What's Up with the Market?

by: Toro

The indices were strong on Monday, as they have been the past two weeks. The S&P 500 was up 1.0%, the Nasdaq rose 1.3%, and the DJIA gained 0.7%.

However, the volume of 1.3 billion on the NYSE was light. Not only was volume weak, but it was lighter than it was last week, and that’s not supposed to happen. The week before Labor Day is one of the lightest of the year. But, the week following is when everyone is supposedly off the beach, and back at work. Someone must have forgotten to tell investors, many of whom apparently are still working on their tans.

Monday's intra-day volume was more intriguing. By 3:30pm, the NYSE had yet to trade a billion shares. Nearly a third of the day's volume traded in the last half hour. And, what did the market do when the volume came in during the last 30 minutes? It fell. Perhaps that’s because of the index trade with Home Depot (NYSE:HD), which was being sold because of its Dutch auction, but this was the second successive trading day where the market sold off in the last half hour when volume was heaviest.

Monday looked even less impressive when you look at the intra-day volume patterns over the past seven trading days. Compared to those days, much of Monday’s volume occurred in the first hour, relatively less during the trading day (when the market was rising), and then, in the last half hour, volume accelerated and the market fell.

It was just like Friday.

The path of least resistance remains upward, but we are getting overbought, and the intra-day volume patterns are not encouraging. Of course, we can keep rising and the market internals can improve, which would give us more confidence in the rally. Currently, the foundation for the bounce off the August 16 low is weak, and, with the S&P 500 up 9% from last month's bottom, the chances of a sharp pull-back are rising.