Low Volume Yesterday Could Mean Trouble

The major indices posted solid gains
across the board yesterday, but lower turnover failed to confirm the
positive price action. Nevertheless, the Nasdaq Composite followed through on
last Friday afternoon’s bullish reversal by cruising 1.5% higher, while the
small-cap Russell 2000 Index led the way with a 1.9% gain. The S&P Midcap 400
maintained a similar pace by advancing 1.2%. Gains were a bit more subdued in
the S&P 500 and Dow Jones Industrial Average, which rallied 0.9% and 0.7%
respectively. Stocks lazily fell from their highs in the late afternoon, but
each of the major indices still finished in the upper third of their intraday
ranges.

Just as lighter volume enabled the broad market to avert a
bearish “distribution day” last Friday, even lower overall volume prevented both
the S&P and Nasdaq from registering a bullish “accumulation day” yesterday.
Total volume in the Nasdaq declined by only 1%, but volume in the NYSE was 19%
lower than the previous day’s level. Given the relatively high percentage gains
in the major indices, one might have expected a corresponding increase in
turnover. But institutional traders stood on the sidelines, even more so than
they did during last Friday’s selloff. The lack of participation by hedge funds,
mutual funds, and other institutions caused volume in the NYSE to fall below its
50-day average level for the first time in six sessions. The Nasdaq barely
exceeded its average turnover. Despite the lower volume, market internals were
pretty good. In the Nasdaq, advancing volume exceeded declining volume by more
than 4 to 1. The NYSE ratio was positive by 3 to 1.

In yesterday’s
The
Wagner Daily, we said our short-term bias would remain bearish unless
the major indices closed above their respective November 30 highs, which is
exactly what happened. The S&P 500, Nasdaq Composite, and Dow Jones Industrial
Average each finished just above the pivotal resistance levels we illustrated
yesterday morning. The S&P 500 actually finished at a new six-year high
yesterday, but the Nasdaq and Dow both remain below their prior highs from last
month. The recovery from the November 27 selloff has pushed both the S&P and
Nasdaq back above the lower channel support of their primary uptrend lines from
the July lows, but the Dow continues to show relative weakness. As you can see
on the chart below, prior support of the Dow’s uptrend line has now become its
new resistance level:

Since the market immediately began giving mixed signals after
the November 27 selloff, we tightened our stop in the UltraShort Dow 30
ProShares
(
DXD |
Quote |
Chart |
News |
PowerRating) in order to greatly reduce our risk. When the Dow moved
above its November 30 high yesterday, our long position in DXD hit its trailing
stop, but the loss was only 36 cents. The DXD trade could still work out if the
Dow continues to fail at its prior uptrend line, but we can always re-enter the
trade with less risk.

Unexpected merger and acquisition activity in the banking
arena triggered a sector-specific rally that put pressure on our short position
in the Regional Bank HOLDR
(
RKH |
Quote |
Chart |
News |
PowerRating), but it missed our stop by a few cents
before backing off into the close. As for the retail ETFs we were stalking on
the short side, all bets are off because the Retail Index ($RLX) rallied in sync
with the broad market and never broke down below its 50-day moving average.

Right now, we really don’t like the overall price and volume
action we see in the broad market. Specifically, the stock market has made
substantial price moves in both directions over the past two days, but
has done so on declining volume each time. It was positive that volume declined
when stocks fell last Friday, but negative that they followed up with a strong
session of gains on even lower turnover. When this type of action occurs, it is
often an early warning sign that institutions are backing away from the market,
leaving the retail investors to battle it out amongst themselves. Unfortunately,
this usually leads to choppy and erratic trading action that is plagued by both
false breakouts above resistance levels and breakdowns below support levels.
Simply put, the buying power of institutions is required in order to sustain
steady trends. Without it, short-term traders can easily churn their accounts.
For that reason, we are shifting into SOH mode (“sitting on hands”) until
the market decides with conviction the direction of its next major move. Capital
preservation is key when the market is giving mixed signals at pivotal levels.

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