<i>"volume as an indicator = tea leaves"</i> Low volume = lack of market participants. Pause in prevailing trend. High volume = accumulation or distribution is the trend. Low volume periods following high volume periods are usually a pause or correction before high volume trend continues.
I couldn't disagree more Austin. Just put up a daily bar with NYSE volume and scroll the past dozen years. Every corrective phase from 2003-2007 as well as the 90's (which has a similar profile to now) has seen heavy volume on big range days lower followed by months of grinding higher on crap volume. The same thing happens time and time again. A break causes massive long liquidation by mutual funds and attracts short sellers in the broken down sectors. Then as the market finds a bid-which it invariably does because not enough people on Main Street i.e. long timeframe participants, dump stock. So the market becomes short and those underweight fund managers and short term futures shorts are forced to pay up in a slow grinding market that has few sellers. Big volume days are a bear item. Volume signals liquidation. As soon as you see that volume dissipate though you better run for the hills if you're short. Light volume is a clear signal that the trade has already established shorts on the busy days. That's not to say you can't break again, of course you can but as a perma bear I've been VERY selective selling all week because I see bearish sentiment with crap volume. To me that screams trapped sellers below.
But pretty much the only people who caught those 100 handles were those who were long all the way down from 1550. A few traders, who did not sit like chumps during the 180 handle downmove from July's highs, have probably got long again after Helicopter Ben's temporary market crutch was wheeled out. But there are a lot of frustrated people on the sidelines (who were waiting for a bottom but missed it due to the sudden move), and even more people who are underwater from the highs last month and will start bailing once the market moves a bit higher and gets them close to breakeven. So IMO the most likely scenario is short term pressure on the upside from frustrated wannabe longs, which will eventually run into breakeven liquidation from the people who've been underwater the last month. Hence, be long for a bit more, but liquidate into overhead resistance. Next resistance is around 1505-1515, so that's where I'd be looking to book profits and start playing from the short side again. I suspect if we breach 1500, we get a bit of a spike as shorts and sidelines wannabe buyers capitulate and start buying stock. Another issue is that a lot of people are still bearish or nervous. Any time a rally is met with scepticism and doubt, that's usually a good signal that it has a fair bit further to go. It's only once people start to accept and believe in the rally that the downside risk will return in a meaningful way.
Interesting discussion re volume, particularly the present low volume and what it means. Thanks, Austinp , Pa(b)st, and Cutten, for the intelligent and thought provoking comments, from somewhat different points of view. Scriabinop, you asked why didn't 1370 hold? I guess you meant that as a rhetorical question, since the pat answer is the Fed move. As i mentioned, it would seem we are moving toward recession, and so it would not be surprising if we were to revisit the lows and go still lower, perhaps after the likely bounce that Cutten referred to. Right now, I don't see a very rosy picture on the horizon that could continue to propel us higher and higher much past the old highs, if that. But we have all seen irrational markets. Regardless, we are traders, so what do we care so long as the market moves?
