Low Volume and No Selling
The market finally took a breather on Friday. But the bears were hardly as forceful as the decline would have you believe. Volume only ticked slightly higher and once again the bulls managed a short but effective late-day rally.
The result was that the bears could only manage a 0.65% decline. Additionally, the bears failed to challenge 1332 support, much less break that zone.
So the eight-week rally rolls on and I still remain a skeptic. Maybe not quite as skeptical as New York Knicks fans are of Jeremy Lin, but it's very close.
Again, I don't want to appear gloomy or perma-bearish. I am far from either about the stock market. I am very much bullish and I think nearly every major U.S. index will challenge its 2007 highs this year. But in the near term (1-7 days) the bulls need to concede some ground and recoup.
Buyers have pulled the market higher since November without pause. While that may seem exceedingly bullish behavior, the price movement was not accompanied by volume.
Trend strength is dependent on volume. Price can be carried higher or lower in the near term, but in order to build a lasting trend, volume must be above average. High volume indicates investor participation, which is critical to trend.
Investors are not short-term minded. Unlike a trader, an investor plans to hold a position for months and years not minutes or hours.
As such, investor participation is essential to trend because they will be reluctant to sell their position should the market or economy go sour. Further, investors will likely be inclined to buy more shares on pullbacks which would then provide a foundation from which additional rallies can spring.
The absence of volume concerns me because if the economy or Europe goes sour the recent gains in the indices will all be washed away much like they were in August. I want to see the market consolidate in order to tell where investors will be willing to provide them with support.
Until the market pulls back (meaningfully) it is futile to assume where the indices could find support. With that in mind, it makes trading extremely risky in the near-term. While I think we should get a 3-4% pullback, if the indices motor higher from here without pause a much nastier decline would be in the making. Another reason for caution: volatility has increased while the market reached new highs last week.
