Ron Griess of The Chart Store points to the rally continuing on decreasing volume. I would also note that breadth is softening as well.

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click for larger chart
8-7-09-monthly-dji-and-volume

Category: Markets, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

52 Responses to “Rallying on Falling Breadth, Volume”

  1. leftback says:

    Volume will decline even further if HFT is banned. LB has bad dreams where there is no real market, just a flat line with computer trading by GS and MS superimposed on it, and a few Cramer viewers on top of that.

  2. Andy T says:

    “the lack of expanding volume makes us very uneasy….”

    That’s an understatement.

    The lack of bigger volume into the low should also be cause for some concern. It was decent volume into that low, but not the legendary capitulation volume one would expect at a major low.

  3. km4 says:

    The “Recession is over…green shooties for everyone!
    http://bit.ly/Pnzcm

    1. Structural unemployment is skyrocketing.
    “Structural” is a polite way of saying there won’t be any jobs for the long-term unemployed this year, next year, or the year after that.

    2. The jobless rate declined because the work force shrank.

    3. Everyone seems to have forgotten we need to create 250,000 jobs a month just to stay even with population growth.

    4. The interest on all the debt the nation is taking on to bail out bankers and “stimulate” the dead credit-bubble model will place a drag on growth far into the future.

    5. Interest rates are set to double. A funny thing happened on the way to borrowing “free money” in the trillions; there isn’t enough free money around for everyone to borrow unlimited amounts of it. So there’s actually more demand for surplus cash than there is supply of surplus cash. That sets up a supply-demand imbalance which leads to higher costs of borrowing. Nothing fancy here–even the Fed economists understand this.

    6. Tax revenues are tanking.

    7. Normal accounting and reporting rules have been suspended. The U.S. financial markets are still a hall of mirrors; mark-to-market is still a pipe-dream; mark-to-fantasy reigns supreme as the easiest way to prop up insolvent banks’ balance sheets.

    8. Commercial Real Estate is spiraling round the drain.

    9. Consumers are retrenching generationally, not for a few months.

    In the long years of bogus “prosperity,” consumer credit grew every month like clockwork. $70 billion isn’t much, but it’s the start of a trend which essentially dooms consumer-based, over-leveraged economies like the U.S. to years or decades of (at best) meager growth.

    10. Residential housing is not healed

    NET NET Behind the hoopla, the Wall Street conspiracy has dumped $23.7 trillion new bailout debt on taxpayers. The bailouts have merely postponed the inevitable. The bill will come due. But for now, we’re getting their wish: A new bubble is accelerating, thanks to America’s “too-greedy-to-fail” Wall Street banks. “We are in for another day of reckoning down the road.”

  4. cvienne says:

    @lefty @ Andy

    “Volume will decline even further if HFT is banned. LB has bad dreams where there is no real market, just a flat line with computer trading by GS and MS superimposed on it, and a few Cramer viewers on top of that.”

    touche’…x2…This has been “synthetic” volume all along…

    Here’s a link to a Norman Rockwell illustration:

    http://www.robertedwardauctions.com/auction/2006/1.html

    Note: The boy with the ball is Lloyd Blankfein, the boy waiting to step off the bag are Cramer viewers…

  5. cvienne says:

    opps…looks like the link is broken…Anyway, to view the illustration, it is the

    May 28, 1927 cover of the Saturday Evening Post…

  6. cvienne says:

    Thanks Mortimus!

  7. Init4good says:

    …’rally continuing on decreasing volume’….

    WHEN decreasing volume becomes decreased volume, for an extended period, does it then not become “normal volume?”

    I’m concerned about that prospect…

  8. Vilgrad says:

    Insider selling to buying is 4.16 to 1

    In March it was .76 to 1

    This entire rally is being produced by Goldman and the other TARP banks with their MBA produced models. Their models will tell them all to exit at the same time. The average 401K schmuck will screwed again.

    Count on it.

  9. thetanman says:

    The volume today is tiny. Some single digit midgets are barely trading. About 1/5 the usual volume on some. On overall volume and the VIX they are just coming down from insane levels. People have either dived back in or have said “no way in hell”. Now we see what happens.

