Wanted: VOLUME (part 2)
Although the market has started to behave better, there is still one missing element: VOLUME. Typcially, volume confirms price, and when markets sell-off or rally on light volume, the moves are less trustworthy than a high volume action.
In the U.S. equity markets, volume has not kept pace with price, suggesting that recent strength may be more likely a technical rebound than a new bull run.
Our friend Mike Panzner looks at the recent volume trends in four markets:
Four of a Kind?
click for larger charts
Courtesy of Michael Panzner, Colins Stewart Securities
>
Here's a look at the recent index gains, and the differences in July and August 5 day movign average of volumes.
| Index (low) | Return | Volume Decrease |
Volume Differences (August v July) |
| DJIA (7/18) | +4.9% | -31.3% | 202.4 mil vs. 294.6 mil |
| S&P500 (7/18) | +4.7% | -21.7% | 1.19B vs. 1.52B |
| Nasdaq (7/18) | +5.2% | -17.2% | 1.11B vs. 1.34B |
| Russell 2000 (7/21) | +5.3% | -27.5% | 461 mil vs. 635.8 mil |
NOTE: The value for volume is the difference between the 5-day moving average on the initial date and the 5-day moving average yesterday, through 8/16/06.
Thursday, August 17, 2006 | 10:45 AM | Permalink
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Comments
I wonder how the volume this year compares to typical July/August differentials? It seems like August is always light. Bob Pisani would know!
Posted by: oldprof | Aug 17, 2006 11:35:26 AM
You're absolutely right Barry. Volume has been pathetic.
I attribute this to the totally APATHETIC individual investor...who took his licks in '02, and hasn't come back (yet). Of course some of them left equities for the "safety" of real estate and bonds. Both are expensive right now. If I'm right on the economy, and IF equities follow through, and OIL BREAKS DOWN, I think the massive amount of cash is short term CD's etc, and (deflated) real estate proceeds will come back to large cap growth stocks.
Yes volume will be a huge tell that this is more than a recovery to the top of a trading range...it will change perception.
I think we're seeing the beginning of the Energy > Tech swap. I recognize this sounds really dumb to many here.
Posted by: ss | Aug 17, 2006 11:39:59 AM
you are right, you do sound dumb. a swap from energy into tech implies rotation not mountains of new money pouring into the stock market from "unsold" houses....huh? ss, you do not make sense here.
Posted by: doh! | Aug 17, 2006 11:55:38 AM
ss,
No, I agree with you that the next bull market could be driven by a swap from energy to tech, and small-caps to big cap tech. I think where we disagree most is on the timing.
But tech needs a driver, and the only thing that I can think of that could cause a major spending spree on tech is WiMax. The last tech bull was caused by the buildout of broadband to the home and office, and now everyone is a broadband junkie but we're tethered to desks, what do we want now? To cut the cords.
I think portable broadband is the next big thing in tech. The internet everywhere, all the time, with acceptable speed. Google Maps in your car, hooked into GPS. Thousands of internet radio stations, TV webcasts and YouTube on your cellphone...
Sprint is already making the move. Let's see how long it takes for Verizon and AT&T to follow.
Posted by: Craig H | Aug 17, 2006 12:03:29 PM
Hmmmm....Philly Fed prices paid index dips to 45.3 from 50.3
Nah...couldn't be
Posted by: ss | Aug 17, 2006 12:06:34 PM
You gotta look at more than the headline numbers. The bond market hasn't liked the Philly Fed survey, at least not initially.
Cost Increases and Higher Prices Reported
Respondents reported increased costs for inputs again this month. Although the prices paid index remains at a relatively high level, it decreased five points. Forty-eight percent of the firms reported higher input prices, compared with 53 percent last month.
Twenty-five percent of the firms reported higher prices for final manufactured goods; 8 percent reported decreases. The prices received index, at 17.1, was unchanged this month.
Posted by: Craig H | Aug 17, 2006 12:28:37 PM
Craig, depends on which part of the yield curve you're talking about. Short term yields don't seem to like it, but prices went up on the long end.
Posted by: Bynoceros | Aug 17, 2006 12:37:03 PM
The philly Fed number is a diffusion index. The 45.3 is still a monster number for the index. The falloff simply tells you that the price rises last month were slightly less than the previous month.
Posted by: Fullcarry | Aug 17, 2006 12:37:43 PM
Bynoceros,
I'm looking at the 10 year. It's gone from 4.857% at noon to 4.877% at 1pm.
Posted by: Craig H | Aug 17, 2006 12:58:58 PM
Hank,
The 10 year isn't stuck. The yield is up over 50% from the low in 2003.
Gotta run. My egg timer needs turning over. ;-)
Posted by: Craig H | Aug 17, 2006 1:18:37 PM
I wonder if the Cult of the Bear still expects 6800 or thereabouts or if there have been any revisions. Anybody think we will really tank in October/November or that Nenner will be right and we will go down most of the rest of the year?
Posted by: Becky | Aug 17, 2006 1:26:00 PM
It's about 1:30 - the Q's are just up behind 39 and the $compx is just near 2170 - without VOLUME this could be a short term hold with options friday coming.
your page is excellent - thanks for all the info you provide
paul
I guess, I'll go short at this point if it arrives
Posted by: PAUL | Aug 17, 2006 1:30:16 PM
Right now, I see the S&P's E/P on operating earnings around 6.5%, and treasuries around 5%. Well and good, a 30% move (equities up, bonds down, or both) equalizes those. So? Stock E/Ps and Treasury yields do not always mean-revert to equivalence. I agree that rates plug into valuation equation, but there we part ways.
At the end of 1990, the same numbers were 7% E/P versus 8% for Treasuries. Shorting equities against bonds would have killed you in 1991. End '94 looks the same, and you lose. In the 2000s, though, your method works like a charm -- it keeps you out of the market in 2000-2, gets you back in for 2003-present.
