The Nasty Side Effect of Low Volume
The market rose slightly yesterday and volume picked up from dreadfully low to modestly below average. The indices look stable, although the relative weakness in the NASDAQ is noteworthy. As I mentioned in the midday alert on Wednesday, the worst is over for the week. But the bulls need to fight their way back above 1220 to set in motion any kind of near-term rally.
The bears protected 1220 all day on Thursday, which is not good at all. The bulls need to take back 1220 today, otherwise the bears are likely going to drag the market down to 1197 before any rally of sizable magnitude can develop.
The movement in the indices over the past month has been anything but crystalline. Or as my old professor might say, "It's been about as clear as mud." And low volume has compounded the misty trajectory of the indices.
Nearly every session over the past three months has been on seasonally adjusted low volume. So it's very difficult to say with any certainty where the strong money has gone.
The lack of volume indicates that no one wants to make a stand and invest money for the long term. And I can't blame those investors either. Political uncertainty, along with debt dilemmas, added risk to equities.
But the low volume has another nasty side effect. Low volume makes it very easy to manipulate the market. And with the excessive amount of extreme headline risk from Europe present, we can expect volatility to stay at a high level.
When the indices are this volatile it adds risk to portfolios. Large institutions do not like to take on risk, which means that until volatility declines those investors will not return to the marketplace and the movement in the indices will be controlled by traders.
Unfortunately, I don't believe the debt problems in Europe will resolve anytime soon. In fact, they are likely to intensify. And we will read more comments like, "We have an atomic bomb that we can use in the face of the Germans and the French: this atomic bomb is simply that we won't pay," which was said by Pedro Nuno Santos of Portugal. 2012 is likely to be an ugly year and filled with political fury.
Going into the final stretch, and despite the tribulation in Europe, I favor the bulls. A breakdown of 1197 would make that analysis wrong and would likely result in a push lower to 1155. The bulls can claim victory if 1250 is taken back - such an event would shoot the SPX to 1301.
Where do you think big bank stocks like Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC) are headed next year? Please drop me a line sometime today at marketforecast@wyattresearch.com.
