For years I have discussed how the market tends to rally on light volume and decline on heavy volume. I touched on that subject in my latest column. But on Monday, everywhere I turned, everyone else was saying the same thing.
Yet, I remembered that we had seen a shift in that view (volume up on declines and volume down on rallies) since November. It turns out my memory is not nearly as faulty as it could be. Take a look at the rally in Nasdaq (black), since the late October low and look at volume (red bars). For the most part Nasdaq volume did what conventional thinking said it should do: rally with price.
Even as we moved into the February decline, you can see that volume was falling with price. Early March saw high volume on the capitulatory low, but then after that, we went back to my view of volume falling as stocks rise. So what changed? What changed was the mega-cap tech stocks became the game again.
Take a look at the McClellan Summation Index for Nasdaq using volume (red) on the chart below. It bottomed in early November and was relentless on the upside until early February and since then it has been an elevator down. Remember, this tells us what the majority of stocks are doing. So, yes, when it comes to this market and Nasdaq, this indicator should be concerning, because it tells us that the market is narrow.
If this indicator can stop going down and turn up, maybe we will see overall volume rise again for Nasdaq. What will it take to get it to stop going down? Well it needs a net differential of 5.5 billion shares (up minus down volume) to stop the decline and more to turn it back up. The best day Nasdaq had last week was +1.8 billion shares. So it's a tough road to hoe.
Obviously Monday's action did not help in that respect because the downside volume on Nasdaq was 72%. That needs to change if this indicator is going to change.
I want to end by noting that there are many indicators out there that are back to levels not seen since January 2018. That date keeps coming up. In late January, that year we had what many refer to as Volmageddon, when the Volatility Index products imploded.
I find myself thinking that in the last three months we had the GameStop (GME) and its related pals' dislocation, and we had the Archegos fund blow up, another dislocation. Yet, underneath it all, the stocks that have gotten hit the hardest are the most speculative in the market: electric vehicles, space, special purpose acquisition companies, pot, and, yes, even biotechs. So, these dislocations might not be evident in the indexes, but they are surely showing up under the hood.