Houston, There is a Problem
We have already highlighted the breakout in the PowerShares QQQ Trust Series (symbol: QQQ), and it is has been clear from the market action over the past 3 weeks that nothing else really matters except, well, the market action. As long as prices are going higher all must be right in the world. Right? It must mean something. Why else would prices be breaking out?
But you really don’t have to go too far to see that something is really, really wrong with this rally. It is volume. Where is it? How bad is it? Well, Houston, there is a problem. See figure 1, a weekly chart of the QQQ going back to March, 2009.
Figure 1. QQQ/ weekly
The breakout above the 58.46 key pivot level is noted. Volume bars are in the lower panel. The pink dots on the price bars are those times when the QQQ traded less than 200, 000, 000 shares in a week. Excluding the last 4 weeks in the markets, all but one of those times were holiday weeks like Thanksgiving or Christmas. In other words, the volume that we have seen in the past 3 weeks is on par to holiday trading.
So while we can debate the state of the economy and the importance of valuations, we cannot debate the shrinking and absent volume. It is an un-arguable fact. So is price and right now that is all that matters and all that investors see. But the volume will matter some day. It usually does when you least expect it.
Category: Equities, Technical Analysis
The market has broken out with a gold cross.
The Dow theory has made a bottom.
The retail investor (sucker) has been selling the market since mid 2008.
I’ll bet vol will eventually follow price. It usually does.
burton: thanks for the comments
There is no certainty in my statements that rising price on weak volume is necessarily bad; I will give you that as it is mostly dogma….but your statements are easily countered
The golden cross is a losing strategy (and easily tested); it works some times and sometimes it doesn’t
Dow Theory, while difficult to test, is fraught with interpretive nuanaces
The retail investor has been in bonds; what was the best performing asset last year?
My point isn’t to make fun of your contributions here, but to state that all these studies that you and I do are having little bearing at this juncture
Well, you are right; there is no definitive technical analysis that works. We have to take various guidance. But in markets that are mostly moving based on major macro economics, big trends seem to work. That’s why the 200 day moving average has done so well since 2008.
Your point on bonds is interesting. Although it is true that retail is a great contrary indicator on stocks, I’ve never seen any such studies with bonds. Come to think about it, every retail I know has a buy and hold strategy with bonds. So maybe they just average the market. FWIW, the small traders have been about flat (notes + bonds) in the CFTC data.
Poor volume characteristics on breakout = headffake
It means the pros are not interested in participating. It will not stick — fade it after FOMC meeting.