What's Pushing the Market Up?

The market was up hard on Thursday, but it was up on weak volume. The total NYSE Composite volume was 3.73 billion shares, within the bottom quartile of daily volume for the year.

In fact, much of the volume came after 3:55pm, or at least hit the tape with five minutes to closing, when 600 million shares came across the tape. Up until then, we were on track for the second lowest volume day of 2008. Nearly 40% of the volume came in the last 90 minutes of the trading day after markets had made most of the gains.

The positive spin is that the last minute volume was on the buy side, pushing the markets higher, and that yesterday was the heaviest volume day of the week. However, this has also been the lightest volume week of the year, with the four days averaging 3.45 billion shares. In fact, Tuesday was the fifteenth lightest day of the year, Wednesday the eighth lightest and Monday the sixth lightest.  Today, could be the lightest volume day as market participants are likely to head home early for the long weekend.

The market, of course, can still go higher on light volume, as occurred last year when the lightest volume of the year came off the pivot low after August 15, 2007. From August 31 to the high on October 11, 2007, the S&P 500 rose 10.2%, though 3% of that move came on the last 105 minutes of September 18 when the Fed surprised the markets with a 50 bps cut in rates. The Fed meets again on September 16, and may again surprise the markets, though that is unlikely, given that the Fed funds target is 2%, and the FOMC has shown no inclination to ease further, especially given the stronger than expected economic numbers this week.

Until a few days ago, I had thought the market was about to turn down again. However, stronger than expected durable goods orders and a better GDP print due to better than expected net exports powered markets higher. In fact, this move started at 2:30 on Tuesday, when the button-pushers started buying. Since then, the S&P 500 is up 3%, the Dow 3.3%, the Naz 2.8% and the Russell 2000 4.4%.

The financials were amongst the biggest winners. There has been some incremental good news regarding the GSEs (with the market apparently forgetting its fear that the GSEs were going under last week), but the primary driver of the market rally has been the positive economic news. The good news relates primarily to exports, however. Financial companies are not the prime beneficiaries of net exports. Thus it is unlikely they would be a top performer in the market.

I think what happened on Thursday was that Russell was rebalancing its indices at the end of the month and financials are a big net buy. With the much better than expected GDP figure, the hedge funds have a green light to the upside until the close on Friday. Thus, hedgies started buying the financials, knowing that at today's close, they could sell their holdings to the indexers.

Indexers are concerned primarily about tracking error, i.e. how much they differ from their benchmark, which they want to minimize. In their buying decisions, what matters to to the indexers is how close they are to the final closing price of the day, not whether or not the stock is a good buy. All they are trying to do is hit the final print. Thus, the hedge funds bought on Thursday knowing they could sell today to price-insensitive buyers. With the upward bias was exacerbated by the light volume with Wall Street away until Labor Day, it's no wonder the markets were strong.

Unless there is significant bad news, it is unlikely that today will be a negative day for the stock market, and the bias most likely will be the upside. However, when Wall Street gets back from vacation on Tuesday, we will face an overbought situation with the market facing resistance and fresh concerns about the credit market.

Comments

[buyitcheap:]

The volumes do not support this kind of run up - I tend to agree with you that post Labor Day, we will see some overbought selling. I spent yesterday moving to cash and short on a few indexes. Best to all.

2008 Aug 29 08:16 AM

[morph366:]

I agree that we need to see whether the volume kicks in during September to support the bullish prices moves over the last couple of days.
I would suggest that 1350 is a key level on the S&P 500 - if we can get beyond that we may be moving beyond just a rally within a bear market. But to sustain this will require the cooperation of the financials.

2008 Aug 29 08:55 AM

[Kelly Liebe...:]

The Dow is up because the majority rely on soundbites released by the mass manipulators of the marketplace. Check out ShadowStats.com for an interesting read on the real numbers. I am not saying that you can't make money in a mmmp (massively manipulated marketplace), just don't be caught with your pants down.

2008 Aug 29 09:12 AM

[cyclops:]

The volumes don't support, true....The fundamentals don't support either, but that hasn't stopped the run-up.

2008 Aug 29 09:20 AM

[cynic69:]

This market is being manipulated by the Bush puppeteers, Ben and Henry. We wouldn't want the Bushies to look even worse than they already look, now would we?

2008 Aug 29 11:14 AM

[Dr. Jackpot:]

WHAT'S PUSHING THE MARKETS UP ?
It's the election stupid !

2008 Aug 29 12:32 PM

[Urbane Gori...:]

I think that what is pushing the market up is a desire on the part of all players for some relief and the belief that the market **will have to go up** sooner or later. That and a traditionally short memory on the part of American investors in particular. Throw in the massive growth of IRAs invested in funds (that have to be fully invested) and an approaching window-dressing period.... Et Voila!

Aside from our recent stimulus checks, what can Bush or his cohorts do to pump up the economy so their 'team' wins. I don't see much.Seems to me the only hook he has right now is an alliance with big oil. Clearly they'd like to see republicans back in office and if memory serves, gas prices went down before the last election, only to (coincidentally) bounce back up after the election. Low gas prices would seem to be a boon for McCain as we Americans seem to focus on short-term minor issues like the price of gas rather than long term issues.

But! What a clever move on McCain's part .... Pick a woman for a VP!!! Boy does he have some smart handlers or what!!! And to announce right in the middle of the Democratic convention with all the Hillary supporters chewing the inside of the cheeks!!! Damned fine move!!! Still won't vote for him.... But!!!

jegan ;-)

2008 Aug 29 02:23 PM

[poet1:]

great article, thanks for taking all that time out to write.

2008 Sep 05 11:40 PM