  10. alfred e says:

    Expect the PPT to kick in any minute.

  11. ben22 says:

    the lack of expanding volume is just one of many indicators that it’s a bear market countertrend rally. Volume expands in bull markets, in bear market rallies, depsite the “bte” buyers are getting more selective. If HFT can sell as fast as it can buy, which it can, this lack of volume will be all the buzz in the coming months.

    @ahab,

    re: your question on the dollar and prechter, fwiw, prechter, hochberg, and kendall have been looking for a dollar bottom for the better part of a month and half now and the current action shows an impulsive 5 wave up recently so it could be the start of a major reversal. Could be right or wrong, the wave counts aren’t clear on the dollar or treasuries right now. I’ve been long UUP for about a month now with an initial postition that is underwater and that I’m adding to more recently. There are a million different ways to play this trade but we’ve been talking about how for over a month now, I’m sure you could figure it out. I prefer the combo of being long the dollar and short China for my own money right now. The silver short trade is back on imo as well, people were given a gift the last two weeks when ZSL dipped way below $8 again, purchased options on ZSL yesterday.

  12. cvienne says:

    @thetanman

    “The volume today is tiny. Some single digit midgets are barely trading. About 1/5 the usual volume on some”

    …and ironically, this is opex week (albeit August)

    On that note…August 15th is a HOLIDAY in most of Europe (now that falls on Saturday), but it means that either Friday or Monday, in Europe, the markets will be closed…

    It is many times on those occasions when HUGE moves are made in the Forex markets &/or commodities markets…

    Huge dollar rally? Gold/oil selloff? market meltdown this weekend anyone?

  13. zyzy says:

    yeaaaapppp. let’s see . going to be interesting. Thank you for the chart.

  14. leftback says:

    LB took some profits on FXP. There was a nice pile of money sitting there, one was simply compelled to pick it up.
    Expecting a reflex rally some time in the next 24 hours and would be ready to short any irrational exuberance.

    I like Ben’s idea of shorting silver and China, and am already short gold and crude. Banks and REITs, maybe soon.

  15. dead hobo says:

    cvienne Says:
    August 11th, 2009 at 12:02 pm

    “Volume will decline even further if HFT is banned. LB has bad dreams where there is no real market, just a flat line with computer trading by GS and MS superimposed on it, and a few Cramer viewers on top of that.”

    reply:
    ————–
    1st … about LB: Might be a Tim Burton nightmare movie.

    2nd: About HFT and volume … For those who claim HFT has nothing to do with market scams, a lowered volume due to HFT restrictions would be excellent evidence of shenanigans that are no longer being performed. Take away the flash orders and the predatory ping orders and you just have fast switches. There’s not much profit there I would assume.

  16. The Curmudgeon says:

    But the declining volume appears to be declining at a lower rate of decline. Second derivative Green Shoots!

    And given the profits they recently reported, I wonder if most of the volume isn’t just GS trading with itself.

  17. alfred e says:

    And maybe traders and investors are steering clear of the NYSE because of the shenanigans.

  18. constantnormal says:

    Just to take a somewhat contrarian view (but not too much, as I subscribe to the notion of another BIG step down in the not-terribly-distant future), what’s the seasonality of this? Is it possible that in pretty much EVERY mid-to-late August we see declining volume, as traders depart for their vacations?

    Personally, I expect to see a period (2-to-12 weeks or so) of market choppiness, where momentum players and eager bears/bulls are chewed up and spit out, and just when everybody has become convinced that the new game is “buy on the dips/sell on the peaks”, the roof falls in, prolly sometime in early October, as realization of just how bad the quarterly revenue numbers are gonna be combines with the horror of a merchandising Year Without a Christmas.

  19. constantnormal says:

    Of course, the smart momentum players will have gone to cash when the momentum goes away.

  20. dead hobo says:

    The Curmudgeon Says:
    August 11th, 2009 at 1:24 pm

    I wonder if most of the volume isn’t just GS trading with itself.

    reply:
    ————-
    I don’t judge, but wouldn’t a nice girlfriend be better?

