Playing Taps for a Rising Market on Shrinking Volume ~ The Risk Averse Alert

Friday, August 22, 2008

Playing Taps for a Rising Market on Shrinking Volume

Today's push to the upside extends the conspicuous trend since July's bottom of a market forging higher on diminishing volume. This might not mean anything to Wall Street's cheerleaders at CNBC, but to anyone who refused to drink the Jim Jones', "low volume means nothing," Kool Aid from March 17, 2008 through May 19, 2008, it is a different story.

A market rising on diminishing volume is exhibiting one (and only one) thing: complacency. If, indeed, "the market climbs a wall of worry," this should be reflected by the volume of shares exchanged.

Fear in one form or another is what makes a willing seller. Fear builds the wall of worry the market is said to climb. And fearlessness is not forever rewarded on Wall Street.

Granted, an advancing market on diminishing volume can go on longer than might seem "right." Then again, a deer will stand frozen in the headlights until it is too late, and bring many a driver to wonder how much more obvious could their vehicle's lurking danger be?

Move you stupid animal!


Too late.

Why is it they see something coming ... something out of the norm ... yet fail to sense the gravity of the situation? Could it be some natural manifestation of fearlessness born of a critical lack of experience?

Was spring '08 that long ago? Odd, because the situation right now is all the more plainly obvious...


As for the here and now, a number of alternative scenarios could unfold. Best guess is the market's bounce off July's low is not completed.

Still, though, the market could drop like a rock over the next couple days. Furthermore, whether it drops or not, there's no assurance the 8.11.08 peak eventually will be exceeded.

All this only is to suggest the market's anticipated decline below July's low does not yet appear squarely in the cross hairs.

There's something else I just noticed about the volume of shares traded and this could change the complexion of developments I have been anticipating...


Yikes! Are you noticing how volume is spiking over the course of this year's trading as the S&P 100 has given back gains made over the two years previous?

What of the fact this largely has occurred near each new trough — lower than the previous — the S&P 100 has fallen to? Is this willingness to support the market but another manifestation of deer in the headlights fearlessness?

Well, I am not putting forward this question with any terrible sense of conviction. However, I do have a deep sense of suspicion.

Here's what I think this observation makes possible:
  1. The market's pending decline below July's low might unfold rather quickly ... rather than via a slow, death by a thousand cuts move.

  2. The market melt-up I have been anticipating might be a pipe dream. Last year's highs ... at least for large-cap S&Ps and the Big Board's Composite ... might not be seen again for several years.

  3. If the NASDAQ Composite miserably fails to challenge its peak set in 2007, "the stock market for the next one hundred years" might go the way of Bear Stearns.
This is not to suggest a collapse might be imminent. I still expect positive cyclical influences to bolster the market at least through election day ... and quite possibly into the new year.

Beyond Elliott Wave considerations allowing for the possibility presented here, there are observations involving underlying technical measures similarly supporting a view suggesting complacency is pervasive.

Trouble is, though, right now, these same indicators give every reason to suppose a period of buoyancy over the next few months probably is the more reasonable view to hold for the sake of identifying potential trading opportunities. This seems all the more relevant given various sentiment measures which, during periods of distress in bull markets, typically coincide with the stock market turning decidedly higher.

However, much as I have observed already with the Investors Intelligence Bullish Consensus of investment newsletter writers over the course of the year thus far, negative sentiment in a bear market is an entirely different ball of wax.

Now, one last word about the volume spikes noted above... This observation might as well substantiate the possibility the market will melt up once "the" bottom is in place (again, July's low in all probability was not bottom to the market's multi-month decline).

All evidence of fearlessness notwithstanding — or, better put, regardless of the market behaving like a deer in the headlights — there being some apparent willingness to rescue each successive decline from the abyss at least keeps the possibility of a melt-up alive. However, I am growing ever more dubious this, indeed, will happen.

So, in conclusion let me just say the next few months should reveal a lot...

(This, I argue, is behind what's bringing down FNM and FRE)

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