Low Volume Has Been a Feature of the Bull Market

 | Jun 06, 2018 | 6:00 AM EDT
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There is one question I get on an almost daily basis. It's about the volume. Folks seem perplexed at how low volume is. I don't have a good answer for why volume is relatively low but I have said here countless times that since 2009 rallies have tended to come on low volume, so I consider it the hallmark of this market.

However, sometimes if you step back and don't think about the individual days' volume but the net volume added up cumulatively, essentially the breadth of the market using volume, you can see that it's actually performing better than the S&P is. Oh sure, it lags the Russell 2000, but it is doing better than the S&P.

What is not doing better is the number of stocks making new highs. It has inched up on both the NYSE and Nasdaq but they are still (for now) under the peak readings we've seen in 2018 so far.

Yet breadth continues to do well; the McClellan Summation Index is still rising. It will now take a net differential of -1500 advancers minus decliners to halt the rise. If it gets over -2000 we're stepping into 'overbought' territory.

As a reminder, the 30-day moving average of the advance/decline line will step into overbought territory on Friday (but there is a window where it lasts for another week). Nasdaq's Momentum Indicator, which I diligently track each day now shows a window to reach an overbought reading between June 11 and June 13. So if we keep putting up good breadth numbers for a few more days it is likely that by Friday or early next week we could see the 'what-if' for the Summation Index get into 'overbought' territory as well.

The biggest change I saw on Tuesday was sentiment. The Investors Intelligence bulls nudged up to 52.9% this week. Once they get over 55% we're leaning 'too much'; over 60% and we've gone too far. So it is now possible that we see this over 55% next week when it's released.

Sticking with sentiment, the equity put/call ratio slipped under 50% for the first time since January 26. Just hold on before you run out and get super bearish. There were four such readings in January. The first was on the first trading day of the new year, January 2 and you know the market kept on its upward path for a few more weeks.

The next time was back to back readings on Jan. 16 and Jan. 17. Here is the chart of the Russell 2000. The red arrow represents those two days. You can see there was one heckuva decline the next day (the S&P had similar action) but then it rallied one more time before the final low reading.

Then there is the Daily Sentiment Index (DSI) for the VIX. It is back at 11. If it slips under 10, to the single digits I'd have to look for another rise in volatility. So we'll watch for signs of giddiness as we get overbought in the next several trading days. If the DSI for the VIX goes under 10 as we get overbought and sentiment stays too bullish I'd have to look for a pullback despite the good breadth.

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