  21. constantnormal says:

    @Init4good 12:22 pm

    WHEN decreasing volume becomes decreased volume, for an extended period, does it then not become “normal volume?”

    I wonder if there’s a way to normalize volume relative to some function of the size of the GDP and the VIX. It seems like that might be a useful metric to determine when the stew is under/over-cooked, and maybe an indicator of when to add/remove money from the table.

    Any idle quants that can validate/falsify this idea?

  22. constantnormal says:

    @km4 11:49 am

    re:
    #7) ” … the easiest way to prop up insolvent banks’ balance sheets.”

    Why limit it to banks? Can not mark-to-fantasy be used by any firm with worthless junque on the balance sheet? Or even not-quite-worthless, but assets that might be interpreted in a forgiving way as being worth a whole lot more (in an alternate universe) … I can see company XYZ, facing a dearth of revenue, tidying up the old balance sheet by “reviewing” just what the company parking lot is actually worth these days …

    Somehow, I just can’t see how the SEC or anyone else would be able to criticize such behavior, now that we are no longer constrained by reality …

    The only numbers I believe in at this point on quarterly reports are revenue, and I’m pretty suspicious of those.

  23. wunsacon says:

    >> I wonder if most of the volume isn’t just GS trading with itself.

    I hope they scalp themselves.

  24. leftback says:

    Supplemental Liquidity Providers just woke up….

    BTW, the powers that be may re-introduce mark-to-market accounting this fall, as this would certainly create a demand for Treasuries – despite the seemingly endless supply of government debt that continues to be offered. For those of you who believe in market manipulation, understand that the market can be manipulated both ways – when it suits the Fed and Treasury to do so.

  25. constantnormal says:

    @leftback — you have clearly been on vacation. What’s with this aura of optimism you seem to be wearing regarding Uncle Sam cleaning up his act, and accepting the consequences?

    Banning HFT, bringing back mark-to-market accounting, I know that there are been rumors in the media, but that’s the same media that been reporting on all the green shoots!

    Sober up, man. Abandon this delusional state. Ain’t gonna happen without a WHOLE lot more pain.

    Same thing with auditing the Fed — now who really believes that such legislation will not be vetoed?

    Eventually, all these things will come to pass, but not before they have no game plans, and are facing unemployment rates in the neighborhood of 12% U3 going into mid-term elections.

    Churchill was right about the American people. And we have not yet exhausted all the wrong answers.

  26. Mike C says:

    The lack of bigger volume into the low should also be cause for some concern. It was decent volume into that low, but not the legendary capitulation volume one would expect at a major low.

    I don’t think this is true that one should expect legendary capitulation volume at a major low. IIRC, Russell, Hussman, and a few other seasoned pros have remarked that major bear markets end NOT on panic and high volume, but on complete apathy and indifference, and a sense of “why bother with stocks”, “everyone knows they don’t work”.

    IIRC, the 1974 bottom was marked by low volume, not high volume capitulation, and I seem to recall both the 1942 and 1949 bottoms also being low volume.

    I don’t believe for one second that March 2009 was a 1942, 1949, 1974, 1982 type bottom, but the intermediate-term trend seems to have bullish fuel, at least according to some technical analysis tools and indicators. I know from your e-mails you are more of a wave guy:

    http://www.tradersnarrative.com/stock-market-history-of-high-momentum-thrusts-2815.html
    http://www.tradersnarrative.com/lowry-researchs-intermediate-trend-buy-signal-2832.html
    http://www.tradersnarrative.com/coppock-guide-signals-the-start-of-new-bull-market-2622.html
    http://www.decisionpoint.com/ChartSpotliteFiles/090807_itbm.html

    Bottom Line: The very high reading of the ITBM, along with the recent price breakout, presents strong evidence that an initial impulse capable of launching another major up leg has taken place. And the similarity between the present and the 2002-2003 bottom, leads me to believe that it is more likely that we are at the beginning of a bull market rather than at the end of one.

