Where Have All the Traders Gone?
Barrons, 9 September
SO FAR, THE POST-LABOR DAY period has been fairly similar to the pre-Labor Day period.
Summer volume is expected to be light, but with vacations finally over, now is the time for all that pent-up demand -- or pent-up supply -- to hit the market like a sledgehammer. At this point, chart watchers will take a rap with a wooden ruler.
Light volume when it should be heavy tells us that both bulls and bears are not all that sure of themselves. It is not unlike a holding pattern on a price chart where swings higher and lower get progressively smaller while players wait for some spark to break the logjam.
Less aggressiveness by both sides shrinks price moves. Less conviction by both sides shrinks volume. Nobody is willing to make big bets, and the market just sits there confounding just about everybody.
Last month, the major indexes broke through some key technical metrics, namely their respective 50- and 200-day moving averages (see Chart 1). The New York Stock Exchange composite barely paused as it crossed these two thresholds in what looks like a nice rally on the surface. But was it?
CHART 1
Well, we cannot argue with a rally. Prices are higher now than they were a few weeks ago, but the way the market rallied makes it quite suspect. For starters, volume declined the whole way up.
Don't let the pundits explain away this bearish divergence between price and volume as being a normal condition for late summer. Strip away the fact that overall volume levels are low in August, and we still get a declining trend in volume as prices rose.They can't have it both ways. If they believe it was a rally because that was obvious on a chart, then they have to believe that there was a bearish condition with regard to volume because it, too, was obvious on the chart.
Seasonally, the market is now in its toughest time of the year. September is notoriously the worst month, on average, for stock performance and that includes the effects of an election year on the data. Election years usually see a boost for stocks, but this is all just probability.
From time to time, Getting Technical has touched on the sentiment angle. This week, the old formulation of the Chicago Board Options Exchange volatility index, now trading under the symbol VXO, hit a fresh multiyear closing low (see Chart 2).
This index measures the prices paid for protective options, and in times of great fear these prices tend to rise. When they reach an extreme high, they become a contrarian signal that the market has bottomed.
CHART 2
Conversely, when the VXO levels drop to extreme lows, it suggests that few are worried about anything as options prices plummet. This is a contrarian signal that the market may be near a top.
Again, the why is not for us to ponder. Only what is on the chart matters, because that is the market's voice, not ours. So far, we are still getting a lot of evidence that is not so good for stocks.
It's not all bad news, though, as some sectors are doing quite well. For starters, the transportation sector is close to multiyear highs once again and this is without the help of the airlines, which are still under extreme duress from antiterrorism procedures and record high oil prices.
Industrial and many financial sectors are strong and most basic materials groups are still performing well, so there still is solid leadership to follow (see Getting Technical, "Industrial Stocks Are Leaders, Too," September 7, and "Financial Stocks Run Hot and Cold," August 16).
But one group that is not leading is the technology sector and semiconductors specifically. Many point out that a healthy chip sector is necessary for a healthy market overall, and right now the chips are crumbling.
One chart provided by Tom McClellan of the McClellan Market Report shows a very interesting relationship between the semiconductor sector and the Standard & Poor's 500 (see Chart 3).
CHART 3
His caption says it all: "The chart suggests that the SOX knows the real deal." McClellan points out that at many tops and bottoms, a divergence between the direction of the chips and the direction of the S&P 500 is clear. The S&P 500 usually follows the lead of the chips and if that condition is true now, then the August rally for stocks will not stick.
For now, the market remains in a state of uncertainty as it waits for something to drive it one way or the other. This is not necessarily bearish, but tepid economic reports and the evidence stacking up in favor of the bearish argument may make September live up to its reputation as a traditionally bad month for stocks once again this year.
Also read Getting Technical, Sector Alert: "Industrial Stocks are Leaders, Too," September 7.
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