http://www.elitetrader.com/vb/showthread.php?s=&postid=1572370#post1572370 shorts better watch out next week
<i>"Every corrective phase from 2003-2007 as well as the 90's (which has a similar profile to now) has seen heavy volume on big range days lower followed by months of grinding higher on crap volume."</i> Pabst, you are 100% correct about that fact... thru this specific 4yr period. Eventually the bull market will break into a bear market, which will then break into the next bull market to follow. When that may happen, who knows? We might be in the early stages of a bear market without realization = confirmation. Or not. Back in August 2000 I wrote a weekly section on market sentiment for OptionInvestor.com (since changed ownership) that talked about how indexes had suffered critical damage in the early summer, how COT report was historically bearish (data is now purposely muddled and useless) etc. You should have seen the subscriber backlash in reaction. Readers threatened to cancel their subs (some actually did) unless I was fired and publicly denounced in the website. We actually received a few email threats of physical harm, too. That was a time of much frothier (word?) bullish sentiment than now. Or was it? Most market players who joined the game since early 2003, four long years ago have no concept of a bear market in stocks. That is no longer domestic, it's now a global phenom. The SPX chart I posted earlier merely shows market sentiment then. Volume waned, price action rose (like it always does on light volume) and the majority of biased bulls who still had any money left were buying with both hands. Then came September, and a return of volume. * All commodity trends are measurable by volume and open interest. The thing is, long-term trends play out over weeks and months. We here tend to project market trends based on hours or days of price behavior. Incongruous timelines. As for me, I'm just a daytrader right now. My bias and concern only exists while a trade is open, minutes to a couple of hours max. If the S&P prints 1600 or 1200 by xmas, it's all the same to me. That said, this market undeniably suffered a triple heart attack in the past two months. Subprime woes have not ended... they've barely just begun. Wait until the next round of ARM resets this fall, and again next year. Who's holding the soon-to-be worthless paper on those inevitable defaults? For the first time in two years, I ate breakfast at McDonalds today. Egg & cheese muffin, two hashbrowns, medium OJ and small decaf coffee. Any guess what the tab was? Two years ago it was less than five bucks. A local marina is closing its doors after decades in business. Why? It was one of the longest, hottest summers on record, boating traffic should have boomed. Nope... price of gas shut down boat traffic to a greater degree than ever seen. A bulk of pleasure boaters simply cannot afford the luxury any more. Every third lawn in my general area has a boat, corvette or SUV parked for sale on it, been that way all year. Friends & family are complaining about grocery bills breaking $200+ weekly when it used to be $100 - $150 weekly. They are cutting back on junk/pleasure foods and also eating out much less to make up the difference. * But, that must all be a mistake. There is no inflation... once we back food & energy out of our personal budgets. Go ahead and do that for yourself: pretend the dollars spent on gas, oil and heating along with food products are still right there in your wallet. That's what our government measure of inflation does with PPI and CPI. Inflation's in check, subprime and Alt-A are no longer an issue. It was all just a mirage... new market highs are guaranteed! BTW... spartan breakfast at McD was $8.90 today
Inflation is up, thus earnings are up, thus equities are up. Equity values are upward biased (just as home prices) for the primary reason of inflation. You yourself entirely acknowledged that from 2003 on, the slow grinds mostly occurred on weak volume, accompanied by corrections in higher volume. So to say that somehow we are possibly in a bear market now when this correction is consistent with market performance during the past 4 years has more to do with your personal bias towards what you see locally. In conclusion, your one example of volume being a good indicator in the 2000 bubble crash doesn't work right now. It might in the future. But 50%/50% (even less??) is no more valid an indicator than me using the avg world temperature as a future gauge for oil prices (how's that for arbitrary assumptions?). To Fundamentals: Don't forget, 60%+ (or something like that) of the big cap earnings are from international sources. The reason inflation is up, our spending power is down, etc. is for the same reason earnings are up (thus stocks are good) --- commodity demand from rapid intl growth. I agree with you that things can be pretty anemic or even downright recessionary here in the face of inflation pressures. Look at wheat hitting 7.00+ etc. But that has nothing to do with the NOMINAL value of the stock market. In conclusion, I agree that in REAL terms the S&Ps ARE in a bear market and have been for the last several years, with inflation factored in. But thats not tradeable unless you are spreading against going short the dollar, long commodities, etc. Just look at USD index (and then superimpose any commodity index on top of that) against the S&Ps and you'll see the S&Ps have gone nowhere in the last 5 yrs. But we're not trading real terms. In nominal terms, just for all the same reasons above you mentioned, the S&Ps have a lot higher to go to play catchup. We're NOT in an earnings recession, and it appears the energy cost side is settling down here as well. Risk spreads (ie [junk]-[treasury] ) are settling down in their volatility and long bond/treasury yields are VERY low (what, 4.6)?? Even more interestingly, the yield curve is returning to NON RECESSIONARY norms, which tells that perhaps the inversion/flatness we saw the past few yrs was predicting the very 'toughness' we are enduring now (and for the next yr or so). The bullish argument in NOMINAL terms is strong, just as long as policy makers continue bailing out banks, etc. just to maintain status quo (stability and fear removal) at the expense of the dollar, local taxpayers, etc.
