The Problem With Volume
Round numbers were falling all over the markets in the last week as the S&P 500 went above 1,000, the Nasdaq Composite broke 2,000, and the Dow cracked 9,300. Yet momentum is clearly slowing for all the benchmarks, and many are wondering whether these new round numbers will hold. To some degree, this represents normal consolidation of the sharp rally off the July 10 lows. Sentiment has been unduly bullish for several weeks now, and the lack of a more significant pullback suggests underlying strength.
Even so, we remain cautious-to-bearish in outlook. Volume is a key factor that many analysts overlook. A bullish market and rising volume usually go hand-in-hand, but a recent study placed the six-month correlation between advances and volume at -0.81, the lowest since 2002. In other words, stocks have been rising on lower volume and falling on higher volume with today being another example. Big buyers are clearly not taking an interest in this market. Unless they do, the potential upside is limited at best. The area around 1007 on the S&P 500 appears to be the next hurdle, as it is where the index peaked in November and is now providing resistance.
This week the SEC slapped Bank of America (BAC) with a $33 million fine for failing to disclose a bonus liability to its shareholders before they voted on last year’s acquisition of Merrill Lynch. This incident exposes the silliness of what passes for securities regulation in the U.S. Who will pay the fine? The very same people who are victims of the violation: Bank of America shareholders. The actual wrongdoers – BAC head Ken Lewis and his deputies – remain firmly ensconced in their positions (and in possession of their bonuses).
Economic indicators are still pointing toward what can only be described as a weak recovery. Gross Domestic Product for the second quarter beat expectations with an annualized decline of only -1.0%, propped up by government expenditures and an export market that is collapsing at a slower rate than imports. This Friday brings the monthly non-farm payrolls report; early hints from the ADP Private Employment report and the Challenger Gray & Christmas layoff stats suggest the job market is still crumbling. In the first seven months of 2009, layoff announcements were up 72% from the same period a year ago.
Treasury rates are rising again, with the ten-year yield closing at 3.76%. Today brought the unsurprising news that the government plans to issue new debt at an accelerating pace in coming months, with $75 billion to be auctioned next week. The national debt ceiling, currently at $12.1 trillion, will almost certainly be breached this year and Congress will have no choice but to raise it. Nevertheless, the market is absorbing the new supply with remarkable ease. Perhaps this is where the missing stock volume is going.
Helped by a weak U.S. dollar, Materials claimed the top spot of our sector rankings and Financials moved up to second place. Technology slipped back to third, indicating a possible loss of leadership by what had been the strongest sector for several months. Telecom still owns the bottom while Energy’s ranking improved as Utilities and Consumer Staples slipped down the list.
The smallest-to-largest capitalization-size stratification that we mentioned last week is now complete. Micro Cap is first in the Style rankings while Mega Cap is last. Small Growth actually slipped a little, but the upper tier is so tightly packed that there really isn’t much differentiation. The spread between the top and bottom categories widened once again, indicating investors are becoming increasingly selective in their buying decisions.
We noted last week that China was unlikely to keep its triple-digit RSM value, and indeed it slipped in both relative and absolute terms. Some analysts are starting to talk again about a “China bubble” that is on the verge of popping. We won’t go that far just yet, but momentum is slowing while volatility picks up. Pacific Ex-Japan is now the leading global category. This group is heavily weighted toward Australia with significant allocations to Hong Kong and Singapore. The same commodity strength that helped the Materials sector pushed the group higher. A similar pattern can be seen in Canada and Latin America, which are also resource-heavy regions. Japan and the U.S. continue to occupy the bottom of the list.
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
“I will not let anyone tell me we must spend more money. This crisis did not come about because we issued too little money but because we created economic growth with too much money and it was not sustainable growth.”
Angela Merkel (German Chancellor)
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