    Whenever I make bullish comments, and this is as bullish as I have been since the March lows, I get mail asking me how I can be bullish in the face of the dismal fundamentals we are facing. The answer is that I let the charts tell their story and pretty much ignore the fundamentals. If I had to guess why prices are bucking the fundamentals, it is probably nothing more complicated than prices reacting to the huge amount of liquidity that has been (and will be) dumped into the economy.

    Do I think that this bull market will be similar to the last one in length and amplitude? Technically speaking, I think the potential is there, but I don’t want to say that is my forecast. My next target is 1200 on the S&P 500.

    If we are topping out here, it will catch many on the wrong side. I continue to hedge my bets with reasonable equity exposure but also a substantial cash position.

  27. IdiotInvestor2 says:

    A question from an idiot.

    As per the chart, the volume is still above 2006-2007 levels. It seems down trending only if you compare to what it has been since last Sept-Oct. So aren’t we simply going back to historical levels ?

  28. Onlooker from Troy says:

    I wonder how much money is being fed into the market these days in the form of monthly 401K and IRA contributions. I’m sure it’s down quite a bit from ’08 and before, but I wonder how much. Needless to say that dumb money (buying with no regard to valuations; especially index funds) is a good prop to the markets. And once again those folks are being used to sell to by smarter money that cares about valuations and knows that it matters to long term returns.

  29. dead hobo says:

    leftback,

    About mark to market: Unless something really new is afoot, the m2m discussion relates to expanding the concept to many more asset and liability classes, and not just trading and available-for-sale investments. Plus banks can do M2M things with some of their their liabilities. In itself this isn’t bad. Historical cost can hide some ridiculous valuation. Impairment rules should already require write down of permanent impairments, but would ignore temporary impairments. This might add a little better disclosure there.

    All in all, it’s to soon to say if it’s good or bad, but an above the line EPS benefit for marking up the factory would be wrong, since cash flow was not affected.

  30. dead hobo says:

    expecting end of day pump. It look like a set up right now. If coming, it should be obvious in about 15 minutes.

  31. leftback says:

    To pump or not to pump, aye, that is the question.
    Whether ’tis nobler to suffer the slings and arrows of outrageous squeezing…

    Constant, thanks for the injection of cynicism, LB is feeling bitter already.

  32. dead hobo says:

    Looks like no pump. Only an idiot would juice it up this late in the day. No obvious upside to use to entice rubes.

  33. Mannwich says:

    No pump today, I see? Interesting development. Perhaps we go sideways for a few weeks here and then the real fun begins?

  34. leftback says:

    Fed tomorrow. As long as they don’t say ANYTHING about rate hikes, the equity market will rally.

  35. Mannwich says:

    And any dips in the market now are being bought. This will continue for maybe 4-8 weeks, I’m thinking.

  36. dead hobo says:

    Mannwich Says:
    August 11th, 2009 at 4:19 pm

    And any dips in the market now are being bought. This will continue for maybe 4-8 weeks, I’m thinking.

    reply:
    ————
    The Fed still has about $50b of high octane left. I still think they will play the stock and UST markets against each other through Sept. to support housing. The Fed’s authority to monetize using a special program is supposed to run out then. Since it’s immoral to not spend if your budget supports it, I suspect S&P 1200 before people notice the the canyon far below and the air they’re standing on.

    If the market falls to around S&P900 within a week or so, I might think of it as a quick trade for maybe 15%+ (ie: buy the dip) and actually put something in myself.

  37. dead hobo says:

    About S&P 900 vs today’s value: Yes, I think something that aggressive would be required to make UST rates fall enough to keep housing rates affordable for a while longer. Then, some utterly magical news will erupt and cause the markets to jump to the planned limit of the Lehman level.

  38. Mike C says:

    The lack of bigger volume into the low should also be cause for some concern. It was decent volume into that low, but not the legendary capitulation volume one would expect at a major low.

    I don’t think this is true that one should expect legendary capitulation volume at a major low. IIRC, Russell, Hussman, and a few other seasoned pros have remarked that major bear markets end NOT on panic and high volume, but on complete apathy and indifference, and a sense of “why bother with stocks”, “everyone knows they don’t work”.

    IIRC, the 1974 bottom was marked by low volume, not high volume capitulation, and I seem to recall both the 1942 and 1949 bottoms also being low volume.