<i>"So to say that somehow we are possibly in a bear market now when this correction is consistent with market performance during the past 4 years has more to do with your personal bias towards what you see locally."</i> I agree with all of your post above, except this single paragraph. I have no personal bias or preference towards what I see in the markets. At 4:15pm est I'm flat all positions, every day. The only people with any market bias = preference are those who carry positions longer than intraday. The only people with purely objective viewpoints of the market are those with no dog in the hunt. Monday and every day hence I try my best to trade what I see... in the moment. Having a bias is actually detrimental to me. Long-term market behavior will remain bullish until it doesn't. Then it'll be bearish, whether that is the present or future. They don't ring any bells for us at the tops or bottoms, unfortunately.
Again nice discussion, Austinp and Scriabinop. This has been one of the more intelligent discussions i've seen on ET for quite some time. I am reading every word, though not contributing much. Scriabinop, i wonder to what extent the inflation we are seeing is due to increased commodity demand versus monetization of the deficit. I suppose looking at USD versus some stable currency can give me a rough reading on how much of inflation is due to monetizing and then assume the rest is demand. But i am not an economist. From your remarks, Scriabinop, i conclude that if the market does fall down (and can't get up!, even with Fed help) that will be be a doubly dire sign. Since as you say, in real terms the market has gone nowhere. On the other hand, should the market begin to move upward in real terms, could we perhaps conclude that there has been a real improvement in the economy. Thanks again for a most interesting discussion and a nice explanation for why the market may very we'll continue to climb in spite of negative factors that seemingly loom large.
The commentators here have to remember that positioning yourself for a multi-year time horizon is fundamentally different from what most people here discuss. If you have a 401k, you should only reposition a couple of times a year at most, for instance, and it's always tough to do when looking at something like this and trying to figure out whether it's a short-term panic or a longer-term bear market. The standard I've used for more than twenty years is based on a few parameters, and none of them are showing this to be a problem longer term. Indeed - and this is going to sound crazy, but I've used it for most of these past 22 years, and it's mostly worked - the most powerful indicator of whether this is a long-term problem is the 52-week range. Formula in my spreadsheet is: (1-(@MIN($B329..$B380)/@MAX($B329..$B380)))*100 (Yes, I still use Lotus. Shut up.) The resulting number - based on the previous 52 weeks of weekly closings only, because if you're going long term the daily closes are just useless noise - gives you the percentage range for the previous 52 weeks. If this falls below 18 on a major index, this is usually, though not always, bullish. The big exception is if the range goes above 23 and then falls back to 18 or below while the index stays high; that indicates topping and is actually bearish. But we never got to 23 on either index, and as of now, it's below 18 for both the S&P and the Russell. All of my other long-term measures are showing that the bit of froth that built up prior to Feb 27 has been blown away. So, for me, even if there's a crash, I'll be taking my available cash, of which I have some in all of my long-term accounts, and putting it to work, because over the next few years, there's still a large potential for being significantly higher than where we are now. My swing trading model is based on some similar stuff, but a lot of stuff that's different, as well, because short-term market-neutral trading is a different problem. I don't use that formula or any variant of it in that model. I do have a measure in my swing model for whether we're in a panic, because, as all those quants are now learning, you can't model panic. That has kept me flat since the latter part of July in my swing accounts. It's now beginning to indicate that normal conditions are returning, but we're not all the way there yet. So I'm slowly ramping these accounts back up. But I expect it'll be another month or so before I'm fully back to swing trading. Apologies for the length.