Trader’s Narrative

For a while now, we’ve been concerned that volume hasn’t been powering the market higher. In fact, if you think of volume as fuel for any sustainable market rally, then we’ve been running on fumes for a few months. Since I wrote that in early June the market wobbled a bit and traced a shallow correction but before long it was on to new highs for the year. This has been a teflon coated rally.

But there is no mistaking that what we are seeing is a true outlier in terms of historical market performance. Here is a chart from Hussman’s most recent commentary which shows the six-month percent change in the S&P 500 from the bottom of each bear market (going back to the early 1940’s) compared to the percent change in volume over that same period:

Source: Hussman Commentary

As you can see, this rally is the largest one powered by the least volume. If we imagine a “best fit” line for the data, it would be going from the lower left to the upper right, implying that usually, the more volume, the bigger the recovery from a bear market low.

The state of volume (or lack thereof) is even more alarming when you consider that for the past year a baker’s dozen of stocks have grown to account for eyepopping proportions of total volume on the exchanges. Just to give you an example, on August 6th 2009 Citigroup (C) and Bank of America (BAC) accounted for 25% of total NYSE volume. Dr. Brett have brought attention to this last month: The Recent Concentration of Volume.

There are many theories about what exactly is behind this crazy volume: daytraders, HFT, short covering, secret government recapitalization, etc. Whichever reason is the real one, a market structure where total volume is distorted by such gigantic proportions from a handful of issues is, simply put, deceptive.

Some are comparing the current bear market to the brutal one we saw in the 1930’s, so here’s a chart comparing this rally (so far) to the bear market rallies back then:

Source: Chart of the Day

To be honest, I don’t really like the Dow Jones Index so I’ve plotted the point at which the current rally reached its maximum as measured by the Standard & Poors 500 Index in green - a 37.4% increase from the spring lows (reached on May 8th 2009). Since then, the stock market has just slithered sideways anyway.

Any way you measure it, either by the Dow or the S&P 500, the present rally has been stronger than most of the bear market rallies in the 1930’s. The outlier is the November 1929 rally which lasted 155 days and took the Dow 48% higher.