Is the Bear Market Exhausting Itself?

After rising 20% over 15 trading days - the fastest ascent since 1938 apparently - the market is taking a breather, with the S&P 500 falling 5.4% over the past two days.

The two-day decline has been on light volume. NYSE Composite volume was 5.5 billion on Friday and 5.7 billion today, the 32nd and 27th lightest volume days over the past 34 trading sessions respectively, which marks the sell-off that began on February 10 and the subsequent rebound starting on March 6.

The volume statistics have been interesting. Over 17 trading days beginning on February 10, the S&P 500 fell 21.5% to the closing low on March 5. Average daily volume during the decline was 6.6 billion. Over the next 15 trading days, when the market rallied 22.0% until the closing high last Thursday, average daily volume was 7.3 billion.

The largest volume day was on March 18 at 8.94 billion when the S&P 500 rose 16 points to 794. There have only been two other 8 billion plus volume days during this period, both down days - the following day on March 19 at 8.86 billion when the S&P 500 declined 10 points, and on February 27 at 8.74 billion, when the market fell 18 points to 735.

However, the lightest volume days have tended to be on declines. Of the eight days with volume below 6 billion, six of them have been down days, including the last two. The only two up days on light volume were on February 11 and 12. The next four days were all down on light volume, with the market falling a total of 56 points and no trading session exceeding 6 billion.

Thus, it appears that the market has been selling off on lighter volume and rising on heavier volume.

It should be noted, however, that even though the past two trading days have been declines on light volume, volume was also light at the beginning of the sell-off in February before it picked up on higher volume. Thus, simply because the last two days have been light does not mean markets cannot go lower on rising volume.

Some investors argue that bear markets end on capitulation bottoms, with heavy selling occurring at the ultimate low. This can be the case but it is just as likely that bear markets exhaust themselves, exhibited by selling on volume that becomes lighter. It may be that the bear market is in the process of exhausting itself.

Comments

[Moon Kil Woong:]

The answer to the author's question is: Nope, the bear is still munching on the bones of optimists quite fine thanks.

The reason for the low volume drop and high volume rise is the absolute inverse to a healthy market. That means the market is negatively SKUed. This means the market feels that the market should generally slide over time with balancing risk on the upside by rising substantially. Usually, the market should rise gradually with volatility on the downside being the exception and thus being substantial.

Even though this is the case, right now volatility has been so big on both sides that the graph is looking more dysfunctional than giving a good slope for chartists to watch. But generally I still hold to a downward SKU for exactly the reasons the author states.

Mar 31 05:16 AM

[squark62:]

seriously doubt the bear market is exhausting itself. i agree with moon that the market is still SKUed downward. just when you think all is quite, bad news that gives the market a reason to sell appears and the 24-hour news cycle will go to work on lowering the markets. don't forget, everyone thought bear stearns was THE low 1 year ago.

Mar 31 06:59 AM

[doubleguns:]

A couple of low volumn down days does not a market make. Dont be getting to excited about this markets up days could end up getting your wallet handed to you (empty).

In my very humble opinion it will be commodities and basic materials that will get us out of this market and they have not settled down yet. Inflation is still coming they will be effected.

Mar 31 07:24 AM

[jamesa40:]

Technicals aside, the mere involvement of the government in banks, autos and whatever else they plan on taking over is enough to keep volatility and potential risk to the downside high for months to come. Once you get the government out, maybe upside reward will return.

Mar 31 08:37 AM

[Massimo19:]

I would really like to believe the bear is getting ready to hibernate, but I can't. This rally was a started by a deep short cover that got momentum with main street money. The shorts took their time, finished covering last week and let window dressing close the quarter. This was a rare occurance that some smart traders capitalized on...just my thoughts

Mar 31 12:33 PM

[logicalman:]

again after reading the negative comments on this article,must i remind you that markets ADVANCE on a WALL OF WORRY,or at least something to that effect...you get the drift!!!

Mar 31 05:35 PM

[Guru914:]

What you described has long been known as On Balance Volume. Check out what I wrote back in November at around the October low in "Resurrecting OBV" at tinyurl.com/stockchart....

Mar 31 09:39 PM

[Smarty_Pants:]

"it appears that the market has been selling off on lighter volume and rising on heavier volume."

Thus increasing the number of shareholders who will eventually capitulate when the bottom is reached. The fundamentals for the economy combined with the boneheaded reactions of the politicians and bureaucrats assure that we have not seen the worst yet.

I sincerely wish that weren't the case, but those are the facts. There are a lot more things just waiting to 'surprise' the financial media to the downside. Commercial real estate, credit card debt, auto loan debt, business failures, and increasing unemployment, to name a few, are still sources of more bad news yet to hit the headlines in a serious way.

We have a long way to go before we get our collective feet on solid ground with a sound base of savings to get us over hard times. Until the average consumer pays down his debts or liquidates them via bankruptcy or foreclosure we will have a sluggish economy.

Mar 31 09:46 PM