Heavy Volume Continues To Suggest This Correction Is Important
Late last month we noted that stock volume was soaring. We said:
Since April 7 the S&P 500 is nearly unchanged. An uptick in volume in a market that moved from a strong uptrend to no trend is what technicians call a “distribution pattern.” It suggests those who held stocks during the [year long] rally are “distributing” them to new players. Often these players are weaker hands, meaning they are looking for short-term gains and would quickly exit should the market turn lower.
This story is getting more interesting and an update is in order.
Distribution Continues
The chart below is an update of the same one we used last month. It shows the volume of the 500 stocks in the S&P 500 across all exchanges (composite volume). The blue bars in the second panel show daily volume while the red line shows a rolling 10-day average.
As the 10-day average shows, volume has been spiking in recent weeks. At 5.8 billion shares/day, the 10-day average is at its highest level since April 2009.
As the blue bars show, last Thursday and Friday were the highest volume days since the dark days of the credit crisis in late 2008.
The message is clear, volume reversed its slow slide this past March and is now spiking higher. This is the first time we have seen a volume spike since the March 2009 low.
<Click on chart for larger image>
As the next chart shows, the current volume spike coincides with the biggest correction and most volatility since the March 2009 low (-8.74% correction through May 7). Note that the stock market had a similar correction in early February (-8.13%), but that occurred on low volume. This one, however, is occurring on spiking volume. The volume difference makes this 8% correction more significant than the February 8% correction.
As we noted above, technicians call this a “distribution pattern” and it is bearish. It often means those that bought earlier are selling at a profit to “weak-handed” traders. Such patterns often occur when a market is changing direction.
<Click on chart for larger image>
Bond Volume Confirms
The next two charts detail Treasury market trading. They show a similar volume spike, suggesting that the spike in stock market volume is not a technical aberration within the stock market.
Technicians say that volume shows conviction. When volume spikes as markets are seeing higher volatility and changes in the existing trend, it suggests investors/traders are rethinking the sustainability of the existing trend. This is what we are seeing now. Risk assets are being questioned to a degree not seen since the March 2009 low.
<Click on chart for larger image>
<Click on chart for larger image>
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May 13th, 2010 at 12:22 pm
the charts aren’t showing …
May 13th, 2010 at 12:50 pm
ditto on the “no charts for you” aspect.
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BR: whoops — let me fix that
May 13th, 2010 at 2:55 pm
[...] shares per day, the highest level since April 2009, James Bianco of Bianco Research says in a note re-published at The Big [...]
May 13th, 2010 at 3:02 pm
[...] shares per day, the highest level since April 2009, James Bianco of Bianco Research says in a note re-published at The Big [...]
May 13th, 2010 at 4:21 pm
Really clear and helpful posting – thank you thank you!
May 13th, 2010 at 7:13 pm
This is great work. Most importantly, volume is being driven by international banks. Eurodollars plunged on Thursday creating a wave in the interest rate swaps market. The largest cash market in the world. These swaps are what most ETFs actually trade, not baskets of stocks. They’re unregulated instruments moonlighting on regulated exchanges. This is a serious threat to 401k and retirement savings.
In-depth look at the hidden risks of ETFs:
http://www.gamingthemarket.com/financial-armageddon-zombies.html
May 13th, 2010 at 10:57 pm
princess Says: May 13th, 2010 at 4:21 pm
Really clear and helpful posting – thank you thank you!
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x2
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“…Technicians say that volume shows conviction. When volume spikes as markets are seeing higher volatility and changes in the existing trend, it suggests investors/traders are rethinking the sustainability of the existing trend. This is what we are seeing now…” from, above post.
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definitely.
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“…This is a serious threat to 401k and retirement savings.”
In-depth look at the hidden risks of ETFs:
http://www.gamingthemarket.com/financial-armageddon-zombies.html
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great point.
May 15th, 2010 at 2:02 am
I’d submit that the redistribution is bi-annual and tied to ESPPs. Either the major players are stocking up to fill ESPP orders, or some ESPP accounts have already hit their dates to purchase. Check this time last year for the same increase in volume while keeping in mind what the average ESPP participant was telling their accounts to do (raise/lower participation or hold/sell based on the news at that point).
May 15th, 2010 at 2:20 pm
the drawdowns seem to be getting deeper and a little wider. It gives me the itch to put in a put in a bear put backspread if hit new highs and keep roll it up and forward everytime it’s in solid return territory near opex on the front side. It would bleed less and less quickly than straight up volatility purchases with the addition of carrying a small credit if we keep inching up
Ahhh well. I’m just waiting to see if volatility settles again so I can enter a gamma scalping trade on some individual names i have in mind. I’m tempted to do the bleed thing right now but there’s that whole eats like a bird and shits like an elephant thing with the gamma bleed I like to stay clear from.