    I don’t believe for one second that March 2009 was a 1942, 1949, 1974, 1982 type bottom, but the intermediate-term trend seems to have bullish fuel, at least according to some technical analysis tools and indicators. I know from your e-mails you are more of a wave guy:

    took off some of the web coding because the message was getting hung up in moderation

    tradersnarrative.com/stock-market-history-of-high-momentum-thrusts-2815
    tradersnarrative.com/lowry-researchs-intermediate-trend-buy-signal-2832
    tradersnarrative.com/coppock-guide-signals-the-start-of-new-bull-market-2622
    decisionpoint.com/ChartSpotliteFiles/090807_itbm

    Bottom Line: The very high reading of the ITBM, along with the recent price breakout, presents strong evidence that an initial impulse capable of launching another major up leg has taken place. And the similarity between the present and the 2002-2003 bottom, leads me to believe that it is more likely that we are at the beginning of a bull market rather than at the end of one.

    Whenever I make bullish comments, and this is as bullish as I have been since the March lows, I get mail asking me how I can be bullish in the face of the dismal fundamentals we are facing. The answer is that I let the charts tell their story and pretty much ignore the fundamentals. If I had to guess why prices are bucking the fundamentals, it is probably nothing more complicated than prices reacting to the huge amount of liquidity that has been (and will be) dumped into the economy.

    Do I think that this bull market will be similar to the last one in length and amplitude? Technically speaking, I think the potential is there, but I don’t want to say that is my forecast. My next target is 1200 on the S&P 500.

    If we are topping out here, it will catch many on the wrong side. I continue to hedge my bets with reasonable equity exposure but also a substantial cash position.

  39. dead hobo says:

    Or the Fed might put all of its remaining efforts into a last burst closer to the expiration of their authority to monetize debt via direct injections into the markets. This makes sense. Overt monetization beyond a bureaucratic deadline is just not the way I think they do things. They will pump for maximum effect unless authorization to monetize is expanded (doubtful). The big UST buydown will be the last call for trading opportunities until a real recovery or another stimulus.

  40. AmenRa says:

    When it is all said and done the fact that the MSM is constantly jabbering on about a consolidation is a contrarian indicator in my book. I figured the market would have to correct because it’s the only way the Fed can convince investors to buy treasuries. So expect a double whammy tomorrow. The 10 yr will beat expectations and the Fed will hold rates with no mention of a hike. They will also find a way to continue QE.

  41. AmenRa says:

    The 10 yr auction bid to cover will be higher than expected that is.

  42. some_guy_in_a_cube says:

    The decline in volume is relative to the sky-high crisis volume. So don’t get your shorts on fire, it could be nothing more than a reversion back to trend.

  43. toddie.g says:

    Not for nothing, but the volume has been punkish virtually the entire rally and that kept me out of participating whatsoever. Being a skeptic is fine to a degree but not when you miss out on a really big move.

    Let me point out that yes, the volume sucks but no, earnings this past quarter didn’t suck. The ”beat rate” was 75% an all time record. Yes, you can make a case that it was based upon cost cutting and not revenue growth but the point is, the bottom line is the bottom line and that produced a 75% beat rate. With inventories as lean as they are, it won’t take much in the way of incremental demand to allow corporate profits to beat again in the next 2 quarters.

    My number one indicator to watch for stock market moves is junk bonds, and for that I watch COY. Stock market volume lies but to me, the junk bond market doesn’t lie. It didn’t lie in 2007 when junk bonds tanked first and then didn’t rally back even as the market made a false breakout to a new high in November, 2007. It especially didn’t lie in early 2008 when junk bonds caved and the stock market then died. And, it didn’t lie on this move up on this steady move since the spring and especially since it broke out around July 11. And, yes I think COY is kinda pricey here so I am more cautious on the market. But, COY isn’t screaming sell to me yet, either. I will be the first to be a bear when it does.

