The One Thing This Rally Has Been Missing
The market continued to move higher last week, but the selling pressure certainly picked up. Despite a minor positive gain, 0.07%, during the week, the bears made their presence known on a few occasions. The most notable day was Thursday, which became a high-volume decline.
Volume has been lacking in the market ever since November. And even though Thursday's session had high volume, it was only high compared to the low-volume days that preceded it. Volume on a historical basis was low.
Traders use volume to measure strength. The logic goes that higher volume indicates conviction since more investors are willing to participate. For example, if you see a bottom in the market and volume increased during the bottom and continued to increase for several days after the bottom, chances are that low is an area of strong accumulation.
For a trader, those confidence spots are important because they represent support zones that are unlikely to break. A good real life example was SPX last August. After 1100 was supported on massive volume it became an important support zone. And much to the bears' chagrin, that zone held for the next two months.
Over the past several months the volume in the market has been low. Of course, low volume doesn't mean that stocks will not go higher from here. But it does mean that the recent climb higher is unreliable since most investors were not willing to enter positions, which makes sense given the general degree of economic uncertainty around the world.
The lack of enthusiasm during the rally, measured by volume, makes it prone to swift reversals like the ones in October and November.
With earnings season mostly behind us along with all the stale economic data that has been announced recently, the market is prone to another such reversal.
In the near term, I am only expecting a few percent to the downside before another rally higher. But unless volume can pick up during such a rally, the market is highly prone to another major reversal that takes it back near 1200.
In the short term our focus is still on a pullback so that the indices can work off their overbought conditions. Economic data will be tame this week and mostly related to employment figures.
The Chicago PMI and Wednesday ISM are also important. But for the most part, the data this week is benign in the U.S. In Europe, however, talks between Greece and Germany revealed that Germany would like to take a greater role in the oversight of Greece's budget. Any resolution in the Eurozone about Greece would increase the appetite for risk assets.