Are you sure your confidence is not based on a plausible timing hypothesis because it happens to have worked for five years? If PIMCO is right about housing and consumption, the E numerator is going to shrink, while your treasury coupons just keep paying out.
Posted by: wcw | Aug 17, 2006 1:46:31 PM
I think folks get tripped up on volume. Granted, higher volume is definitely a sign of something. But lighter volume could have many reasons. Vacations and holidays. Something news worthy on TV or YouTube.
One thing for sure, even those like myself who think that we've been in a typical summer trading range must be a little surprised by an August rally. Since we were up near the top of the trading range, I fully expected another trip down to retest the lows in another typical October-like pattern. Wouldn't that be something if folks who have hung up the Gone Fishin' Until October signs came back to a market at new highs instead?
Posted by: muckdog | Aug 17, 2006 1:48:02 PM
I've never trusted volume all that much because it hasn't always been reliable for me, but I do pay heed to MACD and Stochastic divergences.
On the SPX and Dow dailies we have bearish MACD divergences, but the stochastics are confirmatory (and very overbought now). You can pick your favorite indicator but between the two I've always been more partial to MACD when they disagree.
Posted by: Craig H | Aug 17, 2006 2:03:04 PM
That cracking sound you hear in the distance is the flimsy support for Crude prices. This is a very crowded trade...heavily levered. When this corrects, it will lift yet another headwind to consumers, and the commodity "push" inflation argument will be that much more questionable....this is NOT priced in the market yet...but we're getting a whiff of it in the OIH > QQQQ swap.
Posted by: ss | Aug 17, 2006 2:09:32 PM
The internals have been deteriorating since this little rally started. Just about time to sell 'em boys.
Posted by: Alaskan Pete | Aug 17, 2006 2:14:12 PM
I think folks get tripped up on volume. Granted, higher volume is definitely a sign of something. But lighter volume could have many reasons. Vacations and holidays. Something news worthy on TV or YouTube.
One thing for sure, even those like myself who think that we've been in a typical summer trading range must be a little surprised by an August rally. Since we were up near the top of the trading range, I fully expected another trip down to retest the lows in another typical October-like pattern. Wouldn't that be something if folks who have hung up the Gone Fishin' Until October signs came back to a market at new highs instead?
Posted by: muckdog | Aug 17, 2006 2:19:22 PM
that resistance @ 1300 on the S&P today was a bitch... wow.
Posted by: m3 | Aug 17, 2006 2:45:23 PM
Altria could give the indicies a shot in the arm...or a punch in the gut tomorrow. 4:30 pm today we get a DOJ announcement -- should be market moving.
Posted by: ss | Aug 17, 2006 3:11:26 PM
DOJ announcement is likely a response to a District Court ruling that the NSA Wiretapping program is unconstitutional. Probably address the ruling, announces an appeal, and requests stay of injunction.
We'll see soon enough.
Posted by: Alaskan Pete | Aug 17, 2006 3:23:42 PM
"And don't we all wish we jumped with both feet into that 1979-1980 market, a buying opportunity of a lifetime."
LOL.
Better late than early, baby. The SPX topped in Nov 1980 and spent the next 21 months in an excruciatingly slow 30% drip/drip/drip down to the August 1982 bottom.
By the bottom, investors were worn out, thoroughly bearish after nearly 10 years of watching a trading-range market, not to mention 21 months of recent downside misery.
Sentiment was beyond bearish, it was nonexistent. No one cared. "The Death of Equities". Recall?
Compare that to today. The SPX dropped a whopping 8% in six weeks after making a 4-year high while speculative buying was frenzied. And so far, that has been the extent of the decline.
I have no idea whether stocks will rise from here. Maybe the 2002-2006 bull run will get a second wind. Maybe it won't. But it certainty won't be because the sentiment landscape is anything like 1982.
If the market chooses to go higher from here, so be it. But who in their right mind would buy the Dow, for example, today at 11,350 when the all-time high is just above at 11,750? Let's see the Dow get above 11,750 and stay there and then we'll talk.
If it gets above, buy it and put a stop around 11,300-11,400. You miss out on 3-4% upside but would catch whatever "New Bull Market" comes along. And if the Dow doesn't get above it, you've missed nothing at all.
Simple risk/reward. Right now, it's all risk, no reward.
Posted by: angryinch | Aug 17, 2006 4:20:24 PM
The economy is now at full capacity. It can't take on anymore in this cycle.
The key is when the long slide of industrial production begins essentially signaling a recession. Unlike the 90's expansion which took FOREVER to reach full capacity or the 80's which took awhile due to the nasty early 80's downturn, this one shouldn't last over 6 years due to the fast stimulus of debt and artificially low interest rates.
Thus the Market has hit its peek. The economic expansion has peeked. Nowhere to go but down. Doesn't matter if industrial production begins its decline this month or in February of 2007. The decline it must be.
Usually the stock market "busts" right before this decline begins. So if it busts in October, that means a recession will begin late next spring or early summer. If it busts in February(weirdly, I have been have dreams that it does in 2007 for some reason, a prophecy lol?) Recession in Fall.
Looking for a rally is nice, but lets call the peeks: September 16: 11810.............................down to 9212 by years end before a moderate rally pre-recession.
Posted by: Cherry | Aug 17, 2006 4:27:03 PM
Uh, where exactly do we draw conclusions the economy is at full capacity? Please don't tell me productivity numbers or manufacturing capacity.
Posted by: BDG123 | Aug 17, 2006 6:02:44 PM
What makes you think it is not? Not every business cycle is equal.
Posted by: Cherry | Aug 17, 2006 8:16:31 PM