  44. toddie.g says:

    One final point. This past quarter’s earnings reports display that there is a disconnect between the lousy Main Street economy, which gets reported on endlessly, and U.S. corporate profits as so much profitability is derived from the international operations. To derive one’s stock market view so much based on the lousy U.S. economy is to miss the forest from the trees. This disconnect will likely be with us for many years to come and those who don’t recognize that will remain permabears and miss out on some great opportunities.

  45. deadonarrival says:

    @toddie.g

    2007 disconnect = fear flight to quality
    Early 2008 = HF deleveraging
    recent 2009 rally = dollar weakness

    At present levels, if the dollar rallies, thesis is blown.

    Play at your own risk.

  46. limaur says:

    Thesis doesn’t make sense to begin with. Profits from the dollar carry trade maybe, but from sales! I doubt it. Toddie was right on though re: junk bonds. Best indicator there is.

  47. AmenRa says:

    @toddie.g

    Just took a look at COY. Using TLB to check the trend in the Corp HY it reversed up on 6/12/09 (weekly chart). The last move was down on the week ending 6/13/08. I’m going to take a longer look at this.

    This is what I have for trend changes in COY: starting 5/17/96 down, 1/24/97 up, 4/4/97 down, 1/7/00 up, 3/10/0 down, 6/30/00 up, 10/6/00 down, 12/29/00 up, 3/23/01 down, 1/18/02 up, 6/21/02 down, 1/10/03 up, 5/9/03 down, 10/31/03 up, 1/30/04 down, 10/8/04 up, 12/3/04 down, 2/4/05 up, 3/18/05 down, 7/1/05, up. 8/12/05 down, 10/27/06 up, 3/2/07 down, 4/11/08 up, 6/13/08 down, 6/12/09 up.

    If it can stay in an uptrend for 3 months you may have something here. How do you analyze COY for clues?

  48. jasonfr says:

    Could someone explain to my why volume is relevant?

    For every buyer (who believes stocks will go up further) there is a seller (who wants to quit the market).

    A high volume means a large number of interested buyers but also a large number of people quitting the market.
    A low volume indicates a low interest from buyers but then sellers seem also happy to just stick to their stocks for the time being (otherwise they’d sell it at lower prices until volumes increase).

    Commonly it’s said that volume has to support a trend. But why? It’s a market. Every buyer is matched by a seller…?!

  49. mdod says:

    I think that it might be better to see a seasonally adjusted plot of volume. The summer is traditionally dead as far as activity is concerned.

  50. toddie.g says:

    @AmenRa:

    I use COY as a bigger picture view and don’t make trading decisions on a day to day basis. I look at the overall pattern and it’s relationship to 50, 100, 200 dma’s.

    If you look at COY during the bull market from 2003-June, 2007 you can see that this was an incredibly stable asset class where daily movements were extremely muted. The range from high to low was negligible. In July, 2007 there was a sudden swoon from around 8.40 to as low as 7.00 by the 2nd week of Auguast, in a matter of 6 weeks – a near 20% move down on a sudden surge in volume. The stock market caved accordingly, but then made a new high in Nov 2007 while COY never came close to reaching the levels reached back in the spring of 2007. It never was able to get back above those critical moving averages and the ensuing pattern became increasingly bearish. At this point in time, I was extraordinarily cautious on the market and while I wasn’t predicting a crash I was describing the investing environment as highly risky and uncertain and that a market event could not be ruled out. COY utterly crashed in March 2008 and from that point on the mayhem began in the stock market in earnest.

    So my conclusion is that COY (and financials) led the market lower in 2007 and 2008, and they are leading the way up now making it very difficult for the market to fall apart. Looking at COY in relationship to the critical 50, 100 and 200 dma’s, it is now safely above those and all of those averages are now in steep ascents meaning that pullbacks in COY can be bought. I assert that weakness in the stock market can also be bought as well because of the constructive formation in COY.

    Having said that, I think COY is a little pricey here at a 5% premium to NAV and I expect a pullback in the next few weeks. Bigger picture though, to me COY is saying the investment environment will remain better than people expect and the surprises will be pleasant as opposed to nasty.

  51. [...] volume indicates the rally may be losing steam. Is this simply the end of shorts covering? (Source: The Big Picture) Shanghai Stock Exchange Composite Index [...]