2003)?”
Most important chart out there in my opinion. Good post whipsaw. Kinda scary what that implies though, as the move could very well be highly deflationary. And don’t tell me bulls that that’s a great scenario for equities. Maybe for two days it is. Then the Oh Shit! realization hits that the party is over for the global economy for this cycle.
Agree. You can also get a clear picture of this by looking at the Rydex info….huge bearish bets placed. There is also HUGE % in thier money markets….the current levels are a very bullish tell for the future.
I have the Rydex data in front of me. Your huge position amounts to less than an hour’s trading on the NYSE. And, in order to divine the data you simply cannot just look at cash. The positions in the Rydex funds are NOT that bearish right now. Plus, youmust understand that data changes as smarter, more sophisticated clients use the data.
Money is in money markets because a guaranteed 5% is alot better than watching your AMD drop 70% in two months.
Oh, come on B, this “cycle” is at full capacity. It can’t substain anymore. Maybe the National Economy should be doing better overall with the exceeding debt costs factored in temporarily, but it is, what it is.
Market failure around the corner? You betcha!!!!