|
Daily State of the Markets Good Morning. One of the bear camp’s big gripes about the current rally – other than the idea that it came out of nowhere and caught the nattering nabobs of negativism flat footed, of course – is that fact that volume has been lacking. As any chartist worth their salt will affirm, a market doesn’t need volume to fall but a strong, sustainable rally should be accompanied by increasing volume. In short, rising prices being accompanied by rising volume represents strong demand. As such, our furry friends contend that the current joyride to the upside isn’t long for the world. While I vehemently disagree with my bearish buddies on the subject of what the market can or can’t and/or should or shouldn’t do, I will agree that volume hasn’t been a confirming factor for some time. In fact, the trend of total volume (I’m looking at the 50-day moving average of Total Volume on the NYSE here) has been in decline since late August – when the market first bottomed. What’s more, if you take a step back and look at the bigger picture – via a weekly chart – you will find that 10-week average of total volume on the NYSE is at its lowest point since the turn of the century. And after hitting a high of 2.1 billion shares in the summer of 2007, the 10-week average now stands at just 839 million, which is less than 40% of the high water mark. Thus, the first point we may want to consider is that declining volume is not something that can be attributed only to the current run for the roses. No, volume has been declining steadily for years. The second point to look at is that since the big bear began in the fall of 2007, the periods of increasing volume were also accompanied by sharply falling prices. From my perch, this would seem to suggest a couple things. First, that volume increases when fear is on the rise. Given that the stock market hasn’t exactly been a bed of roses over the last 12+ years, investors have learned that buy-and-hold is a failed strategy. Thus, whenever things get ugly, the public has been making a beeline for the exits. Now factor in the insane volatility that took place last year and I will conclude that one of the primary reasons that volume continues to fall is the public has simply given up. So far we’ve got fear and the fact that the public isn’t buying into Wall Street’s game anymore as reasons for the decline in volume. But, as they say in the infomercials, but wait, there’s more. Let’s not forget that the Credit Crisis not only beat the public’s finances to a pulp, it also obliterated the trading books of the big Wall Street banks and the hedge funds. As a result, leverage is no longer an easy way to a brand new Ferrari for hedge fund managers every year. And with the fast-money types no longer being levered up 30- and 40-1 on their can’t-lose, algorithmic trades, there is less trading going on. Another thing the Credit Crisis bear market did was create a whole bunch of new regulations (because clearly more regulators to not see the problem or do their jobs is the answer!). And one of those regulations is a little something called the “Volcker Rule.” The implementation of this rule, which isn’t an altogether bad idea if you ask me, meant that Wall Street banks had to choose between being a hedge fund or a bank as they no longer could count on their proprietary trading desks to print money. Again, the bottom line is this has led to less volume being traded. Given that volume has been in decline for a variety of reasons, I’m not buying into the bear camp’s argument that the current rally is fundamentally flawed. No, I believe the most important thing to watch with regard to volume is supply versus demand. So, when we plot supply volume against demand volume on a chart, we want to see demand volume crossing above supply volume during rallies. And while there is certainly room for improvement in this indicator, it is clear that demand volume is above supply volume at the present time. And based on historical data, the S&P has gained ground at an annualized rate of nearly 12% per year (versus an average decline of -2.7% per year when supply volume exceeds demand volume). So, although volume is in decline, don’t listen to the bearish argument that stocks can’t rally unless volume is advancing because it just isn’t true. Turning to this morning… This just in… Reports indicate that Greek political leaders have reached an agreement in order to meet the troika’s demands for additional bailout funds. Stock futures have moved to the highs of the day on the report. On the Economic front…Initial Claims for Unemployment Insurance for the week ending 2/4 fell by 15,000 to 358K, which was below the consensus estimate for 370K and also last week’s revised total of 373k. Continuing Claims for the week ending 1/28 came in at 3.515M vs. consensus of 3.492M and last week’s 3.451M. We will also get reports on Bloomberg’s Consumer Comfort Index and Wholesale Inventories later this morning. Thought for the day… Remember that you can choose a peaceful mode at any point of any day… Pre-Game Indicators Here are the Pre-Market indicators we review each morning before the opening bell… !========>
Positions in stocks mentioned: None For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com !========> The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment. Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided. The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed. The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer. Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice. Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results. !========> |
Uncategorized
