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Excerpt from fund manager John Hussman’s weekly essay on the US market:

There's presently no evidence in the quality of market action that investors have adopted a robust speculative mood. Good investments are those based not on hope, but on some foundation of evidence -– either of reliable “investment merit” (based on properly normalized valuations), or of measurable “speculative merit” (based on the quality of market action). Taking a significant exposure to market risk without such foundations is like moving into a house built on sand.

The NYSE registered 193 new highs on Friday. This was fewer daily new highs than we observed two weeks ago, and less than half the number registered in early May. Weekly new highs also fell far short of the April-May period. Despite the recent advance in the major indices, the Dow, S&P 500, Nasdaq and Russell 2000 all remain below their April-May highs... This simply is not a market that is “running away,” but rather one that is range-bound and now strenuously overbought...

Trading volume has fallen off substantially as the recent rally has progressed, while the apparently strong breadth of the NYSE has been driven mostly by interest-sensitive stocks. While the link between trading volume and subsequent market action is not reliable as a single indicator, trading volume has a very useful role in either confirming or diverging from the indications given by prices, breadth, and other internals.

The chart below depicts the 30-day average of NYSE up-volume plus down-volume. It's long been observed that trading volume often precedes price, and that advances on dull volume are often suspect, because they indicate a lack of legitimate investor interest and instead indicate a “backing off of sellers.” Short-covering rallies, for instance, typically become low-volume moves fairly quickly. Presently, the dropoff in trading volume is the sharpest we've seen in a year, and matches the dropoff in volume that led into the spring 2005 market decline. Again, the correlation between volume and subsequent market fluctuations isn't strong in and of itself, but large divergences between volume and price action generally warrant attention:

The next chart depicts market breadth on two measures. The violet line shows the overall NYSE advance-decline line. The blue line is the NYSE advance-decline line restricted to common stocks (excluding preferred stocks, which behave essentially like bonds). Notice that in recent weeks, the recovery in common stocks has been very muted. This is also evident in the advance-decline profile of other exchanges.

In short, despite the enthusiasm about a “soft landing,” the recent advance has been selective and on deteriorating volume. This doesn't suggest very strong investor sponsorship at present.

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Source: John Hussman: Market Internals Reveal Hidden Weakness