If a Rally Runs on Volume, This One Is Running Out of Steam

If it is true that a lasting rally needs volume, then we are pretty much running on fumes here. While the market’s spring rally has been impressive, the volume behind it has been anemic. For example, take a look at last year’s spring rally and you’ll see the same pattern: higher prices accompanied with lackluster volume (orange line). And again in July 2008, we had a shallower price move with very poor volume levels:

William Hester of Hussman Funds did a very good historical analysis of volume characteristics during important market bottoms: Comparing Bear Market Rallies.

But there is an important nature of volume that I don’t think he took into consideration. Everything else being equal, volume tends to be cyclical and follow a pattern. For example, it tapers off during holidays like Christmas and New Years (yellow squares on the chart). Volume is light from June to August - what is referred to usually as the summer doldrums. And it spikes for panic lows (you can see a few examples above).

This makes analyzing volume patterns very difficult because we have to adjust for the seasonality. In any case, it is not really justifiable to give the spring rally some wiggle room for this because it doesn’t overlap with any important seasonal volume changes.

Comments

[Larry House:]

Good point. I think it is going to be a quiet summer. I don't expect much movement in equities up or down. At some point we have to wait for fundamentals to show if the runup has been justified or not.

Jun 09 11:47 AM

[mlp investor:]

there will be a push up before options expiration.
a real good chance of a melt-up.

the result will be all equity/debt offerings will be overbooked - only way for money on the sidelines to buy in quickly

Jun 09 12:52 PM

[Donald Ingram:]

Agreed. True recovery volume is lacking. The majority of the money is sitting on the sidelines, waiting to see which way the economic wind will blow.
This current bull will come to an end this Autumn sometime, then the trap door opens and the ride down will be past the March lows. The bounce will create a "last gasp" rally post Christmas into next Spring before totally capitulating at Dow 1450. Just my opinion, and am planning on just such an eventuality.
'True' recovery will then start to occur. The road will be long and pain filled.

Jun 09 01:28 PM

[drewriders:]

Normally I would agree with you but volume is normally light in the summer. It doesn't make sense to me either that the market is SLOWLY moving up but it is none the less.

Jun 09 03:34 PM

[H Nguyen:]

While we are waiting for signs of deterioration in the market, just consider one point: The market can go higher very slowly into the coming months, maybe all the way though July or August since the banks have over $800 billion war chest (excess reserve) that they can buy this market up. All the big banks have trading desks and programs, and they certainly can out last all the shorts. Also, the government is backing them up big time.

We appreciate the charts and the TA, but price will move and change all the TA in the short term. If certain conditions exists, with a small amount of equity, you can manipulate the market. This is what we call minority effect.

Jun 09 03:57 PM

[Windsun33:]

It is so slow I actually watched Cramer for 3.7 minutes last night :(

But in the meantime I am about 85% out of the market except for a little bit of etf day trading. I may be wrong (again), but this low volume seesaw with mini-rallies every day at 3:45 looks more and more like a correction waiting to happen on the slightest bit of bad news. That is, bad news that can't ber explained away as "not as bad as that other news, therefore good news".

On Jun 09 06:49 PM Mad Hedge Fund Trader wrote:

> That's right. The market has gotten so dead here that I have started
> watching Suzie Ormand to get trading ideas. So I’m not supposed to
> run large balances on my credit card? Who knew? A hedge fund friend
> told me that the market is now like watching a ball tossed in the
> air that is at the apogee of its move, just before the free fall
> begins. No news, with shrinking volume and volatility.

Jun 09 07:43 PM

[raylndn:]

H Nguyen,
Your comment is precisely on course. This market can and has done things no one expected.... How many expected this crash?How many expected a rally of this magnitude? This has been a dumb luck rally for me and I am here to admit it. My sell stop was tripped more times than I will admit since my entry in February before the market held and took off. I am 100% natural resources. It was a rough ride but here we are. There is a ton of money waiting to come in and a lot of folks like me holding for much higher prices after market timing the crash of the century. There will be corrections along the way. Never fight the Fed. My 401K is vewy vewy happy.
.

Jun 09 09:53 PM

[Moon Kil Woong:]

If it wasn't for bond and inflation hedge investors this market would be sliding on almost no volume. You can tell that these are risk adverse investors. They don't even want to risk loosing during the day on some bad news. That's why they wait until the last 15 minutes to buy. At least until open (except for after hours trading), they are as safe as houses lol.

Their daily trades are looking a lot like a bunch of sheep or pigs all packed together ready for slaughter.

Jun 09 10:00 PM

[raylndn:]

Larry House,
I appreciate your comments as they are well thought out and do provide a balance to my enthusiasm. Thanks.

Jun 09 10:11 PM

[lex:]

This market has gone up on hot air and manipulation from Obamonomics. He is trying to instill a feel good factor to get everyone to spend again so that the economy can recover. Now the TARP banks have raised enough money to pay off the TARP..no more need to support the market

Jun 09 11:37 PM

[Windsun33:]

Over the past few weeks the market has fallen into an almost 80% predictable pattern.

1. Minor rise (.5% or so) or fall on opening.
2. Brief up or down spike after the first few minutes
3. about 5 hours of drifting aimlessly.
4. massive buying or selling in the last hour - with most of that being in the last 15 minutes.
5. minor fall, then rise, in after market/futures
6. rinse and repeat

#3 and #4 tell me that despite the continued rise, there is still a whole lot of caution out there, and many (including me) will take flight out of the market on almost any really bad news (that is, bad news not disguised as good news because it could have been worse).

Jun 10 01:52 AM

[asceptic:]

It certainly seems like the market is being manipulated i.e. a big pump and dump scheme is going on - but can anyone explain exactly how it is done ?


On Jun 09 03:57 PM H Nguyen wrote:

> While we are waiting for signs of deterioration in the market, just
> consider one point: The market can go higher very slowly into the
> coming months, maybe all the way though July or August since the
> banks have over $800 billion war chest (excess reserve) that they
> can buy this market up. All the big banks have trading desks and
> programs, and they certainly can out last all the shorts. Also, the
> government is backing them up big time.
>
> We appreciate the charts and the TA, but price will move and change
> all the TA in the short term. If certain conditions exists, with
> a small amount of equity, you can manipulate the market. This is
> what we call minority effect.

Jun 10 02:59 AM

[PainfullyAware:]

I suggest you research The Presidents Working Book On Financial Markets and how the "Influence" is applied. Their "Mission and Mandate" Is Directly Applicable To The Current Market Environment. Goldman Sachs, JP Morgan, Morgan Stanley and others are the instruments for manipulation through back door "Bonds" delivered for specific purpose.

The SEC Red Book is another to look into.

Dark Pools have recently been exposed as well.

This is not Fantasy nor Fiction - These Are Real Entities.


On Jun 10 02:59 AM asceptic wrote:

> It certainly seems like the market is being manipulated i.e. a big
> pump and dump scheme is going on - but can anyone explain exactly
> how it is done ?

Jun 10 02:42 PM

[Alphameister:]

After reading the same comment by Mad Hedge Fund Trader 17 times today, I feel obliged to point out that Suzie has changed her tune. If a person lacks substantial emergency funds in the bank, they are now advised to run up those card balances (paying 20% interest) while sticking the money saved in the bank where it can earn 2% interest).

Slack volume is indeed a caution flag, but the answer for a good trader is to find expanding volume (in individual stocks) and play those volume spikes worth playing (the discussion of which must await another day).

Jun 10 05:27 PM