Where is the Volume?

I’m of the opinion that there are two key points that are important to recognize about the current market. First, the volume relationship during the recent joyride to the upside has been exceptionally bad. Second, this market seems like it just wants to go higher due to the fact that all news is good news at the present time. And while both of these points can turn on a dime, both cause me to scratch my head a little.

To be sure, this is a difficult market. The huge volatility, the reactions to the news flow, and the one-way moves that change direction in an instant make the current environment tough to both understand and trade. And then there is the fact that the two key points I’ve presented this morning would appear to be diametrically opposed.

At some point, the trading range will be resolved. At some point, one of the two teams will have a position that can be supported by the masses. And at some point, the insanity will end. But until then, we have to grin and bear it.

If one looks only at the price action seen since the “great save” began at 3:45 pm eastern time last Tuesday, it would appear that the bulls are back in a big way. In short, this move up from the abyss “looks” different than the prior trips through the trading range. And the fact that all the news has been good news lately certainly helps to make the current run for the roses feel like it can morph into a game-changer.

Although I remain suspicious as to the origin of the “great save,” one also has to recognize that in this market, HFT is as HFT does and that a move is, well, a move. We should also point out that the fear that the U.S. is currently dipping into a recession has been refuted by the recent data. And although ECRI’s call should clearly be respected, the numbers suggest that a “double dip” just isn’t happening at the present time.

However, the volume relationship seen lately has been textbook – and not in a good way. Cutting to the chase, since the “great save” began on October 4th, the overall volume has declined on each successive day. Yep, that’s right; while stocks have surged more than 1,000 Dow points in just six sessions, the volume has been falling. As the technical analysis textbooks tell us, this is not good. And before I leave this topic, I would like to also point out that this has happened before – the last time the market made a trip up from the low end of the trading range seen in mid-September.

The key takeaway here is that the market doesn’t act like this in response to game changing events. When a “game changer” occurs, volume should surge – it’s as simple as that. So, unless the bulls can start getting some volume going, one has to raise an eyebrow in regard to this being the start of something meaningful.

I would also like to offer up the idea that the current rally has been based on little more than hope – the hope that there will actually be a workable solution that all parties can agree on for the European situation. The thinking seems to be that if a solution can be found, then stocks can move higher into the end of the year.

The bottom line here is traders appear to believe that a “grand solution” for Europe is in the offing. Just this morning, we learned that EU President Jose-Manuel Barroso will present a plan to recapitalize the Eurozone’s banks. Although we aren’t sure if Team Merkozy is onboard with the plan yet, the point is that we will start to get some clarity on what the EU plans are.

It is my sincere hope that my “thinking out loud” this morning can prove helpful in some small way. This is a tough time to be playing Ms. Market’s game and I’m of the mind that one needs to remain as objective as possible. So, while I’m not convinced that a “grand solution” will be forthcoming, I will continue to keep my eyes open.

Turning to this morning… The fact that Barroso will present a plan to recapitalize the Eurozone banks this morning has put the bulls back in business at the open.

On the Economic front… We don’t have any economic data to review before the opening bell. However, we will get a peek at the most recent FOMC minutes later this afternoon.

David Moenning
Editor:  The Daily Decision