Volume Sends Contradictory Signals Across Asset Classes

Watching intraday and daily volume on the SPY, USO, and GLD sends some mixed signals when compared to our asset class correlations over the previous 6 months. During this sustained rally off the market lows, we have seen a fairly strong positive correlation between oil and equities, and a slightly weaker but fairly significant positive correlation between gold and equities. Simultaneously, we have seen the U.S. dollar (here UUP serves as a proxy) trade with a negative correlation to all of the above assets, the overarching theme being dollar devaluation from the myriad sources of liquidity in the system and rising inflation expectations due to increased confidence in the renewed flow of business activity. Let's look at what volume is telling us about the direction for all of these assets.

First, let's examine the SPY. First off, we can see that despite the impressive rally of the previous few days that equities haven't yet surpassed their peak of mid-September. We can see that the RSI has experienced a series of lower highs and lower lows since the beginning of August.

In addition, we see that as the rally has proceeded upward, volume has continued to decline while down days have experienced a serious pick-up in volume. Several particularly strong down days saw above-average volume: Sept 1 (328 mil), Sept 17 (229 mil), Sept 30 (254 mil), and Oct 1 (281 mil). Comparatively, the explosive multi-day rally we're in the midst of has seen significantly below average volume.

This seemingly straight-forward volume picture would indicate that equities could fall in the intermediate term (especially coupled with valuation analysis). This should imply that we're getting similar bearish signals from oil and gold.

In contrast, volume seems to be giving us bullish signals in commodities. For example, despite recent spikes in volume on both up and down days in the USO, pullbacks on volume have been followed by upward moves on higher volume. This pattern occurred Aug 13-19 and Sept 23-Oct 1. The 5.5% move on Sept 30 is the volume peak of the previous few months at 28.46 mil shares traded. To add to the potentially bullish volume picture, its possible the USO is breaking out from a series of lower highs.

The volume picture on the GLD is even more clearly bullish. Besides a single down move with above average volume on Sept 24, GLD's volume chart indicates classically positive volume signs: rising volume on rallies, falling volumes on pullbacks, and volume spikes on breakouts. Sept 2 (28 mil), Sept 3 (26 mil), Oct 6 (34 mil), and Oct 8 (24 mil) stand out as examples. The recent historic breakout of gold prices above $1033 is only support for the upward trend.

Finally, an examination of the U.S. dollar Bullish ETF, the UUP completes the picture. In a strange paradox, it seems that the volume picture for the UUP was essentially bullish until the down day on massive volume that we saw today (Oct 8). Although in a downtrend, peaks in the UUP were made under significantly higher volume than the ensuing breakdowns for the past 3 months. June 15, Aug 10, Aug 15, Sept 18, and Sept 24 all stand out as good up days on very strong, above average volume. Yet today, the UUP seemed to break through a multi-year technical level on the highest volume day it has ever had. But! Further inspection of the intraday volume on today's chart shows that even today, periods of strong volume did not correspond to downward price movement. The only exception to this rule was a powerful down move at 12:28. Elsewhere, spikes in volume occurred during plateaus or short-term price upticks. This pattern may indicate a false breakdown, although this is very speculative.

The confusing volume signals make it challenging to understand correlations going forward, no matter our views on the conditions of the equity markets. Is it possible that our bullish volume in gold and oil will mean a move higher in commodities while the U.S. equities markets moves lower? Its likely that at some point the U.S. economy will be hurt by a lower dollar. Could the weak dollar/strong stocks correlation be falling apart? Or is it possible that bullish volume in the dollar is signaling a false break down and a strengthening of the dollar will coincide with a weaker stock market, yet simultaneously higher gold prices as people continue to fear the unraveling of the global fiat monetary system down the line?

Disclosure: The author does not hold positions in any of the above ETFs.

Comments

[adan:]

very interesting useful info regarding the volumes of the differing indexes -

the notice about the volume changes, up and own, on the large down day for uup, was particularly interesting -

thanks!

Oct 10 12:41 PM