Skip to main content

A Strong Market Should See Volume Rising, Not Falling

The last two times volume was at these levels, the market did not make much progress.

The Market

I would like to be able to tell you that much has changed in the last week, that the choppy market we have had for the last six weeks has miraculously set itself up to be oversold or has worked off all the overbought-ness in order to all of a sudden fly again as it did in November. Yet neither is the case.

What has transpired in the last week is that breadth has weakened somewhat. Recall it had been quite strong early on in January, then it weakened and strengthened again. But now it is back to a little bit weak again. Thursday saw the worst breadth reading in more than a month.

Volume, though, has been weakening for just about a month. When we use volume as a breadth indicator we discover that it has been weakening since late December. It is evidenced by the rolling over of the McClellan Summation Index using volume The Summation Index using the advance/decline line only finally halted its lethargic rise midweek last week. It will take a net differential of +700 to get this indicator to stop from rolling over. Witness the difference between the two, though.

Image placeholder title
Image placeholder title

Why the discrepancy? I suspect because the buying that has been done has been of smaller size than we saw. Translation: it seems to me the majority of the buying took place in November and ever since then there's been mostly churning and pruning and shuffling about. If you look at the chart of the 20-day moving average of NYSE Composite volume, you can see it peaked and rolled over in mid-December. A strong market should see volume rising, not falling. What's more, typically January sees volume rise, especially when we consider how much money has flowed into equity funds and ETFs since the election. The last two times the 20-day moving average of volume was at these levels the market did not make much progress; it was June 2015 and early September of this year.

Image placeholder title

So you see, I would love to tell you sentiment has retreated enough for us to rally hard. I would love to tell you my Overbought/Oversold Oscillator is oversold enough for the market to rally hard. Rather, sentiment has merely moved from giddy to complacent. The Oscillator, while appearing oversold, is more likely to move up and peter out quickly.

Image placeholder title

What concerns me most about the market is my intermediate term indicators. Insiders have been doing quite a bit of selling. The ratio of the S&P to the Russell 2000 shows that the S&P has been outperforming the small caps for weeks now; typically, when this happens the market is closer to a high than a low.

The number of stocks making new highs refuses to expand, also showing a narrowing market, one that is more difficult to find good stocks in. Then there is the spread between the 50 and 200 day moving average of the Dow (I know, that ancient index!).

Here I take the net differential between the two moving averages and then plot the daily change between the two. Think of it as an intermediate-term oscillator, showing us when things have gotten extreme. Last week this indicator reached +27 and is now +20. That might not sound like much to you but it rarely gets over +20 and +40 has only happened three times in the last 20 years. Once this peaks and rolls over (as it has now) the market is close to an intermediate-term overbought reading.

Image placeholder title

I still have charts that look good, yet we all know that at lows charts look awful (you do remember how bad everything looked in late October, right?) and at highs charts look great. In fact, I have a button that says: "If it looks great, it's too late". For now, I continue to think the best we can do is chop and maybe even get some downside.

Dow is the Most Vulnerable to Profit Taking

Dow is the Most Vulnerable to Profit Taking

Despite the newfound focus on the Dow Jones Industrial Average last week, it turns out we may be seeing the last gasp of outperformance here.

How Hungry Is This Market?

How Hungry Is This Market?

Here's what I'd like to see happen with this rally -- I'd like it to show some FAANGs. Here's why -- and a look at Microsoft's chart, news highs and more.

Sloppy With a Chance of Rallying

Sloppy With a Chance of Rallying

Here's why I see another rally before the weekend, even amid the messiness, and a bump for Amazon.

Sloppy With a Chance of Rallying

We Can Rally Just a Bit More

Energy stocks have a lot of complacency in them.