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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 in 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

Source: A Problem With Volume for the New Rally