A Problem With Volume for the New Rally

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


One of the most talked about aspects of the stock market rally that began in March 2009 was the lack of volume support. As the market continued to go up, buying continued to dry up. The rally that began on Monday is exhibiting this behavior to an extreme. Lack of volume support now makes stocks vulnerable to another sudden downturn.

The problem with volume is most evident on the Dow Jones Industrial Average. Around the low last March, the index was trading over 600 million shares a day. Within the last two months, there were many days when volume was frequently below 200 million shares. During 2010, there have been a few volume spikes around 400 million shares, but almost all of these took place on options expiration days. Rising volume on those days doesn't indicate increased investor interest in the market.  Volume finally did perk up considerably at the end of last week though - on big selling.  Over 400 million shares were traded on the Dow on both Thursday and Friday.

Buyers have not been as enthusiastic on the upside however. The volume on the big rally on Monday was around 300 million shares, much less than volume on the two preceding down days. The Dow dropped slightly on Tuesday and volume was somewhat over 200 million shares. In and of itself this was OK since you want to see lower volume on down days.  When the market goes up afterwards though, the volume must also rise.  This didn't happen on Wednesday, despite the 150 point rally. Volume was well below 200 million shares until the close when around 30 million shares traded at the end of the day. Despite all of those shares changing hands, stock prices barely budged. This would indicate equal amounts of buying and selling (also known as stalling or churning). Final volume on Wednesday came in at 195 million shares. So there was a big rally on pathetic volume.

Not only is the rally lacking proper volume support, but the Dow, S&P 500 and Nasdaq all bounced off their 200-day moving averages on Thursday (they actually pierced them for a short period) and they have now traded back up to their 50-day moving averages. This is now a key resistance level. So far, this is a normal bear-trading pattern.  For it to turn into a bull pattern, the stock indices must get above and stay above the 50-day moving averages. We should soon find out if this can happen.

Disclosure: None relevant

Daryl Montgomery Organizer,
New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Stock Market Rallies Like It's 1932

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Increases in liquidity show up in the stock market immediately and in the economy months later, but are not fully reflected in the inflation rate until years later. Yesterday's promise of UNLIMITED liquidity for the banking system in Europe (backed up by the U.S. Fed) along with the announcement of several trillion dollars in financial company bailout programs created the biggest global stock market rally ever. The future effects on the global economy remain to be seen. The likely biggest global inflation ever will not be showing up for awhile.

The Dow was up 936 points yesterday or 11.1% to close at 9387. The S&P500 was up 104 points or 11.6% and reclaimed the 1000 level by closing at 1003. Nasdaq rose 195 points to 1844 and was up 11.8%. Small caps, which have held up better than any of the other indices saw the smallest rise, with the Russell 2000 up 48 points or 9.3%. Before the rally, the Dow had fallen 40.3% from the high that it had reached on October 9, 2007 (a bigger percentage loss than in the 2000 to 2002 bear market) and had fallen eight consecutive days for a loss of 22.1%. While the points gains were impressive on Monday, the volume was nothing to write home about. Nasdaq only managed to break just above its average daily volume level at the close. Volume on the Dow was more enthusiastic, but not spectacular. Although yesterday's point rally in U.S. stocks was the biggest ever, in percentage terms it was not. Comparable and even bigger rallies took place in the U.S. during the 1930s Great Depression, but have not been seen since.

A rally of similar magnitude to the one in the U.S. took place in the world's other bourses as well. In Europe, the FTSE 100 in the UK was up 8.3%, the CAC-40 in France up 11.2% and the DAX in Germany was up 11.4%. The Hang Seng in Hong Kong rallied 10.2%. Japan was closed on Monday, but got two days of rallying in by rising 14.2% when it reopened on Tuesday. The Nikkei was trying to test test its 2003 low (which took 12 years of selling for it to reach) of just above 7600 last week. If it can manage not to break it in the next few months, the Japanese stock market may finally have bottomed after almost two decades.

Options expire this Friday and the current rally is likely to be sustained until this support for the market runs out (since August 2007, options expiration week has been the time for major stock rallies in the U.S). Today is already starting out as another big day for stocks, but be ready for any possibility. Extremely big rallies, which are typical of bear markets, are not necessarily good news. They certainly weren't during the Great Depression.

NEXT: So Much for That Rally

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

More Collateral Damage from the Fed's First Helicopter Drop

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The impact of the Fed's September 18, 2007 rate cut was not limited to the panic sell off in the dollar and the incipient bubble in gold, silver, oil, and food commodities. The lower rates that were supposed to help the housing market didn't materialize. By the end of the month, mortgage rates were actually higher than they had been before the Fed's action. Instead of helping the beleaguered housing industry and homeowners , the Fed's rate cut was actually ineffective at best and did nothing to decrease costs for those struggling to deal with ballooning mortgage debt.
Of course, in reality it was the big banks and broker-dealers that were stuck with increasingly worthless securities backed by subprime loans that were the real target of the Fed's beneficence. It would prove to be too little too late however. By October, the first of a series of multi-billion dollar quarterly write offs would start - $5.5 billion for Merrill Lynch, $3.4 billion for UBS, $3.3 billion for Citibank, and $3.1 billion for Deutsche Bank. As bad as these write offs looked at the time, they were not nearly as bad as what was to come.

The Fed cuts also gave the Wall Street Pollyannas ammunition to game up the market, since Fed cuts were traditionally bullish for stocks. The financial media had wall to wall coverage of talking heads urging viewers to buy stocks now because they were at fantastic bargain prices (of course at a real bottom no one appearing in the media urges viewers to buy stocks). Any experienced trader looking at the market rally that ensued knew something was terribly wrong however. While the market had sold off in heavy volume in late July and the first half of August, it rallied on light volume and then hit new highs on even lighter volume. Trends on low volume are usually soon reversed and the September rally would prove to be no exception.

Next: The U.S. Government Goes from Lying with Statistics to Just Lying

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please see our web site: http://investing.meetup.com/21