The market confirmed a new rally last week amid plenty of skepticism. The Nasdaq's follow-through day on Aug. 23 occurred on the 11th day of its rally attempt. But doubt waned a bit after the Nasdaq surged another 2.5% on Friday.
The Nasdaq made it six wins in seven sessions on Tuesday. Unfortunately, volume was on the light side, once again, as it was a scant 1.85 billion shares. Institutional buyers are the real fuel behind sustained market rallies, and, so far, they don't seem to be participating. If they were, I'd expect to see more volume expansion on up days for the New York Stock Exchange (NYSE) and Nasdaq. That's not happening -- at least not yet.
Until this week, lack of leadership was a concern. However, Tuesday's session saw more breakouts emerge. One thing I've learned over the years is that the more technical breakouts there are from good bases in the early stages of a new rally, the better the chance the rally has of succeeding.
Despite low volume in the market on Tuesday, three high-quality names flexed their muscle, and scored big percentage gains in higher volume.
Dollar General (DG) cleared a long base, and rallied 5.8% to $35.76 in heavy volume. The stock finished near its session high on volume of 4.5 million shares, well above its average daily volume of around 1.5 million shares. Early Tuesday, the discount retailer reported strong earnings and issued a solid outlook. The company's second-quarter profit rose 24% from a year ago to $0.52 a share, and its sales grew 11% to $3.58 billion. Same-store sales in the quarter rose a solid 5.9%.
Dollar General cleared a buying area of $35.09. As of Tuesday's close, it was only 1.9% past that price level. I consider a stock extended -- or too late to buy -- when it moves more than 4% to 5% past a buying area.
Volume continued to roll into Monroe Muffler Brake (MNRO). On Tuesday, it rose for the third straight session in above-average volume and gained 2.8% to $40.51, higher than Monday's breakout above $38.48 from a solid base. The company provides automotive undercar repair and tire services in the U.S.
Finally, Nu Skin Enterprises (NUS) broke out smartly on Tuesday, and rose 5.6% to $42.25, clearing a buying area of $41. The company makes and distributes anti-aging, personal care products and nutritional supplements. The company's personal care products are sold under the Nu Skin brand and its nutritional supplements are sold under the Pharmanex brand.
Price and volume in all three stocks will be important to watch in coming days because how a stock trades post-breakout can often say a lot about the market's potential to continue higher. Ideal price action for recent breakouts would be relatively tight, sideways trading from here. It's always good to see breakouts hold their gains. The last thing you want to see is volatile, whipsaw price action after a breakout. It often leads to failed breakouts, and a multitude of failed breakouts usually doesn't bode well for the broad market.
In sum, we've come up off the market lows in a short amount of time so it wouldn't be surprising to see some profit-taking soon. But there's healthy profit-taking and unhealthy profit-taking. Declines for the major averages in lighter volume would be much more preferable than declines in higher volume. It's a simple concept, but an important one when gauging the market's health. Declines in higher volume would at least point to some institutional selling, which could really cause problems for a rally and recent breakouts.