Here’s an example of something that concerns me in light of the current rally. Namely, that price and volume should go together, but now they’re not. That is, in a normal environment–one where things are acting right–rising prices are accompanied by rising volume, and falling prices are accompanied by falling volume. The latter is one reason that folks could say that the market’s bottom testing had been successful in March even though it occurred at lower prices than in November.
When volume does not–as technicians say–confirmthe price action, a divergence is said to have occurred. You’ve probably heard this in the context of Dow Theory, one of the oldest technical measures, which says that highs in the Dow Industrials should be confirmed by highs in the Dow Transports, with the original thinking being that if the Industrials are doing well, the transporters of the goods should be doing well since they’re shipping stuff to the ones making the stuff.
So here is a sampling of stocks from the sectors that have been the hottest since Armageddon (i.e. March 6). Each has the same pattern: rising prices and falling volume. The lower volume means that fewer and fewer (and fewer?) buyers are responsible for pushing the stocks up. Tops–of varying magnitudes–are not made of a bunch of astute sellers, but, rather, a lack of buyers.
We could be in for a bit of a pullback, but one that shouldn’t be as severe as some in the past. Maybe the S & P 500 will drop to the 800 level before resuming the rally. That’s just 4.6%, and that might not be worth standing aside from.
Here are the charts:
Also, the tenor of banking news has definitely gotten better–maybe too better, such that expectations have been pushed to high. That was, perhaps, evidenced in the reaction to Goldman Sachs’ Monday night early release of earnings. Despite doubling estimates, the stock sold off with a vengeance on Tuesday–on strong volume.